TheCable

First City Monument Bank’s (FCMB) third quarter operations ended in a loss that nearly wiped off the bank’s closing profit figure for the second quarter. The full year profit outlook for the bank for the 2015 operations has therefore dimmed and the earlier projected earnings figures for the bank have accordingly been revised significantly down.

Much of the net profit figure of N8.30 billion the bank showed at the end of the second quarter melted down to N1.86 billion at the end of the third quarter. The bank therefore looks likely to post the lowest profit figure since 2012.

A violent fluctuation in earnings is therefore to be expected from a strong profit growth the bank achieved in 2014 to a sharp drop that is apparent for 2015. In 2014, the bank lifted net profit by 38.3% to a new peak of N22.13 billion mainly because interest expenses declined slightly against the rising trend in the banking sector. In 2015, interest cost rose ahead of interest income as per the interim reports but the big event that broke the profit capacity is an upsurge in credit losses. The two major rising costs slashed the bank’s profit margin to the lowest level in four years at the end of the third quarter.

On the driving wheel of FCMB is Mr. Peter Obaseki, the bank’s managing director/chief executive officer. The man, who assumed office in 2013, achieved the strongest profit growth in five years in his first year in office. In the second year just ended 2015, he is very likely to post the worst earnings report in four years. The undermining forces are flat revenue against rising major expenses. How to navigate the bank towards operating stability is no doubt a pressing need for the CEO going forward.

In terms of revenue performance, the growth momentum that led to an increase of 11% year-on-year at the end of the second quarter, weakened to a marginal gain of 2% in the third. There was weakness on both interest income, which improved marginally and non-interest income, which declined slightly during the period.

Based on the third quarter growth rate, we revise gross income estimate from N158 billion to N147 billion for FCMB in 2015. This will be a marginal decline from the gross earnings figure of N148.64 billion the bank posted at the end of 2014. This will be a sharp slowdown from the revenue growth of 13.5% the bank recorded in the preceding year. Revenue growth for the bank has decelerated in the two years following the peak growth record of 46.1% in 2012.

Revenue growth is constrained by a sustained drop in the investment portfolio in the past two years and a decline in loans and advances in the current year. At N147.81 billion at the end of September, investment securities have fallen by 40% from the 2012 peak. The net loan portfolio also declined by 8% to over N568 billion at the end of the third quarter from the closing figure in 2014.

The bank posted an after tax profit of N1.86 billion at the end of the third quarter, which is a sharp fall of 87% year-on-year. The full year after tax profit estimate is therefore revised from the earlier projection of N17.5 billion to under N3 billion for FCMB at the end of 2015. This will be a big slump from the bank’s peak profit figure of N22.13 billion in 2014. From a profit growth of 38.3% in 2014 – the strongest in the past five years, a crash of nearly 90% may follow.

Two major cost elements are to blame for the profit fall. One is interest expenses, which grew three times as fast as interest income. The bank devoted an increased proportion of revenue to meet interest expenses in the year at 35.4% in September compared to 30.5% at the end of 2014. The challenge of rising interest cost has faced both banks and businesses in recent years.

Provision for credit losses affected profit performance much more than rising cost of funds. Loan loss expenses rose by 291% year-on-year at the end of the third quarter to about N15.29 billion from only N3.75 billion at the end of the second quarter. In the third quarter of 2014, loan loss expenses claimed 3.7% of gross earnings. In 2015, the proportion advanced to 14%.

Effective cost control registered in respect of operating expenses, which grew moderately at 3% though still slightly ahead of gross earnings. That increased operating cost margin from 44.6% at the end of 2014 to 46.2% in the third quarter of 2015.

The cost-revenue relationship at the end of the third quarter weighed heavier on the side of cost, which eroded profit margin during the period. Net profit margin declined from 13.3% in the third quarter of 2014 to 1.7% at the end of September 2015.

The bank earned 13 kobo per share at the end of the third quarter, down from 96 kobo in the same period in the preceding year. We expect earnings per share of 14 kobo for FCMB at full year. This will be a sharp fall from N1.12 the bank earned in 2014. It paid a cash dividend of 25 kobo for the 2014 operations. The bank seems to lack the ability to maintain a record of stable dividend seen over the preceding two years.