TheCable

First City Monument Bank’s (FCMB) three-year profit rebuilding trend lost its momentum in the 2021 financial year. Four key factors will shape the bank’s full-year earnings performance depending on how they turn out in the final quarter.

The first and the most critical is the cost of funds, which posed a major headache to the bank’s management in the just concluded financial year. Up to the end of the third quarter, interest expenses grew well ahead of interest income — which shrank margins.

At an increase of over 14 percent to over N50 billion at the end of September 2021, interest expenses rose more than four times ahead of interest earnings — which grew by 3.3 percent to N115.7 billion over the same period.

The growth disparity worsened in the third quarter with interest expenses rising by close to 56 percent quarter-on-quarter against an increase of about 20 percent in interest income over the same period.

The bank’s cost-income growth imbalance squeezed net interest income, which went down by N2.7 billion or 3.9 percent year-on-year to close at N65.4 billion at the end of September 2021.

The direction of interest expenses in the final quarter will therefore be a key determinant of whether the bank’s recovery journey would progress or falter with the 2021 outing.

The second key factor to watch is on the side of revenue. Revenue and profit improved for the first time for the bank in the 2021 financial year in the third quarter.

The gains in revenue followed major improvements in two-income lines, which are net fee and commission income that grew by 40 percent quarter-on-quarter and net trading income that more than doubled at 118.7 percent over the same period.

The revenue gains in the third quarter helped the bank to step up gross earnings from a slight increase in the second quarter to 14.5 percent growth quarter-on-quarter in the third quarter.

On year-on-year reading, FCMB raised gross earnings from a 4 percent decline at half year to an increase of 2 percent to close at N149.5 billion at the end of nine months of operations. This is a sustained improvement from a 12 percent revenue drop in the first quarter.

A downside development on the side of earnings is a huge drop in other revenue from almost N5 billion in the same period in the preceding year to less than N94 million at the end of the third quarter.

Whether the bank will sustain or lose the revenue upturn in the final quarter is therefore a critical factor that will define the bottom line at full year.

The third key factor to watch is cost savings from rapidly dropping net impairment loss on financial assets. The bank recorded a drop of 64 percent in net loan impairment expenses year-on-year to about N4.8 billion at the end of September.

This is an accelerated drop from 49 percent year-on-year at half year in June 2021 and also a major change of direction from over 62 percent growth in credit loss expenses at the end of 2020.

The biggest drop in loan impairment charges was recorded in the third quarter at 86.5 percent quarter-on-quarter to less than N757 million. This is a drop of over N4.8 billion in loan loss expenses for the quarter.

Whether the margin of drop in credit loss expenses will increase or shrink in the final quarter is a key development that will either improve of squeeze the bank’s profit capacity for the year.

The fourth key element underlying the bank’s full year performance is an equally big cost saving from fee and commission expenses. The expenses dropped against a major increase in transactions income.

Fee and commission income increased by over 15 percent year-on-year to N25.6 billion while fee and commission expenses dropped by 26.5 percent to N5.4 billion. The result is an increase of almost 36 percent in net fee and commission income to over N20 billion at the end of the third quarter.

Whether the gains will be sustained or lost is a crucial development that will define the bank’s full year performance.

FCMB has been on a long recovery journey since it lost 78.5 percent of its profit in 2015. Its closing profit of N19.6 billion in 2020 remains down from the peak profit figure of over N22 billion it registered seven years ago in 2014.

The bank’s group profit amounted to N13.8 billion at the end of the third quarter. As much as N6.2 billion or 45 percent of the nine-month profit figure was generated in the third quarter. That enabled management to level up a 22 percent profit drop at half year to flat at the end of September.

How the crucial factors play out in the final quarter will determine whether FCMB will head off profit drop in 2021 and keep its recovery on track for the fourth year running.