FCMB Group Plc (FCMB) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's FCMB Group Plc's Nine Months 2020 Results Webcast and Conference Call. [Operator Instructions]. I must advise you that this conference is being recorded. And I would now like to hand the conference over to your first speaker today, Mr. Ladi Balogun, Chief Executive Officer of FCMB Group Plc. [ Please go ahead, sir. ]

Hello. We're ready to start?

Yes.

Okay. Good afternoon, ladies and gentlemen, and welcome to FCMB Group's nine months results investor and analyst presentation. My name is Ladi Balogun. I'm the Group Chief Executive Officer for FCMB Group. And on the call today with me, I have a number of my colleagues. Standing in for Adam Nuru, the bank's CEO who is currently in transit, is the bank's CFO, Mr. Yemisi Edun. We also have in the room today the CFO of FCMB Group, Kayode Adewuyi. We have Mr. James Ilori, who is the CEO of FCMB Asset Management and will be talking us through our wealth management activities and performance. We have Mr. Femi Badeji, who is the Executive Director, Corporate & Investment Banking, who'll be talking us through our Corporate & Investment Banking performance. And we have Toyin Olaiya, who is the bank's Chief Risk Officer, who'll be taking us through the risk management reviews. Also in the room today is the Chief Digital Officer, Emeka Eboegbune; as well as our Head of Investor Relations, Ms. Ori Rewane. I will start off by walking you through some introductory slides and then hand over to the Group CFO, Mr. Kayode Adewuyi, who will take you through the nine months results and on. So moving to Slide 4. We just give a quick summary of the key performance highlights for the 9 months year-to-date, and we see across the board, they have been broadly positive. Of note is the fact that our profitable tax rose by 24% to NGN 15.9 billion year-on-year when compared to the same period 2019. Also interesting to note is the growth we've seen in assets under management of 22% across the group, rising to NGN 462.1 billion compared to this time last year. I'd also want to highlight the growth in our digital customers at 56%, which as I think many companies and businesses experienced this, whereby as a result of the restrictions forced by COVID, we're seeing a more rapid adoption of mobile banking services within the bank as well as some of our subsidiaries of our services. As I said, most indices did improve. We saw a slight decline in our NPL ratio, which rose to 4.4%. Moving on to Slide 5. I'll just talk you through the sort of progress that we're making across our strategic teams, trying to build a more resilient business, trying to diversify our earnings away from pure banking and even within banking, trying to make sure that we're less concentrated in terms of the customers providing and driving this earnings, which we think will ultimately give us a lot more stability over time and, of course, the progress we're making on innovation. In terms of resilience, we've seen our capital adequacy ratio at the group level rise to 18.4%. This represents a 6.5% and a 2.2% increase year-on-year and quarter-on-quarter, respectively. This is largely because of the capitalization of the 9-month audited figures of the banking subsidiary. Our liquidity ratio fell by 16% to 33.5% quarter-on-quarter. However, it's important to know that liquidity was adversely affected by the very significant rise we've seen in cash reserve requirements. We've had NGN 257 billion of our deposits withdrawn by the CBN or -- of our funding, I should say, withdrawn by CBN and placed in cash reserve. And so that has been -- were it not for that, our liquidity ratio would have been very significantly higher. In terms of diversification of our business, we continue on a rapid customer acquisition strategy. This has grown 24% year-on-year in terms of customer numbers across the business. And we have 8.1 million customers as of September 2020. Personal and business Banking, which represents where most of these customers sit now, account for 71% of deposits, 30% of risk assets and 65% of net revenue. One of the key things we're also trying to do is move more and more of our profitability to more capital-efficient sources of income. And the most significant of this is investment management, where we saw year-on-year growth of 28%, and it accounts for 9% of our profit before tax. We saw that business achieve, as mentioned earlier, 22% growth in AUM. And this has really been achieved by leveraging the distribution model across our banking network and our total group customer base. In terms of innovation, we're making very good progress in this regard as well, still very much at the early stages, I would say. However, we've seen transaction volumes grow by 21% quarter-on-quarter on mobile banking, and this is across the app and USSD, and 72% year-on-year. Important to note that the 21% growth quarter-on-quarter was achieved after lockdown, where people did have access to branches and so on and so forth. So the growth that we're seeing is not only driven by the fact that people could not move around. We did see a drop in revenue, but we think this is temporary, where, in the 9 months, we saw 13% year-on-year drop, where we went from NGN 1.5 billion in the 9 months 2019 to NGN 1.3 billion. This was mainly due to the introduction of USSD session charges by the large mobile operators. Credit Direct has also launched its mobile app, and we expect that this business would steadily migrate its loan disbursements on to the digital platform and about 60% by the end of this year of the loans originated will be done digitally, and we expect that, that proportion will grow as we go into 2021. Our digital loans in the bank continued to be the main means of loan origination, certainly by count. We've so far been able to disburse about NGN 67 billion of loans digitally, representing 26% of the value -- sorry, 26% of the -- our loan sales in terms of value, but actually about 85% of the count. In terms of our API platform, as of Q3, we were able to connect about 50 technology companies and other organizations to us via this platform, and we're beginning to see gradual revenue contribution as we provide banking as a service to technology companies. We believe that as we go into 2021, again, this area will begin to contribute quite materially to our noninterest income and also to our float. I will now hand you over to Mr. Kayode Adewuyi, who will talk you through the results overview.

