FCMB Group Plc (FCMB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to 9 months '21 results webcast and conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Ladi Balogun, Group Chief Executive. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen, and welcome to FCMB Group Plc's 9 months analyst and investor presentation. The figures and performance that we're presenting today include the audited numbers of the bank that were done as at September 2021, hence, the delay in the publishing of our 9 months results, and this is done to enable us to transfer dividends to our holding company ahead of our full year numbers. I will be taking you through the initial introduction. And then hand over to our Chief Financial Officer, Deji Fayose, who will talk you through the 9 months results overview. After this, we will be having a review of our digital business activities which should be done by Mr. Gbolahan Joshua. That is not actually stated in this agenda, but Mr. Gbolahan Joshua, who is our Chief Operating Officer in the holding company, will be walking you through the digital business review. We will then have Yemisi Edun, who's the Managing Director, take us through the review of the commercial and banking business. And then we will have Femi Badeji, the Chief Financial -- sorry, Femi Badeji, the investment banking -- Corporate Investment Banking Director, take us through the performance of the core investment banking division. We'll have Toyin Olaiya, who will talk us through the risk management review and she is the bank's Chief Risk Officer. And we would finally have Mr. James Ilori, who is the CEO of FCMB Asset Management, talk us through the investment management review. So, taking you back to the main presentation and Slide 3, which gives a summary of our performance in the 9 months to 2021 -- 9 months of 2021. We see that most of our indices trended positively. Our balance sheet grew by 20% to NGN 2.4 trillion, and our profitability was more or less flat relative to this time last year at NGN 15.7 billion versus NGN 15.9 million, so a marginal decline of about NGN 200 million. This, however, does not show the significant improvement that we saw in the quarter because as at half year, I think we were trending about just under 20% or thereabouts from the same position last year. As we see from most of the other indices, they're also positive with the exception of ROE that did come down slightly by about 90 basis points to 8.9%. And capital adequacy ratios that came down by 170 basis points to 16.7%. In terms of balance sheet in more detail, we saw the deposits grew by 12%, loans by 22%, and NPL ratio also reduced slightly by 120 basis points. Our AUM grew by 10% to NGN 510 billion. I should stress that this does not yet include the AIICO Pension acquisition, and I'll explain why later. Customer base has risen by 11% to 9 million, and our digital customer has risen slightly faster by 16% to 7.4 million. The next slide gives you a sense of the things that are underpinning our strategy and how we're faring on those. We're focused on innovation, largely through digital. We're also very much focused on diversification, trying to reduce the -- or increase the contribution, I should say, of nonbank activity and also the general concentration, customer concentration continues to be diversified or reduced. And increasingly, what we're focused on recognizing that we do have a fairly [ capital ] group structure and an increasingly large customer base is we're building an ecosystem that can benefit both our customers as well as our partners and their customers. So specifically, how these things fare along these pillars. On the digital side, we've seen our revenue hit NGN 18.3 billion coming mostly from payments and lending activities as of the 9 months ended September 2021. These revenues have grown quarterly and now account for 12% of growth -- gross earnings. Specifically, digital lending has seen NGN 94 billion of disbursements in the first 9 months of the year. The portfolio size, which is about NGN 48.5 billion has increased by over 170% in 9 months. And this lending now accounts for about 46% of our digital revenue. In terms of customer growth, as mentioned earlier in the last slide, our digital customers are now 7.4 million. We're achieving this by continuing to simplify our onboarding processes across the group. So this is not just in the bank, but also in our asset management business, where now about 50% of our customers are acquired digitally in the pension business. We're also leveraging data much more effectively to do digital marketing. And what we're also finding is that one