FCMB Group Plc

FCMB GROUP PLC

Company Overview
Though First City Merchant Bank was incorporated as a private limited company on April 20 1982, it was not licensed until August of the following year. In 2001, it became a universal bank and was renamed First City Monument Bank. It went public in 2004 and got its shares listed on the Nigerian Stock Exchange in the same year. The bank acquired Nigerian-American Bank Limited, Midas Bank Limited and Co-operative Development Bank Plc in the wake of the banking consolidation of 2005. Also, it acquired FinBank Plc in February 2012.

FCMB Group Plc was formed on 20th November, 2012 as a non- operating financial holding company with offerings in stockbroking, commercial banking, investment banking, trusteeship and micro-lending making it a full-fledged financial services provider.

Its subsidiaries are FCMB Capital Markets Limited, CSL Stockbrokers Limited, CSL Trustees Limited and First City Monument Bank Limited.

The major shareholders of FCMB are Capital IRG Trustees Ltd, Stanbic Nominees Nigeria Ltd and Asset Management Corporation of Nigeria. Together they account for 43.4% of the company’s equity stake (2014:46%). Domestic investors have 61.3% (2014:58.5%) equity participation.

The company’s 10-man board comprises one executive director and nine non-executive directors. The chairman of the board is Dr Jonathan AD Long while the MD is Mr. Peter Obaseki.

Investment Thesis
Retail banking is the highest contributor to revenue. And interest income is responsible for 72.3% of revenue over the past eight years. At present, the non-banking subsidiaries account for about 2.2% of operating income. The economic quagmire and the general apathy to the capital market are responsible for the declining contributions of its subsidiaries in recent years. But we are of the opinion that the bank’s resolve to diversify its income base by leverage of the competence of these subsidiaries will pay off in the future.

Though the quality of its loan portfolio looks good, we are of the opinion that that it may worsen if management does check this going forward. Most of its loans are given to the retail end of the market. Although it is lucrative, it comes with some risks. In 2015 Individuals got loans of NGN134.7 billion as against 118.7 billion of the previous period. This represents 22% of total credits (2014: 18.7%). It is against this backdrop of under-collaterisation of personal loans and dwindling economic fortunes that we put forward our opinion.

Also, the bank grants a lot of credits to the volatile oil and gas sector of the economy. The upstream sub-sector got the second largest loans amounting to 16.1% of gross loans (2014: 14.5%). This sub-sector poses more risk than the downstream subsector. Besides, NGN7.2 billion of total loans was written off in the year (2014:NGN7.4 billion).

Though the bank is solvent, the bank should watch its liquidity position closely.

Valuation
FCMB has a historical Book Value Per Share and Earnings Per Share of NGN7.3 and NGN0.5 respectively. Adjusted Earnings Power Value is put at NGN3.5.

Our Discounted Cash Flow Model gave a price ranging from NGN10.7 to NGN15.6 for a share of FCMB. A return of is anticipated in three years’ time.

Financial Overview
Gross and net earnings increased by 11.2% and 8.3% respectively on the average over the past seven years. However, revenue only grew by 2.6% in 2015 while Profit After Tax (PAT) lost 78.5% in the same year. This tantamounts to a year-on-year dip of 10.9% in revenue for the year under consideration. PAT growth has been erratic over the past eight years. Despite an improvement in interest income, net interest income dropped by 12% because interest expenses outgrew interest income.

Profit margins declined; net interest margin was 41.9% down from 48.9%; Profit Before Tax (PBT) margin of 5.1% compared to 16.1% of the previous year; PAT margin worsened by 11.8%. Shareholders’ fund hit NGN162.4 billion compared to NGN160.4 billion of the year before.

Earnings Per Share (EPS) lost 69.3% to close at NGN0.35. Return on Equity (RoE) and Return on Assets (RoA) are 4.3% and 0.6% respectively compared to 14.9% and 2.1% of a year ago.

The proportion of loans that is non-performing is low. It stood at 4.2% at year end (2014:3.6%).

Business Risk
Suffice it to say that the lack of liquidity and business profitability in the economy as a whole has affected the ability of banks to grow their deposits. FCMB has a weak competitive advantage relative to its peers. However, it could leverage on the goodwill of its non-banking subsidiaries to nudge up its earning capacity and deliver a moderate return to shareholders.

Recommendation: Buy

Vital statistics of FCMB