FCMB says group will diversify earnings from retail, raise Tier-2 Capital. After disappointing earnings in the third quarter of 2019, FCMB Group www.fcmbgroup.com said it plans to diversify earnings concentration from banking, sets strategic course for 2020 with Tier-2 capital raise which is expected to be closed in January.
The management stated at their earnings call with analysts that it would diversify revenue concentration from banking activities, just as it stated readiness to push investment banking.
Ladi Balogun, the Group Chief Executive said corporate investment banking will play a more prominent role. However, the momentum in retail is going to continue and we think it would be very robust.
Balogun said: “We are on course to close a tier-2 offering before the end January 2020 and we will continue to reinforce this capital adequacy ratio (CAR) particularly in the bank in spite of the pressures to meet loan to deposit ratio targets set by the regulator”.
He explained that the capital raise is really to make sure that FCMB grows loan book next year, keep CAR at a fairly healthy level.
In the third quarter, CAR and liquidity ratio were above regulatory minimum requirement at 17.6% and 39.5% respectively.
Against the apex bank target of 60% for September, the management said loan to deposit ratio was 73.9%.
However, analysts raise dust on ability of the group to meet 65% LDR, but reacting to this, FCMB said it has a fairly robust pipeline which would be fulfilled between now and the end of the year.
The management said they recognised that there can always be delays and drawdown.
“One very critical thing for us will be the resumption of growth in corporate investment banking. We have been over the last few years heavily focused on retail. We saw the retail business now maturing”, Balogun said.
According to him, Asset under Management (AUM) is growing fairly well and it would be fair to say that during that period, corporate investment banking has sort of lagged. Some of that was environmental and structurally the nature of our business”.
Speaking further, Balogun said a theme for us has been diversifying the business, generally reducing our concentrations of customers in the bank side as well as reducing concentration and reliance on banking business to drive revenue.
It would be recalled that FCMB third quarter of financial year 2019 was less impressive amidst earnings misses. The group revenues and profit performance failed to meet the year guidance as well as analysts’ estimates.
But Balogun said that the group saw momentum in terms of customer acquisition particularly in the bank as it grew by 27% year-on-year from 4.6 million to 5.9 million.
“At group level, I think our customer numbers now stand at about 6.4 million. We saw a 69% increase to 4.1 million digital customers. Impairments are also coming under control with cost of risk dropping 29%. Deposits are growing fairly strongly, at 14% to N 863 billion”, Balogun added.
Non-banking activity accounts for about 11% of PBT year-to-date, driven by asset management.
FCMB asset under management excludes our pensions business was N73.6 billion. Total digital loans surged about 559% year-on-year and make up about 21% of the overall personal and business banking loan book.
FCMB said it will accelerate the digital transformation with both personal and business banking in 2020.
“I think this will have a positive impact on overall economies of scale, profitability and the customer experience”, Balogun added.
He also said that management will continue the transformation of digital assets and processes generally, expect that Credit Direct Limited loan distribution will go digital next year, improving their profitability and efficiency.
Balogun said FCMB has currently digitalized some of it SME lending products, predominantly sort of short term advances and temporary overdrafts are now clearly digitalised.
We expect that next year, we will move more of our lending products to the SME space. The aim is actually the vast majority of all loans below 50 million will be processed digitally without human intervention, particularly supply chain finance and even medium term loans.
Balogun said cost of funds typically have prevented FCMB from playing at the top end of the corporate market which is where the group would have liked to play to avoid the credit losses that had affected the business historically.
He said that top end of the market that would require investment banking services.
Balogun said: “As the balance sheet has become more liquid, and retail business has grown in momentum, our costs of funds came down significantly and we think we are now in a position in 2020 to begin to grow our corporate business.
Also speaking at the earnings call, Kayode Adewuyi, the Group Chief Finance Officer in his contribution said return on average equity declined quarter-on-quarter and year-over-year, driven largely by reduction in net interest margin and increase in operating expenses.