of the reasons more and more customers are choosing to bank with FCMB is the strength and simplicity of our lending products in the retail space, and that is in itself leading to more of them onboarding onto our digital channels once they start a borrowing relationship with the bank. And in some instances, once they have a relationship, actually accessing those loans increasingly from the mobile phone. So moving on to diversification on the next slide. We now have about 69% of our profits coming from the Nigerian banks, while other subsidiaries account for 31% of our profits as of 9 months 2021. We're increasing our investments and accelerating growth across the investment banking business, the wealth management and pension businesses. Micro lending and our offshore franchise, which for now is just the U.K. as we see the regulatory costs and the fairly challenging macro environment creates obvious headwinds for the banking franchise. Although we do believe that with the initiatives we've taken around innovation, we should continue to see fairly strong growth in the profits of the bank going into last quarter of this year and next year 2022. That being said, by continuing to invest in these other areas, we expect that the contribution of the non-Nigerian Bank activities will hold steady or continue to grow as we go into next year. I talked a bit about the ecosystem approach that we're taking and I wanted to explain this a little bit more. We do have a group structure that enables us to offer an extensive range of products to our customers, from lending to investments and payments to name a few. This large customer base of about 9 million, which is this year will grow by about 1 million. And I think it's the first time we'll cross 1 million customer growth in a year and we will try and sustain this going into future years and in fact, increase in 2022. This is creating a large base for us to sell a varied number of products to. We're beginning to find that there are a number of partners that either want to leverage our infrastructure, our wide product range or our large customer base. And working with those partners, we are beginning to see somewhat of an ecosystem that is emerging on the digital side of our business. This will allow us to scale faster and it will also help us build efficiencies whilst creating value for our customers, the partners that we're working with and all stakeholders. Moving to the next slide, but I'll just give a quick update on the FCMB AIICO merger. I'm pleased to say that we're finally at the end of this fairly long drawn-out transaction. We did obtain all regulatory approvals for the acquisition specifically in Q2 2021. We then, before effecting the acquisition, chose to proceed to obtain approval for the merger, which we received at the beginning of Q4 2021 from all the regulatory bodies from PenCom to FCCPC. So the path is now clear for us to get our shareholder approval and court sanction to conclude the merger. We chose not to effect the acquisition so that we would not need to consolidate the income statement of AIICO until after we have been able to take all restructuring charges. So I will talk a little bit in about the impact on 2021 and 2022 performance. But before that, just so we're clear, the next steps for us are basically to receive court approval to hold the shareholders meeting, we expect that imminently. Get the shareholder approval for the merger, which we're very confident we will get, and then pull sanctions of that merger. So the aim is to have operational integration before the end of this year. Based on the approach that we've taken to defer the actual acquisition, it means that there will be minimal impact on the income statement. Most of the restructuring charges, they run into several hundreds of millions of naira will be taken in the business before we consolidate and obviously before we merge. So what we will be running with once we actually consolidate is a -- an AIICO business, an AIICO Pensions business that already reflects the synergies that we have been working on over the last few months, which is about NGN 1 billion and of course, the AUM of about NGN 155 billion. So what we will be looking forward to in 2022 is for the full financial year, the full P&L impact of the of the synergies of about NGN 1 billion. We think, therefore, that AIICO pensions will add about NGN 1.2 billion to the profit of our Pensions business in 2022, and about NGN 170 billion to our AUM conservatively. I now hand you over to our Chief Financial Officer, Deji Fayose, who will talk you through the results in a little bit more detail on the result.