Thank you, Ladi. Good afternoon, ladies and gentlemen. I'll be presenting Slides 7 to 9. Slide 7 highlights the key performance ratios for the group. Our return-on-average equity improved year-on-year. This was supported by an increase in net interest margin and improved cost-to-income ratio. Our ROE, however, dropped quarter-on-quarter because of higher cost of risk and a dip in our net interest margins. Nonperforming loans, as stated earlier, grew year-on-year and quarter-on-quarter, largely because of the provision of some of foreign currency [indiscernible]. Our capital adequacy ratio improved at the end of third quarter to 18.4%, while liquidity ratio dropped to 33.5%, largely because of CRR withdrawals. But both capital adequacy and liquidity ratios are well above minimum [ level ] requirement. Slide 8 provides a summary of the contribution of our different business groups to overall profitability, assuring that commercial and retail banking still remains our largest [indiscernible] Slide 9 provides a statement -- a summary of statement of comprehensive income. Profit before tax grew 24% year-on-year, largely because of the significant increase in net interest income and moderate increase in operating expenses. Both were -- both reduced the impact of the increased impairment charges we had in the 9 months. However, profit before tax dropped 15% quarter-on-quarter despite the 7% growth in our net interest income. This is because of the impairment charges we took in the third quarter. Our operating expenses grew year-on-year, largely because of increase in regulatory costs and inflationary pressure. I'll now hand over to Yemisi Edun to take us through the commercial and retail banking subsidiaries.

