First Capital gets a clean bill of health


FINANCIAL services firm, IH Securities, says it expects First Capital Bank (FCB) to maintain a solid profit growth and forecasts a net income of ZW$3,45 billion (US$40,83 million) as banks return to their core lending business.

In FCB’s 2020 financial year, on an inflationary basis, the bank’s net interest income grew nearly 16% to ZW$851,68 million (US$10,08 million) during the period from a 2019 comparative of $734,94 million (US$8,7 million).

However, this was nothing compared to the bank’s non-interest income that grew nearly 46% to ZW$2,52 billion (US$29,82 million) for the period under review from a comparative of ZW$1,73 billion (US$20,47 million) on inflationary terms. The number is even more impressive on a historical basis with an 810% growth.

The performance of the non-funded income helped turn a 2019 loss of ZW$732,47 million (US$8,67 million) to a profit after tax of ZW$472,24 million (US$5,58 million) in 2020 for FCB.

“We expect the group to maintain solid profit growth and forecast FY21 net income of ZW$3,45 billion, up from ZW$1,74 billion (US$20,59 million) reported in FY20. Whilst we believe RoAE (Return on Average Equity) will begin to moderate in FY21, we see it remaining sturdy at 66,6% by YE (year-end),” IH said.

“The deliberate push by management to leverage on digitisation has yielded results as net fee and commission income fell just short of the billion mark at ZW$923,24 million (historical) (US$10,92 million), an increase of 817% from the previous comparable period.”

The performance of the non-funded income also helped with FCB’s cost to income ratio which improved from 95% to 50% as a result of the overall income improving.

“Improved economic confidence in the second half of 2020 saw transactional activity grow, which coupled with targeted price increases (due to inflationary pressure) saw increased fee and commission income,” FCB managing director Ciaran McSharry said, in the bank’s 2020 financial report.

“Operating costs increased on the back of inflation, exchange rate depreciation and Covid-19 related expenses. The bank remains focused on efforts to contain the increase in costs.”

In FCB’s financial results, McSharry stated the institution’s significant system investments made in 2019 had resulted in increased platform stability.

This created a springboard for more innovative product developments and seamless customer experience that worked well during the Covid-19 restrictions which resulted in the majority of companies to go digital.

“We estimate that yield in interest bearing assets lifted from circa 13% in FY20 to circa 24% in FY21 as cost of funding remained benign versus nominal interest rates. Notably, income from loans and receivables from banks and investment securities fell in real terms, contributing only 5,28% to the topline from 19,5% in the previous comparable period,” IH said.

“The bank’s NPL (non-performing loans) ratio trended below industry average at 0,16%. Interest expense grew 17,6% , however overall net interest income still grew 695% y/y.”

The bank’s total deposits grew by 331% driven by a 298% growth in local currency deposits to ZW$4 billion (US$47,34 million), while foreign currency deposits grew by ZW$3,7 billion (US$43,79 million), according to FCB’s 2020 financial report.

These local currency deposits were deployed into loans, which grew by 279% to ZW$2,3 billion (US$27,22 million), giving FCB a 63% loan to deposit ratio.

However, foreign currency loans declined in value due to the repayments of high value corporate loans held prior year, although volumes increased compared to 2019.

IH said the bank’s loan to deposit ratio reflected a sustained avoidance of risk.

“Net trading and foreign exchange income was up 1 343% y/y, from a combination of increased trade volumes on the interbank market as well as revaluation of the foreign currency earned on interbank transactions,” IH said. “Fair value gains on investment property of ZW$216,17 million (US$2,55 million) also contributed to the growth in the non-funded income segment. Overall, the bank registered a 782% growth in revenue for the period under review.”

While FCB was profitable, its operating costs grew 437% from ZW$267,78 million (US$3,16 million) to ZW$1,21 billion (US$14,32 million) on the back of increased staff costs which were up 525% for the period.

This is why the significant gains made on non-funded income were not fully realised.

IH said a ZW$508,42 million (US$6,01 million) increase in share of profits of joint ventures also helped increase the overall profit for FCB.

“The bank’s capital adequacy and liquidity ratio closed the year at 29% and 70% respectively, up from 26% and 55% in the prior year whilst core capital stood at US$26 million,” IH said.

IH said that as the spread between interest rates and inflation narrows this year it anticipated that banks would gradually revert to their core business of lending as previously revenue was being driven by the non-interest income.

“With cost of funding unlikely to shift significantly we expect nominal yields to remain robust supporting interest income going forward,” IH said.

“Depending on exposure to the Medium-Term Bank Accommodation facility (MBA), yields on interest earning assets could however be affected by the central bank’s announcement that banks that access the MBA facility can only on-lend the proceeds at a maximum 10% above the borrowing rate effectively putting an interest rate cap of 40%.”