Thank you, Ladi, and good afternoon, everyone. I will take you to Slide 8 to 10. Overall, our third quarter performance improved from the previous quarter, slightly from higher trading in FX revenues, but we saw a slight decrease year-on-year from lower interest margins and increase in regulatory costs, which are credit for about 44% of our total cost growth. After the commissions, trading income and loan recovery also improved year-on-year as we saw trading revenues and treasuries coming better than speed. If I move on to Slide 9, profits before tax increased 46% quarter-on-quarter, but dropped marginally by less than 1% year-on-year. Net interest income increased 3% quarter-on-quarter growth as well, but we saw a 4% year-on-year decrease from net revenue from funds as a result of lower yields on earning assets. On the other hand, impairment charges increased 84% quarter-on-quarter, but dropped 39% year-on-year as the group continues to witness improved loan recovery efforts across all our businesses. The group is on track to achieve its full year '21 PBT forecasts. And operating expense is expected to moderate in quarter 4 as the banking subsidiary has taken 100% of AMCON charges due to the audit of the 9 month financials. So this is a snapshot of financials. And I'll now hand over you to Mr. Gbolahan Joshua, Core Group COO. Thank you.

Thank you, Deji, and good afternoon, everyone. My name is Gbolahan Joshua, I'm taking you through slides 12 to 17, where we just speak on our digital business. On Slide 12, key priorities for this year, simplified customer adoption, increasing the level of revenues we had and also diversifying retail-led [indiscernible] into the SME sector. On Slide 13 just shows an overview of customer adoption over the period. We moved from acquiring an average of 200,000 customers every quarter in quarter 1 and quarter 2 to 250,000 customers in quarter 3, that's a growth of about 25%. And this year, we expect to acquire over 1 million customers by the end of the financial year, which is inclusive of AIICO acquisition of over 250,000 customers. On Slide 14, it just shows the breakdown of our digital revenues, NGN 18.3 billion for the 9 months. We're on track to hit NGN 25 billion for this year. 46% of the revenues are from the payments business and then 54 -- sorry, 46% for lending and 54% of payments business. Contribution to gross revenues is 12%. Overall, mobile, card and digital lending accounts for 90% of revenues, 25% of the digital lending revenues in the retail business comes from our microlending business. If you look at the pie chart at the bottom of the slide, about 30% of the revenues are coming from our SME digital lending, 15% from retail digital lending and 30% mobile. If you go to Slide 15, distribution of trend of digital revenues just shows that quarter-on-quarter growth was about NGN 4.9 billion, increased to NGN 6.4 billion in quarter 2 and then quarter 3 is about NGN 6.8 billion. A lot of that is due from traction with SME lending business as well as [ payment ] business. We're replicating the successes we have in retail lending business to invest in as an open business. If we go to Slide 16, it just shows that digital loan portfolio is NGN 48.5 billion. It used to contribute 2.2% of the loan book, increased to 2.5% from Q1, Q2 was 3.3% and now it's at 5%. The loan book has actually grown from about NGN 17.8 billion to NGN 48.5 billion, accounts for 5% of the loan book. But in terms of loan growth [ this year, ] the group has grown by about NGN 144.8 billion, and digital has contributed NGN 30.6 billion to this group, which is a value contributed of 21.2% side. And then just some highlights of what we achieved from the retail and SME lending business in last 9 months [ FCMB, ] SME digital loan posted over NGN 74 billion to over 14,000 customers, average ticket size by NGN 5.2 million. Portfolio size currently at NGN 37.8 million. As at the end of 9 months, we'll have about 10,000 customers there. For retail we disposed of our 24 billion and over 600,000 customers, average ticket price of 40,000, portfolio size about NGN 10.7 billion at the end of 9 months to about 215,000 customers. I'll now hand over to Yemisi Edun, who's the Managing Director of market subsidiary. Thank you.

