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Fortis MFB: Regulatory hammer cuts earnings

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Fortis MFB: Regulatory hammer cuts earnings

The technical suspension on Fortis’ shares for inability to submit financial statement as at when due impacted negatively on the earnings of the lender. Chris Ugwu writes

 

Microfinance Policy Regulatory and Supervisory Framework (MPRSF) were launched in 2005 and the objectives were to address the prolonged non-performance of many existing community banks.
This has been attributed to incompetent management, weak internal controls and high cost of transactions. Other objectives to be addressed by MPRSF are poor corporate governance, lack of well-defined operations, restrictive regulatory/supervisory requirements, and weak capital base of existing institutions.

Indeed, a huge gap exists in the provision of financial services to a large number of active but poor and low income groups, especially in the rural areas as a result of rigidity in operations of formal financial institutions in Nigeria.
However, despite the efforts, the problem of funding has remained a major militating factor against the effectiveness of micro finance banks in Nigeria.

This is because the Nigerian economy has continued to face major headwinds, from substantial decline in international crude oil prices to significant constraints to business activities in the north eastern part of the country owing to the activities of insurgents.

The fall in crude prices had heightened pressure on the Nigeria’s foreign reserves and the domestic currency, leading to the volatility in exchange rate and a dip in foreign reserves.
These microeconomic pressures and unrelenting regulatory adjustments have to a large extent constrained the margins of financial institutions in the country.

Fortis Microfinance Bank Plc, which had sustained considerable growth in bottom line, has also been affected by not only harsh operating milieu but investors’ negative perception following the suspension NSE placed on its shares for default in filing 2016 financial results as and when due.

The MFB, which began to show positive outlook earnings during the second quarter of 2016, dropped sharply in the third quarter of third quarter of 2017.
The share price, which closed at N2.58 per share in March 31, 2017 has remained at the same price even as at Friday due to the technical suspension placed on the shares of the company.
Financials
Fortis Microfinance Plc began the first quarter ended March 31 2016 with 55.31 per cent drop in profit after tax to N71.910 million from N160.933 million recorded a year earlier.
Its pre-tax profit equally dropped by 55.31per cent from N102.728 million the previous year to N229.904 million during the period under review.
Fortis’s interest income grew by 17.89 per cent from N566.429 million in 2015 to N667.774 million during the financial year 2016.

However, the lender’s second quarter ended June 30, 2016 profit after tax grew by 14.42 per cent to N267.996 million from N234.225 million recorded a year earlier.
The institution’s pre-tax profit equally grew by 14.42 per cent from N334.608 million the previous year to N382.851 million during the period under review.
Fortis’s interest income grew by 37.73 per cent from N1.304 billion in 2015 to N1.796 billion during the financial year 2016.

Also, the lender’s third quarter ended September 30, 2016 profit after tax grew by 15.27 per cent to N421.729 million from N365.845 million recorded a year earlier.
In a filing from the Nigerian Stock Exchange (NSE), the microfinance institution’s pre-tax profit equally grew by 15.27 per cent from N522.636 million the previous year to N602.471 million during the period under review.
Its interest income rose by 44.38 per cent from N1.836 billion in 2015 to N2.651 billion during the financial year 2016.

Fortis’ full year ended December 31, 2016 profit after tax inched up marginally by 0.44 per cent to N586.255 million from N583.703 million recorded a year earlier.
The microfinance institution’s pre-tax profit however, dropped by 5.65 per cent from N882.521 million the previous year to N832.605 million during the period under review.
Its interest income increased by 19.26 per cent from N3.649 billion in 2015 to N4.352 billion during the financial year 2016.

Fortis Microfinance sustained positive bottom line in the half year ended June 30, 2017 with profit after tax growing by 152.82 per cent to N677.549 million from N267.996 million recorded a year earlier.
A report obtained from the NSE, showed that the microfinance institution’s pre-tax profit equally rose by 152.82 per cent from N382.851 million the previous year to N967.927 million during the period under review.
Fortis’s interest income rose by 40.53 per cent from N1.796 billion in 2016 to N2.324 billion during the financial year 2017.

However, the MFB’s third quarter ended September 30, 2017 profit after tax dropped by 82.52 per cent to N73.713 million from N421.729 million recorded a year earlier as challenges of operational environment tool toll on the company.
Its pre-tax profit equally fell by 82.52 per cent from N602.471 million the previous year to N105.305 million during the period under review.
Fortis’s interest income grew marginally by 3.36 per cent from N2.651 billion in 2016 to N2.740 billion during the financial year 2017.

Default in filing results
Consequent upon the inability of Fortis to submit its year end 31 December 2016 audited financial statements to the NSE when due, as required by the applicable provisions, the shares of the Bank were suspended from being traded on the floor of The Exchange.

According to the management, the non-rendition of statements to the Exchange within the material period was chiefly attributable to the fact that, as a banking institution, the statements of Fortis had to be submitted to the apex bank prior to being released for any purpose.

“The technical suspension of Fortis’ shares from the trading floor of the Exchange set off a chain reaction that culminated in several unintended outcomes, the most significant being the panic withdrawals of deposits it triggered. This was because the announcement was largely misconceived, misinterpreted and misunderstood as a revocation of the Bank’s operating license.
“Although the Exchange lifted the suspension on 15th September 2017, after the Bank submitted the financial statements and met other conditions for the lifting as required by the Exchange, it was impossible to change the mindset of majority of depositors within such a very short time, “the management noted.

It noted that the Bank is addressing these challenges, adding that in the third quarter of 2017, just as Fortis was on the cusp of migrating to a more versatile and robust Core Banking Application, several accounting anomalies were unearthed that had to be immediately brought to the attention of the Bank’s primary Regulator, the Central Bank of Nigeria.

“Due to the observed accounting irregularities, previous financials filed with regulatory authorities and released to the public may have been impacted and may have to be restated where necessary. With the approval and guidance of the CBN, Fortis is currently engaged in a far-reaching house cleaning exercise, which at the end will culminate in the emergence of a leaner, healthier bank set apart by a renewed emphasis on professionalism and adherence to international best ethical standards,” the Bank said.

Outlook
In furtherance of the process of enshrining good corporate governance, the lender said it recently identified three qualified individuals with considerable experience to join the Board as independent directors who have no previous existing relationship with Fortis in any way, shape or form.

These individuals according to the bank, would be presented to the shareholders for their approval at the next Annual General Meeting (AGM) of the Bank, which is expected to hold during the first quarter of 2018.
“If approved, the addition of these individuals to the Board will enhance the Board’s capacity to perform its oversight functions and enhance the workings of various critical board committees.

Furthermore, negotiations are on-going with the bank’s group of foreign lenders to grant it the much needed respite through the restructuring of existing facilities,” it said.
The bank added that discussions are also at an advanced stage to engage a reputable firm of turnaround experts working in concert with a revitalized management team to quickly restore the FMFB on the path of sustainability and profitability, through the adoption of a revised business model and rejigging of the existing Five-Year Strategic Plan.

Last line
For micro finance sector to experience positive times, the industry should embrace changes in business environment, which presents uncommon opportunities to deepen penetration of the market through creativity and ingenuity.

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