By Omoh Gabriel Business Editor
FIRST City Monument Bank Plc is one institution the Nigerian banking industry is unapologetically proud of its history and it has sufficient reason to be. Founded in 1982 and commenced business in 1989, FCMB started as the first indigenous attempt at merchant banking in Nigeria. The early years saw the Bank make profound impact in corporate finance with participation in most of the key capital raising, merger and acquisitions and corporate restructuring deals that happened in the financial market.
With a solid entrepreneurial foundation, it was not difficult for it to play such complementary roles in the nurturing and sustenance of other corporate organisations through the provision of not only the much needed capital but also advisory services. To the present FCMB, this is a legacy bequeathed and tradition to be sustained.
Perhaps, in other to maintain this tradition of excellence and ensure best practice in directing and controlling its affairs, the Bank recently concluded a fundamental re-structuring of governance process. Under this exercise, the founder, Otunba Michael Balogun relinquished the chairmanship position, apparently to make way for a Balogun Jnr. who was subsequently appointed the Managing Director/Chief Executive Officer. The Board is now composed in a way that meet the requirements of the codes of Corporate Governance issued by regulatory authorities.
However, the respected founder did not completely leave the Bank as he instead, became the chairman of the First City Group, a position through which his invaluable advise and contribution can still be made available.
Interestingly, the implementation of this restructuring coincided with the first phase of the regulatory-induced recapitalisation exercise during which the Bank was literally called up to play a leading role within the merger group that it participated. For all intents and purposes, the Bank did not disappoint as it arranged one of the most seamless consolidation, witnessed in the industry. Under the exercise, FCMB acquired Co-Operative Development bank (CDB), Nigerian American Merchant Bank (NAMBL) and Midas Bank to form a much larger FCMB.
Industry watchers believe that the new FCMB is one of the few to have attained real integration to levels above 75 per cent 12 months after completion. This includes areas of human resources, technology and processes integration.
But perhaps what made things easier is that in several areas, the combined contribution of the three target banks to the enlarged entity was just about 20 per cent of which the FCMB accounted for the remaining 80 per cent value.
However, the Bank had to pay goodwill, about N3.66 billion to make the acquisitions, an indication of the enormous value it expected to gain in the process. One area the Bank saw potential is branch network. The acquired companies contributed 25 branches which the old FCMB, just before the merger, had just 24 branches. During the 2006 review year, FCMB expanded branches network to 91 meaning that it acquired/opened more branches in just one year than the number it already had. Likewise, it grew staff members from 521 as at April 2005 to 1,329 within a year. Of this number 243 came from the acquired banks.
In order to facilitate technological integration, the Bank recently commenced implementation of the new core Banking Application – Finacle. This software which went live by July 2006, is known to be robust for use in a retail banking environment where multi-channel strategy is implemented. This fitted appropriately to the new consumer-based retail banking approach the Bank has adopted to compete in the market.
Perhaps, to show its seriousness, the Bank proposes to earn at least 50 per cent of total income by way of consumer based income before 2011. Moreover, this is not just a company affair but a group strategy. Recently, it set up a new subsidiary in the Mortgage Market – FCMB Home Loans Ltd. For this outfit, it has set an ambitious goal to generate over N140 billion of mortgages between 2006 and 2011 to be funded through multilateral funding and long-term funding from the international and domestic capital markets.
As a way of deepening its consumer banking franchise, it recently signed a Memorandum of Understanding (MOU) with a Sabre Capital Worldwide, a private equity and management services firm known worldwide for professionalism in the sphere of consumer banking. The MOU provides for possible extension of scope of relationship to provision of international capital to strengthen the Bank’s competitive position especially with several banks making plans to go back to the capital market to raise more funds. But FCMB is not only interested in foreign investors coming to invest in it, it is also exploring the international scene, especially the West African sub-region and the continent.
Apart from the FCMB Home Loans Ltd., the Bank has other strong group members through which cross-selling opportunities are continuously explored. The FCMB Capital Market Ltd., and City Securities Ltd., stand out particularly as strong alliances maintained by it.