Thank you, Gbolahan. Good day, ladies and gentlemen. I'll be speaking from Slide 19 to 24 on the review of the commercial and retail banking business for 9 months ended September 2021. Slide 19 shows the dashboard of key performance metrics. Deposits have grown year-on-year by [ 61% ] and quarter-on-quarter by [ 12% ] to NGN 1.47 trillion. Return on average equity increased by 3.3% quarter-on-quarter to close at 10.1%. Gross loans grew 14% quarter-on-quarter to NGN 477 billion, while the cost-to-income ratio has been trading downwards to 70.5% as at Q3 as we continue to implement our cost optimization plan for the business. Moving on to Slide 20, which contains an analysis of the Commercial and Retail Banking performance for this period. Our PBT improved 54% quarter-on-quarter due to 3.5% and 7.5% increases in net and non-interest income respectively. Net interest income, however, declined 3.4% year-on-year because of growing imports of funds in the market. Non-interest income grew 7.5% quarter-on-quarter and 12.9% year-on-year. This is still attributable to increase in fees and commissions due to increase in transacting customer activity and often, it's platform reliability. Operating expenses decreased 3.2% quarter-on-quarter. However, it increased 8.2% year-on-year. This is largely due to technology enhancement cost, increased regulatory cost, double-digit inflationary impairment and currency devaluation. As mentioned earlier, risk assets grew 14.2% quarter-on-quarter and 49.9% year-on-year. Deposits also increased 4% quarter on quarter and 15.5% year-on-year, respectively, as the bank continues to grow its assets. Slide 21 contains net interest margin analysis. Due to sharp decline on the yield on liquid assets, which is predominantly driven by lower yields on FGN fixed income and also special treasury bills that yielded about 0.5%. Our NIM has remained nearly flat. This special treasury bills account for 33% of average assets over the period and more than 7% of total assets. We are, however, gaining momentum in the digital lending space for SME and retail sectors. We also -- we therefore expect an improved NIM over the next quarter. On Slide 22, we have the net revenue by business segment. Personal Banking contributed 47%, which represents 9.8% year-on-year as it remains on course with our strategy of using innovation and technology, to increase our retail share for this month. This segment has a strong deposit base with a stable liability mix, which continues to position the business for sustainable growth and profitability. We have continuing to see the growing acceptance of our retail products designed with the customer first approach and digital agility. We will continue to use to adopt innovation and technology, to grow transaction volumes, improved cost efficiencies and customer experience. The SME segment contributed 33% to net revenue, driven mainly by growth in net interest income. This growth is supported by the automation of the SME lending platform and partnerships with DFI. Treasury & Financial Markets contributed 8% to net revenue. FCMB UK Limited contributed 5%, Institutional Banking contributed 5% and Commercial Banking contributed 2% to net revenue. Moving on to Slide 23, which analyze the deposit trend for the period. Total deposits rose 4% quarter-on-quarter and 15.5% year-on-year, driven by CASA deposits and because of our sustained focus on retail banking. Low-cost deposits now account for 72% of our total deposits. Low-cost deposits remained flat quarter-on-quarter but grew 6.1% year-over-year. Retail deposits that is part of our personal and SME banking now constitutes about 82% of total deposits and grew 3.3% quarter-on-quarter and 13.1% year-on-year. On Slide 24, we provide the cost analysis and reduction plan for the year. Operating expenses decreased 3.2% quarter-on-quarter. However, it increased 8.2% year-on-year. The decline quarter-on-quarter was due to continued drive to tame operating expenses while the year-on-year increase was due to regulatory costs and resumption of business operational post lock-down. Regulatory costs, that is NDIC and AMCON leading grew 24% year-on-year and accounted for 18% of operating expenses in the 9 months 2021. Reduction plans include but not limited to get a centralization and automation of brand processes. The deployment of staff from back office to front office, focus will remain on driving efficiency and reducing cost-to-serve. Thank you for listening. I will now hand you over to Femi Badeji, who will present the performance of the Corporate & Investment Banking business.