Adewuyi said non-performing loans ratio improved from 4.3% in the second quarter to 3.5%, which also improved cost of risk from 1.8% to 0.6% in the third quarter. On year on year, cost of risk improved from 1.6% in 2018 to 1.1% in 2019.
He stated that the group risk assets grew 3% quarter-on-quarter and 6% year-on-year to N638 billion while customer deposits improved 4.9% on quarterly basis and 14.2% year-on-year.
“Commercial and retail banking group contributed the largest, 89% of group PBT, while our assets and wealth management group contributed 9%, up from 8% same time last year.
“Profit before tax declined 12% quarter-on-quarter and 13% year-on-year. This was largely because of decreasing net interest income, which was driven by 83% year-on-year reduction in FX income”, Adewuyi said.
Speaking also at the earnings call, Adam Nuru, the Managing Director and Chief Executive FCMB Limited added that personal banking contributes about 43% of net revenue.
The Bank Chief said retail-led strategy continues to yield positive results using the investments in retail plus the alternative channels and digital.
“We have seen strong contribution for our personal banking space. Deposits have increased; the segment continues to grow with moderate operating expenses and cost of funds declining gradually”, Nuru added.
He said business banking contributed about 31% of net revenue, which is about 9.6% year-on-year growth. Corporate banking contributed about 10% to net revenue while institutional banking added about 5%.
Decline in PBT of 12.4% during the quarter was recorded just as non-interest income grew 71.4%.
Nuru said: “Total earning asset increased by 14.78% quarter-on-quarter and 34.39% year-on-year. Gross loans and advances grew by 1.54% year-on-year. The gross loan book of N672.52 billion represents about 53% of total earning assets”.
Loan distribution by segment, personal banking continues to yield good growth in the segment with about 2.1% growth quarter-on-quarter, about 4.3% growth year-on-year. Digital initiatives, as mentioned before, contributed to this growth.
Business banking grew about 8.7% year-on-year, however, there’s a slight decline quarter-on-quarter. This was largely attributable to some large pay downs. We expect growth to resume in the last quarter of this year.
Deposits from the retail and business banking now constitute about 75% of total deposits and we saw year-on-year growth of about 14% year-on-year. Operating expenses grew 19%, largely due to reclassification of write-backs in prior contracts.
“Today, digital loans account about 78% of total loan count”, the Bank Chief revealed.
Adewuyi further stated that asset and wealth management for the group grew 7% quarter-on-quarter and 11% year-on-year to N380 billion.
He said this is a reflection of the continuous partnership with other entities within the FCMB Group and the increased conversion of our marketing efforts into sales. The Pensions business contributed 80% of total AUM, slightly down from 83% in 2018.
Tolu Osinibi, Executive Director FCMB Capital Market Ltd in the review said investment banking year-on-year pre-tax profit was down 55% due to a significant drop in brokerage commission, year-on-year about 50% reductions.
Osinibi attributed this to major decline in market activity where in the year-on-year period total market value traded was down about 30%. However, we were able to maintain cost discipline.
Speaking further, Balogun said cost of funds should continue to decline.
“We expect that generally the loan growth will be more robust with resumed growth in corporate banking and continued dimension in retail predominantly through our digital lending”, Balogun stated.
In terms of the lending rate, Balogun said FCMB naira lending to corporate, commercial names and also government is seeing a moderation in rate.
In terms of sectors of interest in 2020, Balogun said he thinks there will be continued growth in agriculture, manufacturing.
Balogun said: “We expect that consumer loans and personal banking generally will also see renewed growth. We had been trending sort of flat or slightly downwards in the last couple of years, but with the onset of our digital products, we’ve seen renewed growth in that area”.
He said for 2020, corporate lending will become more prominent. He anticipates FCMB will see significant loan growth than we’ve seen in 2019.
“But we are trying to play at the very high end of the corporate and move away from what I would describe as the lower to middle tier, where we see rapid loan growth that tends to resolve in non-performance of loans”, Balogun said.