In order to make a more definite statement on the extent it can go to uphold shareholders’ rights and privileges, the Bank had in the past, set up the Investors’ Relations Unit to ensure that its relationship with the owners is always healthy and that dividend warrants, share certificates and other relevant information about the Bank are communicated to them regularly. It must be noted that not many of its competitors provide this all-important service as most of them simply leave the investor at the mercy of regulators. This is a reflection of the level of its commitment to the concept of shareholders’ wealth maximisation. In 2006, the Bank once again reported figures that, for all intents and purposes, fell in line with this overriding goal.
EARNINGS AND PROFITABILITY
During the year, gross earnings rose by as much as 79 per cent to N10.96 billion. But one unique thing about this performance is that there was also 50-50 distribution between interest and non-interest income.
Specifically, interest earning accounted for N5.53 billion or 50.5 per cent of total against N3.36 billion or 54.9 per cent in 2005. This reflects the strong corporate finance orientation of the Bank which has enhanced fee-related earnings. For the Bank, this earning structure was particularly significant in 2006 which witnessed only a modest expansion of risk assets. Less reliance on risk asset for growth gave the bank sufficient latitude to deal with deteriorating facilities inherent from the acquired banks. Measures taken ranged from aggressive recovery to outright cleaning of the relevant accounts.
Accordingly, the Bank achieved a net recovery of N17.9 million as at end of 2006 financial year as against net provision of N771 million in 2005. This was despite the provision of over 80 per cent of all risk assets inherited from the consolidatiion partners.
Apart from the significant increase in fees, one other area that positively influenced direction of the bottom-line was the relative decline in unit cost of funds. Following better access to low cost funds, this dropped from average of 10 per cent in 2005 to five per cent in 2006. In fact, the Bank’s plan is to further reduce this to two per cent by 2011.
With these positive developments, net profit responded positively with an increase from N798 million in 2005 to N2.84 billion in 2006 which translates to increase in return on average equity from 15.9 per cent to 17.5 per cent even in the fact of significant increase in share capital. Earnings per share also increased from 17.9 kobo to 29.9 kobo.
As a result of the impressive performance, directors recommended a dividend of 13 kobo per share against 7.5 kobo in the previous year. Note, however, that the Bank was able to pay this dividend after writing off the entire consolidation goodwill of N3.88 billion in one fell swoop from share premium reserve.
CAPITAL AND SAFETY ISSUES
As a response to the recently concluded phase of banking sector reforms, FCMB set out early enough to recapitalise operations by way of private placement. Recall that prior to this, the Bank was a relatively small private company with just about N2.7 billion shareholders’ fund. It followed up successively with a public offer which was adjudged to be outstanding in its packaging and a success. This, therefore, improved the Bank’s clout in the market leading to its successful fund acquisition of three other banks. At the end of it all, shareholders’ fund rose to about N29.0 billion. However, with the decision to write off all the goodwill from the share premium account, shareholders fund closed at N25.2 billion as at April 30, 2006, up from N7.22 billion in 2005.
The steep increase equally gave rise to sharp increase in risk weighted asset ratio from 21 per cent to 46 per cent, yielding a safety margin that gives significant room for expansion. In fact, the unusually high margin resulted due to the low risk asset portfolio that existed. The Bank, however, gave an indication that it is now prepared to significantly increase this in 2007.
Notwithstanding the obvious high level of comfort implied by its current capital base relative to operations, FCMB has entered into strategic alliances which industry watchers believe are aimed at further increasing capital base in the near future.
QUALITY OF BALANCE SHEET ITEMS
Prior to consolidation, FCMB had always endeavoured to maintain modest quality portfolios that rank slightly above average in quality. For instance, in 2004, non-performing loan ratio was about 13 per cent but improved further to 10 per cent in 2005. However, in 2006, this deteriorated by 30 per cent following the consolidation of accounts of the acquired banks. This proved very challenging to the Bank’s risk management process during the period but the Bank took necessary measures to clean up the accounts through recovery and provisioning. The position is expected to improve in 2007.
Perhaps, as a result of the above, the Bank consciously conserved a significant portion of proceeds from recapitalisation and new deposits in cash and short-term assets. This shot up the liquidity position tremendously with liquid/total assets ratio moving up from 56 per cent in 2005 to 70 per cent as at close of 2006 period. Theoretically, this reduced earnings potential but increased the Bank’s ability to meet obligations to customers, and also served as a counter-balance to reduced quality of risk assets.