Thank you, Yemisi, and good afternoon, everyone. My name is Femi Badeji, and I'll take you through the CIB section of the presentation, which are Slides 26 through 27. Slide 26 shows some key performance highlights of the business. Total assets grew year-over-year by 9% to NGN 567 billion, while the deposits grew year-over-year by 30% to NGN 244 billion. Net interest margin declined 50 basis points to 2.3% due to increased funding costs, while operating income declined 10% year-over-year to NGN 12 billion, driven largely by the declines in brokerage commissions and trading income. Moving to Slide 27. CIB's PAT decreased quarter-over-quarter by 55% and 110% year-over-year. The quarter-over-quarter drop was mainly due to a 34% increase in OpEx and a 10% drop in net interest income, whilst the year-over-year drop was due to a 33% increase in operating expenses driven by regulatory costs. Net interest income dropped 3% quarter-over-quarter and 8% year-over-year. The quarter-over-quarter decline was largely due to increased funding costs. Non-interest income decreased 10% quarter-over-quarter, and this was primarily due to a 195% and 29% decline in income on financial assets and advisory fees, respectively. Year-over-year, CIR increased 48% as operating income declined by 10%, whilst operating expenses increased by 33%. Although NPLs increased year-over-year from 2.3% to 3.1%, impairment charges did drop by 40% and 30% quarter-over-quarter and year-over-year. LDR trended downwards from 269% to 208% year-over-year as our tech solutions and debt collection strategy began to translate to increased deposit growth. I will now hand you over to Toyin Olaiya, Chief Risk Officer of the bank, to take us through the risk management review section. Thank you.

Thank you, Femi. Good afternoon, everyone. I'll be taking you through the risk management review on Slide 29 to 32. Slide 29 summarizes loan book by sector currency and segment. Growth in the loan book has been consistent year-to-date in line with plan as we ended the quarter with 4.8% growth quarter-on-quarter and 20.5% growth year-on-year. Increase in loan book quarter-over-quarter was primarily driven by growth in commerce, finance, individual and agriculture. On segment distribution, we saw growth in the retail and SME book, in line with plan, as we continue to improve portfolio diversification. Corporate Banking represents 53% of the loan book with SME and personal banking accounting for 37% of the portfolio. Our loan growth plan for the year is well on track as we have achieved 17.1% growth year-to-date against our plan of 14%. I now move on to Slide 30. This shows our loan book performance for the period under review. We closed the quarter with NPL ratio of 3.4%. Nonperforming loans grew by 7.7% quarter-on-quarter and 7.8% year-on-year, coming largely from a corporate account in the manufacturing sector, currently experiencing repayment challenges. Workout is currently ongoing on this account. On segment distribution, personal and SME banking accounted for 52% of the NPL book, while corporate banking accounted for 48%. The quality of our loan book continues to be a key priority for us. Moving on to Slide 31. This slide speaks to our cost of risk and net impairment charge trend. Cost of risk and net impairment charge dropped quarter-on-quarter and year-on-year, largely due to improved recoveries. Moving on to the next slide, slide 32 shows how we have proactively built reserves with relatively stable NPLs year-to-date. Impairment coverage has also been consistently above 100%, largely due to expected credit loss in line with IFRS 9. We remain mindful of quality of loans being originated and we will continue to monitor the loan book for performance. Thank you. I'll now hand you over to Mr. James Ilori, who will take you through the investment management review.