Thank you, Kayode. Good day, ladies and gentlemen. I'll be speaking through Slides 11 to 20 for the review of the commercial and retail banking business in Q3 2020. Slide 11 speaks to segment and subsidiary net revenue contribution. Personal banking contributed 46% to net revenue, attesting to the sustainability of our retail-led [ book ] of using technology to drive scale and the acceptance of products and services. The segment has also consistently maintained a strong and stable deposit base, with the right low-cost mix from new-to-bank and existing customers. We have continued to see an upward trajectory on the digital transformation initiatives as more retail transactions are consummated through our electronic banking channels. Also, we shall continue to use digital initiatives to drive OpEx improvements and reduce cost of funds in the segment. Our SME banking contributed about 31% to net revenue from growth in net interest income, while the automation of SME lending has also improved loan origination and processing. Our commercial banking segment contributed 2% to net revenue; institutional banking contributed 5%; and FCMB UK Limited contributed 3%, respectively. Moving on to Slide 12, which is on Commercial and Retail Banking performance review. We saw a 26.8% year-on-year increase in profit before tax from increase in net interest income, securities trading and FX income. However, the PBT declined 34.4% quarter-on-quarter from impairment losses on financial assets and operating expenses. Net interest income increased 29.3% year-on-year and 1.3% quarter-on-quarter concurrently from the consolidated gains on low-cost deposit growth and improvement in cost of funds within the period. Noninterest income declined 14.9% year-on-year due to decline in fees and commissions and 3.2% quarter-on-quarter, respectively, from decline in FX income. Operating expenses increased 2.8% year-on-year because of regulatory overheads and COVID-19 community support, while the 5% quarter-on-quarter increase was because of partial easing of the lockdown in Q3 2020. Risk assets grew 1.3% quarter-on-quarter and 29.5% year-on-year, while deposits grew by 8.2% quarter-on-quarter and 32% year-on-year, respectively, mainly from low-cost deposit accumulation. Slide 13 speaks to noninterest income performance for the period. Net fees and commissions improved 16.8% quarter-on-quarter as the lockdown was eased in Q3 2020, but declined 21.4% year-on-year due to regulatory tariffs. Trading income increased 7.9% quarter-on-quarter and 18.7% year-on-year due to higher volume of trading activities in government-backed securities. FX income increased 150.5% year-on-year from revaluation gains. However, it declined 42.5% concurrently in Q3 2020. Moving on to Slide 14, which is on interest income and earning assets profile for quarter 3 2020. So total earnings assets increased by 5% quarter-on-quarter and 4.6% year-on-year. Interbank placements declined 89% quarter-on-quarter and 90% year-on-year. And gross loans and advances grew 1.3% quarter-on-quarter and 29.5% year-on-year. The gross loan book of NGN 318 billion represents about 39.8% of our total earning assets. On Slide 15, we will look at -- we look at the gross loan distribution by segment for the quarter. So accretion across most business segments resulted in 1.3% quarter-on-quarter and 29.5% year-on-year increase in the risk asset portfolio, in line with plan to grow the loan book in the year. The marginal drop in commercial banking quarter-on-quarter is from paydowns on revolving trade lines alongside a corresponding increase in drawdown post lockdown. 18.3% drop in institutional banking is likely from repayment on financial institutions secured lines with our U.K. subsidiary. Growth in personal and SME banking has remained consistent and sustained through the year, in line with plan. Quality loan growth is expected to continue across all the segments in the last quarter. Slide 16 shows deposits distribution by segment. And so retail, which is comprising of personal and SME banking deposits, now constitute about 84% total deposits, and this grew 10% quarter-on-quarter and 34% year-on-year, respectively. Moving on to Slide 17, which speaks to total deposit distribution by segment. So total deposits rose 8.2% quarter-on-quarter and 32% year-on-year from current and savings deposits and as a result of our focus on retail banking. Low-cost deposits now account for 81% of our total deposits, a 1% quarter-on-quarter rise from 80% and also 9% year-on-year rise from 72% previously. Slide 18 looks at OpEx analysis for the quarter. Operating expenses increased 5% quarter-on-quarter as normalcy returned to businesses in Q3 from the lockdown, while the increase in 2.8% year-on-year is from regulatory, overheads, IT costs and COVID-19 business and community support. Slides 19 and 20 place special emphasis on the performance of our various digital channels. On Slide 19, you see that we have continued to see improved adoption and usage of our mobile channels at 6.3 million out of 7.4 million customers now use mobile channels. This represents about 85% of the total customer base and addition of 1 million new users onboarded from Q2 2020. On Slide 20, we see channels usage analysis showing adoption and usage across digital, alternative and branch channels for consummation of transactions by customers. Digital continues to lead with about 53% adoption and usage, while over 90% of count of personal loans were processed on digital channels during the quarter. Thank you very much. I'll now hand over to Femi Badeji to present the Corporate & Investment Banking performance.

