By Folakemi Emem-Akpan
Our analysis of First City Monument Bank’s (FCMB) recent financial reports show that the year 2015 was not quite a profitable one for the bank. With a very low increase in gross earnings, followed by a huge one-off provision for a receivable, profits were much lower than that of the prior year. As such, profit margins were lower and investor compensation smaller. The Bank however, made it a point to reward shareholders with a dividend, although this was significantly lower than what they got in 2014.
The bank enjoys tremendous goodwill, but this is not exactly evident in the valuation of its stock. It appears currently undervalued, and is exchanging for less than it should on the floor of the Nigerian Stock Exchange.
For its investors and shareholders, the 2016 financial year seems to be shaping up to be a better one than 2015 was, if the half year results are anything to go by.
Contrary to the trend in the banking industry for the 2015 financial year, clients patronised FCMB a little less in businesses regarding loans and advances. The bank’s loan portfolio decreased by 4 per cent to N592.9 billion. Despite this, average lending rate increased over the preceding year’s, as did its average deposit interest rate. So while it charged its lenders more, it also paid its depositors a better interest.
Net interest margin, the true test of a bank’s effectiveness in its core banking operations of lending and borrowing, moderated to 51.6 per cent in 2015 from 61.6 per cent in 2014.
The bank’s gross earnings (which comprise interest income and other fees and commission) increased to N152.5 billion. Such gross earnings were just a 2.6 per cent improvement over the preceding year’s N148.6 billion level.
The growth in turnover, small as it is, however did not make it all the way to the bottom-line. Pre-tax profit declined by 67.8 per cent to N7.7 billion, and profit after tax declined by 78.7 per cent to N4.7 billion. The reason documented by the bank for this was a steep increase in net impairment loss on financial assets. FCMB Managing Director, Peter Obaseki, calls it a one-off provision for a receivable.
Earnings per share, was predictably lower than that of the prior year, closing at 24 kobo, as compared to N1.12 before. Dividend per share also moderated to 10 kobo in 2015 from 25 kobo in 2014.
As previously mentioned, FCMB’s slightly higher turnover intersected with lower profits, and as such profitability ratios for FCMB dipped in 2015. First to achieve a regression was the profit margin of the company, dipping to 5.0 per cent in 2015 from 16.1 per cent in 2014. What this means is that for every N100 earned by the bank in the course of the year, only N5.00 made it to the profit position, as compared to N16.10 for the year preceding 2015.
Assets deployed also earned less in 2015 than it did in 2014. Return on assets (ROA) for the year stood at 0.7 per cent in 2015, as compared to 2.0 per cent in 2014.
For the 2015 financial year, FCMB deployed equity valued at N162.4 billion and for every N100 equity deployed, the bank made an after-tax profit of N2.90, a sharp decline from the profit of N13.80 made in 2014.
It seemed downsizing paid off for the bank in 2015. During the course of the year, the number of employees in its employ decreased to 4,143 from 4,430. Despite this, earnings per employee improved to N36.8 million on the average, up from N33.5 million in 2014. This is an indication of employee productivity and company efficiency.
The proportion of the bank’s loans classified as non-performing in the course of the year was 4.2 per cent, higher than 3.6 per cent in 2014, but still within acceptable levels.
In terms of capital adequacy, FCMB performed better in 2015 than it did in 2014, as its result for the year was higher than the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 27.4 per cent of the loans and advances it gave out to borrowers, up from 26.0 per cent recorded in the preceding year.
A common feature of the banking industry for the 2015 financial year is that most banks had high current ratios. FCMB was not an exception. Current ratio was 1.2 times and this matched its peers’ in the industry for 2015.
With a debt to equity ratio of 6.1, the bank was using N6.10 of liabilities in addition to each N1.00 of its shareholders’ equity. In other words, the bank was using N7.10 of total capital for every N1.00 of equity capital. A little high but still within acceptable limits; it also matches what was normal in the banking industry in 2015.
For the review year, the company had a profit of N4.7 billion, and it retained 58 per cent of it. Asset turnover for the year was 0.1 times while assets/equity was 7.1 times.
In 2015, the bank’s actual growth (growth of income), at 2.6 per cent, was a little below its sustainable growth (2.8 per cent), suggesting that the company grew below its growth ceiling. Simply put, it did not achieve its inherent capacity for growth.
