First City Monument Bank Plc [FCMB] grew the size of its balance sheet in 2020 faster than any time since 2013. Total assets expanded by 22 percent to over N2 trillion mark in the first nine months of trading. This represents a creation of N370 billion in new assets in the year.
Leading the asset expansion bid are restricted reserve deposits, which rose by 123 percent to N465 billion and pledged assets, which expanded by 33 percent to N158 billion. The bank’s investment portfolio swelled by over 26 percent to N303 billion at the end of September 2020.
Customer lending improved by about 11 percent to N793 billion over the period. This means an addition of over N77 billion in new lending over the nine-month period. Loans and advances grew for the second year after an increase of 13 percent at the end of 2019.
The bank maintained its earnings growth levers on the upbeat in the year but failed to get anywhere close to the strong growth in asset base. It achieved an increase of 10 percent in interest earnings year-on-year to N112 billion at the end of the third quarter. This is the highest growth rate in interest income for the bank since 2014.
The increase in interest earnings reflects the expansion of the key earning assets of loans and advances and investments over the period. However non-interest income closed flat at N34 billion at the end of September 2020 and neutralized the gains in interest income.
Nevertheless, FCMB still registered the highest growth rate in revenue in four years over the three quarters of the 2020 financial year. At over N146 billion at the end of the third quarter, gross earnings improved by 7.8 percent year-on-year for FCMB. No reasonable improvement in revenue has happened for the bank since 2016.
The expansion of 22 percent in total assets is out of proportion with the increase of less than 8 percent in gross earnings. The growth in assets did not yield an adequate increase in earnings during the period. This led to a decline in asset turnover from 0.11 at the end of the preceding financial year to 0.09 at the end of September 2020.
Management applied cost saving strategies in the effort to defend profit margin and grow the bottom line. This worked for it in respect of cost of funds that was under its control but failed in respect of loan impairment expenses that are largely out of management’s control.
Interest expenses recorded a year-on-year decline of roughly 4 percent to close at N44 billion at the end of the third quarter. Improving interest income with declining interest expenses made a favourable combination for FCMB in 2020.
The share of interest income devoted to interest expenses went down from 45 percent to 39 percent over the review period. The positive effect is a top record growth of 21 percent in net interest income to N66 billion at the end of the third quarter compared to less than 5 percent improvement at the end of 2019.
There was a major increase in impairment losses on financial assets, which did not let all the increase in net interest income get down into profit. Net loan impairment expenses rose by 70 percent to over N13 billion at the end of September 2020. The expenses claimed nearly 20 percent of net interest income against 14 percent in the same period in 2019.
The development represents a sudden change of direction from three years of sustained drop in credit loss expenses to 2019. The bank’s management didn’t let the asset quality strain impede the growth of the bottom line.
FCMB combined the strengths of improving revenue and declining interest expenses and was able to dilute the impact of rising credit loss expenses and still add some momentum to the bottom line. The bank maintained the path of growing profit for the third consecutive year at the end of the third quarter though it is yet to return to the peak profit figure of N22 billion it attained as far back as 2014.
The bank closed the third quarter operations with an after tax profit of roughly N14 billion, which is a year-on-year growth of 30 percent. Profit accelerated from 16 percent growth the bank recorded at the end of 2019.
The ability to grow profit more than three times ahead of revenue underscores a gain in profit margin. Net profit margin improved from 7.9 percent in the same period in 2019 to 9.5 percent at the end of the third quarter 2020. This is the highest net profit margin the bank has seen since 2015. The strength came from cost saving from interest expenses and a moderated operating cost during the review period.
The bank shows good prospects for retaining the key strengths of growing revenue, moderating interest expenses and improving profit margin to full year. That would keep it on course for rebuilding profit for the third straight year in 2020.
Return on assets
FCMB closed the third quarter operations in 2020 with a return on assets of 0.8 percent, down from 1 percent it registered at the end of the preceding financial year. The weakness reflects largely the decline in asset turnover in the year but also on the bank’s relatively low profit margin. Despite that profit margin improved, it is at the low end of the wide gap in profit margin among banks.