Thank you, Yemisi, and good afternoon, everyone. I will be speaking through Slides 22 to 26. Whilst gross earnings increased 3% year-over-year to NGN 44.7 billion, net interest income decreased 11% year-over-year to NGN 9.8 billion, largely due to a drop in yields. Noninterest income grew 39% year-over-year from NGN 2.6 billion to NGN 3.6 billion, largely driven by the brokerage business, with the bright spots being achieved in commissions and other income. Operating profit declined by 14% year-over-year to NGN 4 billion, largely due to a 6% increase year-over-year in expenses. Losses after taxes increased from NGN 980 billion to -- NGN 980 million to NGN 2.2 billion as a result of impairment charges, which we expect a moderation of in the fourth quarter. The business is focused on returning to profitability and is boosting its efforts to increase noninterest income to offset the decline in risk asset yields whilst also becoming more efficient with the use of its balance sheet. Moving over to Slide 23. Loans grew 28% year-over-year to NGN 527 billion, whilst deposits grew 85% year-over-year to NGN 189 billion. This loan and deposit growth was largely due to increased customer activity as well as some gains from FX revaluations. CIR increased 7% year-over-year to 70%, largely due to the reduction of the yields on risk assets from 11.3% to 9.2% as well as an increase in operating expenses. The return on average equity declined by 120 basis points to negative 3 -- 2.3%. Slide 24 provides a contribution analysis for the CIB segment's noninterest income. Net fees and commissions' contribution to noninterest income increased in Q3 2020 to 98% against 93% year-to-date because of the good growth in our brokerage business. Trading income contributed 1% year-to-date and declined in Q3 2020 due to a drop in prices in some proprietary portfolio stocks. Other income represents mainly dividend income received by our brokerage business, which dropped in Q3 2020 as the dividend payment season wanes. Slide 25 shows the breakdown of interest income and earning assets. Gross loans and advances grew 28% year-over-year primarily by an increase in new loans to customers and some FX revaluation gains on the loan book in Q2. The gross loan book of NGN 526 billion represents 99% of total earning assets for the CIB segment. Investments in government and corporate securities fell 27% year-over-year due to a sharp drop in market rates on T-bills, bonds and other instruments. Slide 26 shows the deposit distribution trend over the past 5 quarters. Corporate Banking's deposits rose 5% quarter-over-quarter and 86% year-over-year driven by CASA deposits as a result of an extensive reengagement effort with quality corporate banking accounts. And as at the end of Q3 2020, 70% of the deposits are classified as low-cost deposits. I will now hand over to Mrs. Toyin Olaiya, Chief Risk Officer, to take us through the risk management review section.

Thank you, Femi. Good afternoon, ladies and gentlemen. I'll be taking you through the risk management review on Slide 28 to 30. So moving on to Slide 28. This slide summarizes the loan book by sector. The loan book witnessed a marginal growth of 0.3% quarter-on-quarter and 25.6% year-on-year. The year-on-year increase was partly induced by 6.5% movement in exchange rates. And growth was also witnessed in certain focused sectors like agriculture, retail, manufacturing and commerce. Growth in commerce sector came largely from trade lines, while the consistent growth in retail has been driven by our various digital initiatives in the year. The agriculture sector grew by 5.6% quarter-on-quarter and 28.2% year-on-year and continues to be an area of focus for the bank. Loan growth will continue in line with our plan for the year. I now move on to Slide 29. Here, we're looking at NPL distribution by sector. Nonperforming loans grew quarter-on-quarter by 26.4% and 59.7% year-on-year. The quarter-on-quarter NPL growth was largely due to impairment charge taken on in particular accounts in the oil and gas downstream sector. We also witnessed strong deterioration in the retail loan book quarter-on-quarter, mainly due to the impact of COVID-19 and reduced collections and recovery. Commerce sector NPL grew by 23.8% quarter-on-quarter, and this came partly due to deterioration in the account of a few of our SME [indiscernible] that were impacted by the COVID-19 pandemic. I now move on to Slide 30. On this slide, this slide [ is ] the trend of cost of risk year-on-year and quarter-on-quarter. The year-on-year growth we have seen has been due mainly to the impact of COVID-19 and the resulting reduction in recoveries and collections that we have witnessed this year. Thank you. I now hand you over to James Ilori, who will take you through our investment management review.

