Fimbank plc published its 2018 annual financial statements on March 25 and convened a meeting with financial analysts on April 10 in conjunction with the publication of the annual report ahead of the annual general meeting on May 7.

The Fimbank Group registered a profit after tax of $10.2 million in 2018, representing an increase of 36 per cent over the profitability achieved the previous year. More importantly, however, is the fact that this represents the third consecutive year of profitability for Fimbank arising from the revised business strategy launched in May 2015 following the significant losses incurred between 2013 and 2015.

The consistent increase in profits over the past three years is an important message for shareholders, especially those who supported the bank in the two most recent rights issues ($50 million in 2014 and a further $105 million in 2018), which were necessary following the losses sustained between 2013 and 2015 mainly due to the substantial deterioration in the bank’s asset quality particularly in Russia and India. Undoubtedly, shareholders were anxious to see whether the group can once again deliver positive and sustainable returns.

The 2018 income statement shows that the group registered a significant improvement in ‘net operating results’ to $21.1 million (2017: $6.5 million) as revenues grew by $9.9 million and costs declined by $4.7 million. The jump in revenues materialised from the higher level of assets following the sizeable capital injection during the first half of 2018, as well as improved margins and reduced funding costs. While the improvement in the operating results is an important signal on the potential for the group going forward following the introduction of a realigned business strategy, on the other hand, the 2018 financial statements were also negatively impacted by a higher level of impairment allowances compared to the previous year. This has disappointed many shareholders following the commitments made by the senior executives over recent years to strengthen the bank’s risk management practices and also introduce new governance structures. Although the impairment allowances reflect the specialised and higher-risk nature of the bank’s activities when compared to traditional retail banks and a number of new provisions were required in 2018 in the trade and commodity finance segments, it is worth highlighting that the level of impairment allowances also take into account the stricter recognition criteria of new regulatory standards. Moreover, during the recent analyst meeting and also in the shareholders’ newsletter issued in April, Fimbank’s CEO Murali Subramanian reassured stakeholders that the impairment allowances “have been immediately addressed with recovery efforts already under way”.

A positive indicator in the financial statements of Fimbank is the improvement in the cost-to-income ratio to circa 64 per cent after several years of much higher levels. Fimbank’s CFO Ronald Mizzi confirmed during the analyst meeting that this important financial metric should continue to improve in the years ahead primarily as a result of improved revenue generation. Although costs declined by $4.7 million in 2018, the cost base is not expected to decline at the same pace in future years since this mainly reflects the sale of Latam factors (Chile) in 2018 as well as the one-off regulatory expenses incurred in 2017 which were not repeated in 2018.

The higher level of revenue is expected to continue to materialise in 2019 and beyond since the funding from the rights issue has not yet been fully utilised

The higher level of revenue is expected to continue to materialise in 2019 and beyond since the funding from the rights issue has not yet been fully utilised. In fact, the CEO explained that the inflow of $105 million from the 2018 rights issue was not only necessary for regulatory purposes but also represented a boost for the bank to maximise its scale and grow the business in a structured manner. Fimbank’s regulatory common equity Tier 1 (CET1) ratio increased to 17.6 per cent as at the end of December 2018 following the capital injection and the profit retention since no cash dividends will be distributed for the sixth successive year.

Mr Subramanian also indicated that the support by the KIPCO group (the ultimate majority indirect shareholder of Fimbank) during the rights issue was a strong sign of confidence for all stakeholders including the credit rating agencies. Fimbank is rated by FitchRatings and in their most recent analysis in August 2018 they maintained a ‘BB’ rating, which is below investment grade. It is undoubtedly a major objective for Fimbank to attain an improved credit rating in the future which would classify the bank within the investment grade category. This would be an important milestone following the setback between 2013 and 2015.

A key financial metric for shareholders in all companies is the return on equity (ROE). Despite the strong jump in profitability in 2018, Fimbank’s ROE eased slightly to 4.5 per cent, reflecting the much larger capital base following last year’s large rights issue. The additional capital has not yet been fully deployed and once management utilise the additional funding from the rights issue, Fimbank should be able to achieve additional growth in revenue and profits in the years ahead. In fact, Mr Subramanian repeated last year’s guidance on achieving a more attractive ROE in future years. The CEO explained that with the funding in place and the current business set-up, Fimbank can aspire to achieve a ROE of between 12 and 15 per cent in the future. This indicates that Fimbank’s objectives in future years is to grow its profits to between $35 million and $50 million annually. This would represent a significant jump compared to the 2018 profits after tax of $10.2 million. Although this may seem highly optimistic, Mr Subramanian stated that it is “merely a matter of time and proper execution”.

During the analyst meeting, the CEO also gave very strong indications that the 2019 financial performance of Fimbank should continue to show a significant improvement over the 2018 result. Mr Subramanian commented in the shareholders’ newsletter that the bank is now focusing on “the next phase of maximising scale, while ensuring cost optimisation”. According to the CEO, the operating performance in the first quarter of 2019 continued to reflect the same strong upward trend as in 2018 and additionally there was a recovery of a legacy impaired exposure pertaining to a business transaction in Mongolia after the end of Q1 2019, which was previously fully written off. Mr Subramanian also said that the outlook for Fimbank is “as positive as it can be”, which should be another reassuring signal.

In several of my articles, I argued that many companies listed on the MSE need to communicate more regularly with the market via the reintroduction of the semi-annual Interim Directors’ Statements to provide an update on a company’s performance in the first quarter and also in the third quarter of their financial year.

The time lag between the publication of the half-year report in August and the annual financial statements in March (for those companies with a December year-end) is far too long and an announcement in November would help the market understand the key trends ahead of the end of the financial year.

When questioned on this topic during the recent analyst meeting, Fimbank’s CEO promised that more frequent updates would be forthcoming once the bank scales its business further.

At that point, the bank’s performance would possibly be more sustainable and less volatile from one period to the next, thus allowing Fimbank to provide more appropriate guidance on its financial targets.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, ‘Rizzo Farrugia’, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

© 2019 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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