This was in contrast to the prior year, when at 13.4 per cent, actual growth was higher than sustainable growth (11.6 per cent), indicative of a company operating at a higher level than its latent possibilities.
As at December 2, 2016, FCMB’s stock traded at N1.00, and it was the seventh cheapest in the banking subsector of the Nigerian Stock Exchange. Our analysis shows that the stock is grossly undervalued at this price. Not only did its price fall below sector average as at analysis date, it also had a low earnings yield of 0.24 and a high P/E ratio of 4.2 as at same date. The combination of these figures gives the investor a basic understanding of how wealthy the company is for the investor, and their interaction points to undervaluation.
Other indices also support this undervaluation theory. As at analysis date, the company had a net assets per share (NAPS) value of N8.20, much higher than the N1.00 at which it traded on the floor of the stock exchange. Also, the bank had a book value of N162.4 billion and a market capitalisation of N19.8 billion, putting its book value/market cap ratio at 8.2. Traditionally, a book to market value ratio of more than one is an indication of undervaluation.
Available results from FCMB’s half year performance shows a gross earnings of N88.32 billion, up by 14.1 per cent from the level recorded in the corresponding period of 2015. Profit before tax and profit after tax grew much faster than turnover did, with profit after tax swelling with as much as 89.2 per cent to N15.7 billion.
As at half year, the bank presented earnings per share of 158 kobo, which is a vast improvement on the 84 kobo it presented in the prior year. Profit margin was also better, and all things being equal, these unaudited results point to a better outing come full year end 2016. Investors and shareholders should therefore have good reasons to have high expectations.
FCMB began many years ago as an investment bank, concentrating on financial advisory services and wholesale banking. It has however been able to successfully and gradually evolve into a robust retail franchise.
It has successfully transformed from just a bank for corporate Nigeria into everybody’s bank. This, has been, one of the unique strategies employed by the bank to ensure its continued relevance. In 2015 for example, the highest beneficiary of its loan and advances portfolio (as determined by volume) were individuals, not businesses, followed by oil and gas industry. In previous years, this was not the case.
By this, it has been able to grow its customer base and expanded its financing frontiers to micro-enterprises who in the past were not traditionally able to access these loan services. By transforming itself into a bank for the people, FCMB is positioning itself for further benefits.
FCMB is a solid bank, perhaps not too firm on its feet right now. But this unsteadiness is currently a general banking industry phenomenon, brought on by negative macroeconomic developments. We predict that the 2016 financial year will be a pertinent one that can be used to determine the growth trajectory of the bank.
Nbillion 2015 Percentage change 2014 Percentage change 2013
Turnover 152.5 2.6 148.6 13.4 131.0
Profit pre tax 7.7 -67.8 23.9 32.0 18.1
After tax profit 4.7 -78.7 22.1 39.0 15.9
Total assets 1159.5 -0.8 1169.4 16.0 1008.3
Equity 162.4 1.2 160.4 11.7 143.6
Liabilities 997.1 -1.2 1009.0 16.7 864.7
Deposits 705.6 -3.8 733.8 2.6 715.2
Loans and advances 592.9 -4.0 617.9 37.2 450.5
Earnings per share 24 -78.6 112 38.3 81
Dividend per share 10 -60.0 25
Core operations 2015 2014
Turnover growth rate 2.6 13.4
Profit growth rate -67.8 32.0
Average lending rate (%) 20.8 19.1
Average interest rate 8.4 6.2
Net interest margin (%) 51.6 61.6
Profit margin (%) 5.0 16.1
Return on assets (%) 0.7 2.0
Return on equity (%) 2.9 13.8
Earnings per employee (Nm) 36.8 33.5
Other important ratios
% of classified loans 4.2 3.6
Capital adequacy 27.4 26.0
Current ratio 1.2 1.2
Debt to equity ratio 6.1 6.3
Actual Vs sustainable growth
Profit margin (%) 5.0 16.1
Retention ratio 0.58 0.78
Asset turnover (times) 0.1 0.1
Assets/Equity (times) 7.1 7.3
Sustainable growth 2.8 11.6
Actual growth 2.6 13.4
Nbillion HY 2016 Percentage change HY 2015
Turnover 88.3 14.1 77.4
Profit pre tax 16.3 69.8 9.6
After tax profit 15.7 89.2 8.3
EPS (Kobo) 158 88.1 84
*Source: FCMB’s 2015 financial report
*FCMB’s 2016 half year unaudited results
*The Nigerian Stock Exchange