The investment management group grew assets management by NGN 83 billion year-on-year, with about 51% of that coming from the Collective Investment Schemes and Wealth Management business lines. The growth achieved was despite the challenges caused by the low interest rate environment and a NGN 10.3 billion pension contribution refund to PenCom. Here, PenCom conducted a pension industry-wide [ bodies ] on behalf of the federal government. The audit slashed the excess government's contributions of over NGN 850 billion. So the refund of NGN 10.3 billion was actually part of this and was around 7% of the total. In terms of the 3 primary drivers of AUM growth, the first was e-learning investment training sessions that were run for the sales staff within FCMB Group; and the second has to do with increased use of digital platforms such as online pension RSA registration portal. The portal accounted for 25% of all RSA registrations by our Pensions business at the end of the third quarter. This compares with just 2% in the first quarter of the year. And lastly, the third primary driver of growth was targeted direct sales. Our Pensions business accounted for 74% of the third quarter AUM of NGN 462 billion. Cost-to-income ratio fell by 9% year-on-year, reflecting better-than-budgeted revenue growth, cost efficiency controls and cost savings from the COVID-19 restrictions. This was achieved despite loss fees on the unexpected NGN 10.3 billion pension contribution refund to the government. On the AIICO Pension Managers Limited acquisition, we expect to receive regulatory approval this year. I'll now move to Slide 33. We project a full year AUM of NGN 614 billion, which would represent a growth of 52%. This figure captures the expected AUM impact from the acquisition of AIICO Pension Managers Limited. Also, we expect our CIS and Wealth Management business lines to account for 20% of the total year-end AUM that comes around NGN 823 billion. And finally, full year PBT should increase by 15% year-on-year to NGN 2 billion. We expect our Pensions business to contribute around 62% of that, which should come to around NGN 1.24 billion. The AIICO Pension Managers Limited acquisition should start to add to income from next year. Thank you. I'll now hand you back to Mr. Ladi Balogun to take us through the general outlook for the rest of the year.

Thank you. So if we could just look at the final slide. We believe that we should be able to end the year relatively strongly. Impairment charges should remain constant. The bank having done a Q3 audit, we have a fairly good sense of what the audited state of the loan book is like. So we don't expect material surprises there. Barring any further devaluation of the currency, we expect that the loan book will grow by about 12% full year, so a very modest growth in Q4 because I think we've already done [ something like ] 10% to 11%. We expect that the revaluation gains will also be recorded in Q4. We expect to see continued momentum in digital lending. Corporate & Investment Banking should continue to see revenue growth as well, driven largely by investment banking fees and commissions as opposed to loan growth or loan yields, which we expect will be around the same level. OpEx, we expect to decline in Q4 as our regulatory charges, specifically our AMCON levy, is taken in the first 3 quarters of the year, so that will not feature in Q4. And we expect that, as mentioned in the prior slide, AUM growth will continue, with the full year growth being slightly above 20% without the addition of AIICO. So overall, Q4 should be relatively strong compared to Q3 or relatively stronger than Q3, largely backed by reduced OpEx and continued growth in noninterest income, primarily from Corporate & Investment Banking as well as digital banking. That brings me to the end of my presentation. We thank you for listening and are ready to take your questions.

[Operator Instructions] There are still no questions coming through on the phone.

Should we take a question?

Yes. One moment. I'm [indiscernible].