First City Monument Bank (FCMB) has now provided a broader outlook into its growth plans for the newly-acquired Legacy Pension Managers.
Management of FCMB which hosted a conference call to review its nine-months 2017 result, provide guidance on outlook and update investors on its acquisition of the pension management firm, said it plans to leverage on its holding of Legacy Pension to diversify the group’s earnings and increase profitability.
“This aligns with our view in our recent report ‘Tier 2 Banks – Playing a catch-up game’ where we forecast a growth in Legacy’s contribution to the group’s PBT from ~3% to 7% in FY 2018. Irrespective, we hold the view that a material change in FCMB’s fortunes in the near term is contingent on its ability to combat funding cost pressures which resonates with the words of Williams Shakespeare ‘No legacy is so rich as Honesty’ or as Funding cost in the case of FCMB.
“Earnings weighed by funding cost and lower NIR. FCMB’s nine-months 2017 result was in line with our expectation. Interest expense of N46.4 billion (+15.8% YoY) grew faster than interest income (+3.3% YoY to N96.3 billion) to drive net interest income lower by 6.2% YoY to N49.9 billion.
“Further down, the impact of a high-base in Non-Interest Revenue (NIR) for 9M 2016, which captured N35.3 billion in foreign exchange gain, marred NIR in the review period (-58% YoY to N18.7 billion). Consequently, despite lower loan-loss provision (-63% YoY to N12.3 billion) and flat operating expenses, the impact of higher funding cost and lower NIR drove a 58% decline in EPS to N0.28 (9M 2016: N0.66).
“That said, the breakdown of standalone Q3 17 results reveal improvement in core performance. In the review quarter, interest income of N39.4 billion (+3.8% YoY) outpaced funding cost (+3% YoY) to drive a 4.5% increase in net interest income. Consequently, Net Interest Margin (NIM) expanded 1.5pps YoY (+0.4% QoQ) to 7.4%.
“More so, despite the absence of sizeable FX gains which underpinned lower NIR in the quarter, FCMB reported robust fee income (+34% YoY) and trading income (+49% YoY). Against this backdrop and markedly lower loan-loss provision of N2.7 billion (Q3 2016: N21 billion), FCMB reported PAT of N2.5 billion relative to loss after tax in Q3 2016 of N2.7 billion.
“O&G and Commerce mar asset quality. In the review quarter, asset quality deteriorated with NPL ratio rising 130bps to 4.7%. Breakdowns provided by FCMB links the sharp deterioration in asset quality to the O&G Downstream (4.6x YoY), O&G Services (25.5x YoY) and Commerce (50.8% YoY) sectors even as Education, Manufacturing and Transport also posed mild quality concerns.
Across these sectors, FCMB stated that a prudent stance informed increased provisioning for NPLs with coverage ratio at 108.2% for its entire NPL book. CAR improved by 90bps QoQ to 17.9 per cent.