FCMB Group sets for growth in Q2, but operational expenses may disrupt the trajectory.

  • FCMB Group appears set to sustain its growth trajectory in Q2.
  • However, there might be potential challenges related to operational expenses that could impact this trajectory.
  • It is essential to carefully manage and control the costs and expenses, so as to sustain the growth trajectory.

FCMB Group is targeting to achieve N89.179 billion in gross earnings during the second quarter of 2023.  This projection indicates an increase from the N65.465 billion generated in the second quarter of the previous year. 

This is contained in its Q2 2023 earnings forecast released via the Nigerian Exchange (NGX) and seen by Nairametrics. 

Furthermore, the document states that the expected revenue growth will contribute to a projected profit before tax of N10.91 billion, representing a 16% year-on-year growth. 

It is important for companies to set earnings guidance. Earnings guidance serves as a benchmark against which a company’s actual financial results are evaluated.  If the company’s actual earnings significantly differ from the guidance provided, it can have an impact on investor sentiment, stock prices, and the company’s reputation.    

In the case of FCMB, the group has continued to record impressive performance across key income and balance sheet lines and exceed its guidance.   In 2022, the Tier-2 bank posted a 5-year record growth of 61% YoY in profit before tax, exceeding its 5-year compounded annual growth rate (CAGR) of 15% per year.  This indicates that FCMB’s profitability has been growing at an accelerated pace, outperforming its own long-term growth trend.  

This growth reflects the bank’s ability to effectively manage its operations. It suggests that FCMB has been successful in implementing strategies and initiatives to drive financial performance and create value for shareholders. 

Looking at its most recent (Q1 2023) results, FCMB will most likely beat the Q2 guidance. The Tier-2 bank posted a 5-quarter record gross earnings of N87.434 billion, exceeding guidance by 10.20%.   Consequently, Group PBT grew by 78% YoY from N6.0b in 1Q 2022 to N10.7b in 1Q 2023. 

However, while it has shown impressive year-on-year growth, the growth on a successive quarterly basis moderated across metrics. This could potentially impact the bank’s ability to meet its guidance in the future. 

For instance, in Q1 2023, gross earnings grew by 5% and 50% QoQ and YoY respectively driven by YoY growth in both net interest income and non-interest income.  In the same vein, while profit after tax grew by 80% YoY, it grew by 13% QoQ. 

One of the potential reasons seen for the QoQ moderation in profit after tax is higher operating expenses relative to operating income.    

The QoQ growth of operating expenses by 26% to N34.638 billion, outpacing the growth in operating income of 15% to N50.496 billion, has led to an increase in the cost-to-income ratio by 9% to 68.6%, though it improved YoY by 6%, it is still high. 

The cost-to-income ratio is an important metric that reflects the efficiency of cost management in relation to generating income. A higher cost-to-income ratio indicates that a larger proportion of the bank’s income is being utilized to cover operating expenses. 

To improve profitability and sustain the growth trajectory, FCMB may need to address the factors contributing to the higher operating expenses and cost-to-income ratio. 

This could involve implementing cost control measures, optimizing operational efficiency, and exploring opportunities to increase revenue while managing costs. 

In the case of increasing revenue, certainly, a combination of improved yield and expansion on average earnings assets can put FCMB in a favorable position to achieve its profit-before-tax guidance of N10.909 billion for Q2 2023. 

This is very important considering that interest earned on loans and advances make up a signification portion of the bank’s gross earnings.  The Group’s interest income from loans and advances to customers in Q1 2023 stood at N49.830 billion (Q1 2022: N38.017 billion).  This value represents about 75% (Q1 2022: 81.42%) of interest income in Q1 2023. 

With interest income accounting for approximately 75% of gross earnings over the last 5 quarters, it underscores the importance of effectively managing and growing this component of the bank’s revenue.

The Tier-2 bank has set a target interest income of N72.303 billion for Q2 2023, reflecting a year-on-year growth target of about 41% and a QoQ growth target of 9.5%. However, the QoQ growth in interest income of 0.88% in Q1 2023 indicates that the bank needs to put in additional efforts to raise its interest income to achieve its target.

Albeit, it is commendable that FCMB has maintained high asset quality and a healthy balance sheet, as reflected in its regulatory ratios. The reported Liquidity Ratio of 35.4% in Q1 2023 above the minimum regulatory requirement indicates that the bank has sufficient liquid assets to meet its short-term obligations and manage liquidity risk effectively.

Additionally, FCMB’s Capital Adequacy Ratio (CAR) of 16.6% in Q1 2023 exceeds the minimum regulatory requirement of 15%. The CAR is a measure of a bank’s financial strength and its ability to absorb potential losses. By maintaining a CAR above the regulatory threshold, FCMB demonstrates its robust capital position and capacity to withstand adverse economic conditions. These strong regulatory ratios indicate that FCMB is well-positioned to meet regulatory requirements and maintain financial stability. They also provide confidence to regulators, investors, and stakeholders regarding the bank’s ability to manage risks and safeguard the interests of depositors and shareholders

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