First City Monument Bank (FCMB) recently released its 9M 2023 results, recording impressive profitability and returns to shareholders evidenced by notable bottom-line growth and a strong return on average equity.
However, the other side of the coin presents a picture of an uptick in risk factors. The bank experienced an increase in impairment charges, net risk assets, and cost of risk, coupled with a decline in the capital adequacy ratio.
But it is imperative to note that despite the decline in the capital adequacy ratio attributed to a heightened risk environment, FCMB disclosed in its analyst and investor presentation report that both Capital Adequacy and Liquidity Ratios remain above regulatory thresholds closing at 15.3% and 42.3% respectively
More details of FCMB’s 9M 2023 results:
The disclosed 9M unaudited interim financial statements results seen by Nairametrics show a significant 108% year-on-year increase in profit before tax, amounting to N55.141 billion.
This figure not only reflects a remarkable increase but is also noteworthy as it stands 49% higher than the full-year figure of N37.105 billion recorded in 2022.
The bottom-line impressive performance can be attributed to a combination of factors; the growth in net interest income and non-interest income.
During the period under review, net interest income grew by 29.46% year-on-year increase, to N120.471 billion, while non-interest income grew even higher by 167% year-on-year, reaching N103.153 billion.
The banking group provided insight into the drivers behind this robust growth in net interest income and non-interest income. According to the group’s investor/analysts’ presentation report:
- “Net Interest Income grew by 19% and 29% QoQ and YoY, respectively, as a result of growth in YoY yield on earning assets from 12.6% to 15.9%.”
- “Non-interest income grew by 167% YoY largely driven by growth in Foreign Exchange revenues, service fees and commissions and trading income.”
Foreign exchange gains accounted for 53% of the total non-interest income, underscoring their pivotal role in driving substantial growth in this income category.
Away from the FX gains, let us look at how the bank fared in its primary business lending activities. The increase in LDR from 54.1% in 9M 2022 to 59.4% in 9M 2023 indicates that the bank deployed a higher proportion of its deposits toward lending activities and that contributed to increased interest income, which rose by 55% YoY to N239.052 billion.
Moreover, FCMB demonstrated effective management of interest rate spreads, exemplified by the noteworthy 13% year-on-year growth in the Net Interest Margin (NIM), closing at 8% in 9M 2023.
The growth in NII and NIM reflects the bank’s success in generating more income from its interest-earning assets.
This positive performance in interest income generation and interest rate spread management often indicates effective lending practices and adept management of interest rate fluctuations.
However, it’s essential to acknowledge that achieving such growth in interest income might not be without certain associated risks.
The Bank’s Risk Profile and Financial Health:
The expansion in profitability is not without recognition of the changing risk environment.
FCMB’s 9M 2023 results underscore a rise in impairment charges primarily linked to heightened provisioning. As stated by the bank,
- “Impairment charges surged by 186% YoY due to increased provisions on risk assets yet saw a substantial 97% QoQ decline.”
This substantial increase in impairment charges can be attributed to the 10% YoY growth in loan to deposit ratio to 59.4%.
Overall, this drove the cost of risk higher by 179% year-on-year, reaching 3.9% with a corresponding QoQ decline of 101% to -0.1%.
The increase in the cost of risk implies that the bank is allocating a higher percentage of its resources to cover potential credit losses.
While an increase in the cost of risk reflects the bank’s proactive approach to managing credit risk, it also raises considerations about its impact on earnings, interest coverage ratio, return on average equity and capital adequacy ratio.
The elevated cost of risk is reflected in the bank’s capital adequacy ratio, which declined by 8% YoY to 15.3% in 9M 2023.
However, it is important to highlight that, despite this decline, the capital adequacy ratio still stands above the regulatory requirements.
Also, the interest coverage ratio quarter-over-quarter (QoQ) experienced a decline of 32%, dropping to 101.17% in Q3 2023 compared to 146.5% in Q2 2023.
However, it is essential to note that a coverage ratio above 100% signifies that the bank is still generating enough income to cover its interest and debt payments.
This becomes particularly relevant when linked with a growth in return on average equity, which increased by 68% YoY to 20.3% in 9M 2023.
When combined with an interest coverage ratio above 100%, it signals to investors that not only is the bank generating healthy returns on its equity, but it also possesses the financial capacity to comfortably meet its interest and debt obligations.
Overall, the growth in net interest income and net interest margin reflects the bank’s success in earning more from its interest-earning assets.
However, the increase in the loan-to-deposit ratio, the marginal rise in the NPL-to-total loan ratio, the consequent increase in the cost of risk and the decline in capital adequacy ratio, highlight the need for the bank to continue to strike a balance between profitability/return and risk.
Investor confidence is likely to hinge on the bank’s ability to proactively address risk factors while sustaining profitability.
The share price at a YtD gain of 79.22% has outperformed the broad market NGXASI YtD 39.59% as of the close of trading on Friday; December 8, 2023.
Adding to investor appeal is the bank’s consistent dividend payments over the past five years. This fosters an expectation among investors for a continuation of this trend, contributing to the overall attractiveness of the bank’s shares.
The bank’s ability to meet or exceed investor expectations, particularly in terms of dividends, will play a crucial role in sustaining and further enhancing investor confidence.
