Retail banking helps FCMB boost earnings

Few lenders in Africa’s largest economy, Nigeria, are as innovative as First City Monument Bank (FCMB) Limited, a bank that uses diversification to reduce risk and also maximise profit. In this time of high interest environment, FCMB’s 2014 full year result is worth emulating by other Nigerian lenders.

For the year ended December 2014, FCMB’s profit after tax surged by 38 percent to N22.13 billion from N16 billion the same period of the corresponding year (FY) 2013.

Gross earnings were up by 13 percent to N148.63 billion in the review period compared with N140.0 billion as at December 2013.

Despite the increased business risk, FCMB interest expense remained flattish at N45 billion, while interest income and net interest income increased by 14 percent and 26 percent, respectively.

The stellar performance of the bank can be attributable to its foray into retail banking and the use of hedging tools which is a major driver of growth. FCMB was able to spur growth with its balanced and diversified business. It has also diversified in currency, segment and products.

The ability of its savvy management and board of directors in using currency diversification in providing a good natural hedge against the depreciating currency of its shareholders also helped place the bank on a growth trajectory.

“However, the most significant segment play for us has been retail banking, which now accounts for 50% of revenues and deposits,” said Ladi Balogun, the group managing director/chief executive officer of FCMB.

“Our unique retail banking strategy has led to healthy margins, and in spite of the constant margin pressure of cash reserve requirement, we have been able to sustain our net interest margins to be amongst the best in the industry,” Balogun said.

FCMB is relatively a new entrant into retail banking and its foray into the segment started about 10 years ago though the lender has been largely a wholesale bank for the first 22 years of its existence.

The Nigerian lender has complemented its retail lending leadership with an ever expanding channel network which includes: 250 branches and growing, internet and mobile banking, Point of Sales (POS) terminals (to help SMEs and large retailers with more efficient collections), a 24-7 multilingual call centre, and an array of cards to facilitate payments. “Our focus remains the reliability and convenience of these channels.

“For example, you can apply for a debit card and collect it at a branch nearest you within an hour. You can also open a bank account via the internet without leaving your home, obtain your account number and start performing transactions, all in a matter of minutes,” Balogun said, noting that “our internet banking and mobile banking apps, which you can also register with and perform transactions quickly, can be downloaded on your mobile devices”.

The bank chief said the lender will continue to develop new lending models especially for those who currently don’t have access to credit as they believe in being a supportive bank while lending.

In terms of strengthening of operations, the bank added that it is committed and will continually strive to make its transacting, savings and investment products more helpful, simpler to use and reliable.

Impressive loan growth means bank is supporting real sector. FCMB is aggressive about lending as loans to deposit ratio spiked to 83.67 percent in FY 2014 from 63 percent in December 2013. Loans to customers surged by 37 percent to N617.98 billion in FY 2014 from N450.53 billion as at December 2013, while deposit to customers increased by 3 percent to N733.80 billion in 2013. It also means the lender is targeting loans to small and medium enterprises, oil and gas, construction, agriculture and industries. The loan growth shows FCMB has continuously been able to develop its risk management strategy and improve on the quality of its loan portfolio.

FCMB’s total assets were up by 5.55 percent to N1.14 billion in 2014 from N1.08 billion in 2013.

“We are targeting the growth areas of the economy that fit in with the country’s comparative advantage. These include population (hence our focus on consumer loans); agribusiness (which accounts for 25%+ of our GDP, with the potential to be a net export sector for the country); and finally oil and gas (which accounts for 20% of our loan book, when we include both upstream and downstream). While all three sectors grew strongly, agriculture and personal loans remain key growth areas this year,” said Balogun.

The bank plans to increase its customers to 3 million by the end of the year from 2.5 million. It is currently acquiring 500,000+ customers per annum.    

“We need to step this up to 750,000 pa. Great products and great service will drive high word of mouth referrals and deliver this customer base”, Balogun added, saying, “We are heavily focused on doing the right things that stimulate strong recommendations”.

The bank is utilising shareholders’ resources in generating higher profit as the average return on equity (ROAE) of 14.58 percent it recorded in 2014 is higher than 11.61 percent posted in  2013, while the return on average assets (ROAA) jumped to 2.05 percent in 2014 from 1.67 percent in 2013.

FCMB has a steady dividend policy as it declared a dividend of 25k, which represents a payout of 10 percent and a dividend indicated gross yield of 11.45 percent. Earnings per share (EPS) increased by 38 percent to 112k in 2014 as against 81k in 2013.

Arguably, the growth at the top and bottom lines amid tough operating environment makes FCMB one of the best performers among its peers that have released 2014 financial results.

Analysts had betted that the devaluation of the naira and the hike in interest rate would make it difficult for lenders to record double digit growth in earnings.

The Central Bank of Nigeria (CBN) devalued the naira in November, raised the benchmark interest rate to a record 13 percent and banned the use of dollars purchased at its twice-weekly auctions for the import of items such as electronics, telecommunication equipment and generators.

This macroeconomic measures, analysts said, is inevitable as oil, which accounts for over 80 percent of export and 90 percent of foreign exchange has reduced by 50 percent, dealing a blow on external reserves.

FCBM in a proactive move has been able to use gains on revaluation of foreign currency to shore off the impact of the currency volatility on its balance sheet.

As a result of the macroeconomic challenges, some companies are planning their cash flows ahead of time. The exchange rate volatility and difficulty in accessing dollars have resulted in companies that are profitable, becoming less profitable and those that are marginal now suffering.

“We anticipate that credit risk will rise and cost of risk may therefore increase but not too significantly. We should offset the impact of this from the gains we make from the revaluation of the foreign currency element of our balance sheet and income statement,” Balogun told BusinessDay.

He added that he expects the demand for Nigerian bank stocks, including FCMB’s, to remain relatively low as most of the bank’s investors are international and “they benchmark us against other African banks”.

“Most big African markets are oil importers and therefore should see a stronger currency while ours is under pressure due to drop in oil price. Therefore, you might argue that a devaluation or negative currency outlook isn’t great for share prices; but this is only in the short run,” said Balogun.

The year 2015 will undoubtedly be a tough year for banks as the high interest rate environment and devaluation of the naira will impact on bank stocks. Growth rate might be around 5 percent per annum.

However, loosening of interest rate by the CBN will ease the pressure of currency volatility caused by fall in oil price. Also, with such easing, lenders will be able to grow their earnings which have been crimped by the tightening stance.

“My personal belief is that a slightly more benign interest rate environment (not necessarily single digit) will help stimulate growth and attract long term investment rather than hot money, but we must be ready for some naira devaluation”, said Balogun, noting that “the question is whether we have the reserves to support this and how we plug the gap if we don’t. In the long run, we have no option but to invest massively to create jobs.”

He noted that “eventually we must become net exporters in the agriculture sector, refined petroleum products and petrochemicals, and then manufactured goods. This can only be done if we are competitive. The right price is everything and comes into this equation from capital to transport, to power etc. Right now the only competitive resources we have are gas, minerals and people.”

“Therefore, our projections are largely dependent on policy direction. If we adopt a growth oriented economic strategy, then banks will do better in a sustainable manner. Either way, we stand ready to support the economy to drive inclusive growth and promote prosperity,” he added.

The bank CEO said he strongly believes there are upside potentials for Nigerian lenders post election as there will be less uncertainty. “Investment activity will resume and that can only be good for banks,” he said.

BALA AUGIE