Thank you, Toyin. Good afternoon, everyone. I will take you through Slide 33 to 35. And I'll start with Slide 34. Assets under management closed 9 months September at NGN 510 billion. We saw that the investment return contributed significantly to the increase that we recorded over that period. Obviously, due to the recovery we saw in the fixed income and equities market this year relative to what occurred in 2020, our Pensions business ex AIICO accounted for 78% of the third quarter asset under management compared with 77% in the previous quarter. Taking AIICO into consideration that percentage would have risen to 83%. The number of retirement savings accounts grew by more than 3% in the 9 months to September 2021. And we saw the registration via our digital platform accounted for 54% of the increase in the 9 months to September 2021. We improved the net inflow in excess of NGN 2 billion from the transfer window in the third quarter. Inclusive of AIICO, that figure came to about NGN 1.1 billion. And looking at cost-to-income ratio, that's reduced by 4% as we continue to record strong revenue growth and expense reduction from cost efficiencies. Moving to the next slide on our projections for the full year. We expect it's a 33% year-on-year increase in assets under management. So we expect to close the year with assets under management of NGN 679 billion, that figure is inclusive of AIICO, and we expect AIICO to account for 33% of the AUM projection. Contribution to AUM from collective investment schemes and wealth management should account for 16% of the total year-end AUM projection, that's down from 26%. That was recorded at the end of last year, and obviously reflects the expected impact of the consolidation of AIICO's AUM on the Pensions business line. Our full year PBT is projected to increase by 34% to NGN 2.74 billion, with our Pensions business, inclusive of AIICO contributing about 70% of the total. We believe the recent increase in the minimum shareholders' funds for pension fund administrators from NGN 1 billion to NGN 5 billion will provide opportunities for further consolidation within the pension industry. We remain open to taking advantage where there are clear synergies between our business and those of potential targets. Just as an update, we expect to close the year with shareholders' funds of roughly NGN 8.5 billion, which would be 70% above the regulatory minimum. At this point, I'll hand you back to Ladi Balogun to talk you through our general outlook for the rest of the year. Thank you.

Thank you, James. So our outlook is that we expect to end the year stronger in Q4. And this will be driven by improving NIM, supported by continued growth in our low-cost deposits as well as our loans in both the SME and personal banking space. We expect that we will add at least another 475,000 customers in the fourth quarter to our ecosystem with 250,000 of them coming from AIICO and about 220,000 coming from the bank and at least 5,000 coming from other non-bank subsidiaries. We also expect that noninterest income will continue its steady growth driven by fees and commissions coming not only from transaction banking or transacting customers, I should say, but also treasury sales, asset management and investment banking. As discussed earlier, we will also see AUM growth of about 33% as a result of the final consolidation of AIICO Pensions, and this will support income growth in Asset Management. OpEx will reduce in Q4 because we will not have the impact of the recurring AMCON levy, and we do expect to see a rise in our cost of risk by approximately 20 basis points. Finally, given the strong growth in Q3 PBT and the non-recurrence of AMCON and its levy in Q4, we're now expecting that 2021 PBT for the full year will exceed 2020. Thank you very much. We're happy to now take your questions.

[Operator Instructions] We have one question from the web. It's from [indiscernible] from CardinalStone is asking regarding the asset portion of your what portion of your loans in advance are currently on bonds? And of these loans on format, what sector are they concentrated? And what is the outlook for these loans in 2022?

Sorry, can you take that question?

Yes, yes.

Did you get the question?

Yes. The question is relating to what portion of our loans and advances are currently on for [indiscernible] And of these loans on the bonds, what sectors are they concentrated in. What I would say is that the audited financials in line with IFRS 9. So we have about 24% of our loans in Stage 3. But of that portion, about 10% of our total loans at the facilities on forebearance, and they are mainly in the oil and gas sector and power sectors. So those are the two sectors.

There is a follow-on it that asks what's the outlook of these loans in 2022?

Okay. So what we're doing right now, so most of the facilities enjoyed the initial profit forbearance, which lapsed in June. So subsequent to that, like I mentioned, because there are many syndicated facilities. So the obligors have requested for restructuring. So right now, those facilities are currently undergoing restructuring arrangements, but the lenders have granted some temporary extension accommodations. So but these facilities have been current on interest based on the upside that we have out with the oil price, especially for the facilities in the oil and gas sector. So the plan is to restructure, reschedule repayments in line with cash flow. So we are optimistic about the future of these facilities. So like I mentioned, yes, they're Stage 2 because of the COVID and the restructuring and ongoing restructuring That is, I mean, ongoing on this facility. So we optimistic about the future of these facilities.

Thank you. There are no questions from the phone. I will hand back the conference to you.

Okay. If there are no more questions, we thank you very much for your time, and we look forward to seeing you next year, and we wish everyone a pleasant end of the year. Thank you.

That concludes the conference for today. Thank you for participating.