With analysts predicting a tougher business environment for the industry in the coming years, especially in the wake of declining Treasury Bill yields, Tier 2 banks in the country are devising strategies to ensure they remain profitable, writes TONY CHUKWUNYEM
Clearly, the Nigerian banking industry has been passing through a difficult period since the middle of 2014 when oil prices slumped, triggering a sharp rise in lenders’ Non-Performing Loans (NPLs). The situation got tougher when the country’s economy slipped into recession in the second quarter of 2016 as banks had to adopt drastic cost cutting measures to stay profitable and in business.
However, as analysts pointed out at the time, Tier 2 banks (with total assets less than N2trillion) and small lenders were more impacted by these challenges due to their less capacity to absorb losses and lower efficiency levels.
Rating agencies’ concern
For instance, in a review of Nigerian banks’ performance in 2016, Fitch Ratings stated: “The latest round of results announced by Nigerian banks highlights capital weakness in the sector, with some mid-sized and small banks particularly vulnerable to deteriorating asset quality.
“Several banks are not provisioning fully for their impaired loans, meaning that their underlying capital position is weaker than indicated by their Capital Adequacy Ratios (CARs). Full provisioning would leave some banks close to the minimum regulatory requirement.”
More recently, despite the country’s emergence from recession and improvement in macro-economic indicators, the rating agency in February this year still highlighted the delicate position of Tier 2 lenders, stating that a number of them will fall below the Central Bank of Nigeria’s (CBN) stipulated Capital Adequacy Ratio (CAR) of 10 per cent for this category of lenders should the naira depreciate to N450/$1.
Similarly, commenting on the CBN’s recent Treasury Bills slowdown, the rating agency stated that while the move is likely to negatively impact banks’ profits in 2018, the big lenders were better placed to address the challenge.
As the agency put it: “We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges.”
Specifically, Fitch stated that some second-tier banks with four to six per cent Return On Average Equity (ROAE) might struggle to remain in profitability this year.
Also, in a report last month, another leading rating agency, Moody’s Investors Service, raised concerns about the status of midsized banks operating in Nigeria. The agency stated that due to their lower capital, Nigeria’s midsize banks’ capacity to grow their business and generate revenue is limited.
It further noted that Nigeria’s midsize banks face greater risk of losing business to financial technology (fintech) companies because they tend to provide retail banking and payment services to individuals and small and midsize enterprises, a key entry target market for upcoming Nigerian fintechs.
However, the Tier 2 banks do not seem to be deterred by the tough business climate as they have been unveiling a variety of measures that will enable them cope with the emerging challenges.
For instance, one of the country’s Tier 2 lenders, Wema Bank, announced last week, that it plans to raise N20 billion from the bond market by July and aims to pay a dividend this year for the first time in a decade, paving the way for an equity sale next year.
The bank’s Chief Financial Officer, Mr. Tunde Mabawonku, who disclosed this, said the mid-tier bank was focused on selling debt this year after it raised N6.2 billion in its first tranche of a N50 billion debt programme.
He stated: “We would want to pay dividends first to existing shareholders before raising equity in early 2019. It could be a combination of rights issues and private placement.”
Analysts point out that the debt issue would help Wema boost its capital ratio above its internal guidance of 15 per cent, from 14.3 per cent. They further note that the capital raising move has been triggered by declining Treasury bill yields as well as expectations that the CBN will cut interest rates this year as inflation slows.
Focus on retail banking
Also, another lender in this category, FCMB recently announced that it would focus on retail banking with a higher margin this year to make up for a drop in government bond yields.
The FCMB Group Chief Executive, Mr. Ladi Balogun, who disclosed this during an analyst call, explained that the lender was, “pushing more in the area of retail banking, ” as it believes the improving economy should boost consumers.
He revealed that the Group was seeking to convert its wholesale banking unit in Britain, FCMB UK, into a retail bank, as part of its push to grow its balance sheet and tap into non-institutional customers in Britain.
He said the impact of the British strategy would not be immediate but would enable the lender to achieve incremental growth.
Balogun said the earnings contribution in naira terms from the British unit will be around N500 million for 2018.
He, however, said FCMB does not see a need to raise funds this year due to high funding costs, especially for borrowing in dollars, and would maintain a conservative dividend policy to improve its capital position.
Divesting international subsidiaries
Interestingly, Diamond Bank, which is another midsized lender with a UK unit, announced last November, that while it would continue with its British operations, it was quitting other West African markets to focus efforts at home and deploy its resources on personal banking business in the country.
In a statement, Diamond Bank’s Chief Executive, Uzoma Dozie, said: “After 18 years of building the Diamond Bank franchise in other markets in West Africa, the time has come to fully apply our resources to Nigeria,” adding that the lender wanted to apply its resource to Nigeria to develop a profitable technology-driven retail banking business.
Dozie said Nigeria’s unbanked population and the rise of cost-effective digital banking platforms provided it with the opportunity to reach millions of customers in a market where it already had over 15 million clients.
Importance of risk asset creation
However, with the Tier 2 banks apparently trying to ensure that their bigger counterparts don’t further extend their industry dominance, a report released last week by the Lagos-based firm, Coronation Research, argued that: “The ability to support risk asset creation in the real sector will differentiate winners from losers in the Nigerian banking industry over the next three years.”
The report, which categorized banks into three tiers: Group A, Group B and Group C, with lenders in Group A (Zenith Bank, GT Bank and Stanbic IBTC), being the most well capitalized and having the biggest opportunity to increase consumer lending, stated that lenders in Groups B and C have moderate and limited capital levels respectively.
The report stated that: “if equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B we see some, but perhaps not significant, market share gains.”
Indeed, the consensus among analysts at the weekend was that unless Tier 2 lenders are able to adequately cope with the current challenges, they could lose more market share to their Tier 1 counterparts.
This, however, may not necessarily be bad for the economy, because as a financial consultant, Mr. Charles Okonne, contended, the tough operating environment was pushing banks to increase lending to the real sector.
He said: “With yields on T-bill declining, banks will have little choice but to look for ways of growing risk-weighted assets if they want to generate income. This means that there is likely to be a significant increase in customer loans in the coming years.”
TCIP Customs explains cargo clearance delays at port
The Tin Can Island Command of the Nigeria Customs Service has said the recent in cargo clearance being witnessed by importers and Customs Brokers at the Apapa and Tin Can Island Ports in Lagos is because the NCS Internet Server was down thus impeding cargo documents processing.
This was disclosed by the Tin Can Island Customs Public Relations Officer, CSP Tony Ejesieme during a chat with the Sunday Telegraph on Wednesday at the port city of Apapa.
Ejesieme noted that the internet network breakdown as experienced by the Service could cause delay at anytime and was not the fault of the NCS but that of a bad weather.
The PRO, who admitted that there was delay in cargo release, said the command had not captured any importers for cargo release but was optimistic that the network would surge back and cargo clearance processing would commence immediately.
“We have not been able to work since morning as no importers have been captured. This is another delay; issuing debit note has become a problem. But the network will certainly come back and we will commence work immediately,’’ said he.
According to him, the major reasons for delay were non-compliance with import guidelines, wrong classification and declaration by importers, and lack of working scanners.
He, however, absolved the Service of any complicity and maintained that the NCS works based on procedure. ‘’Whatever we are doing is based on procedure and in accordance with the import laws. It is true that there is delay; if there are issues of infraction, there will be delay,’’ he said.
Ejesieme also caused by lack of scanners, saying that all scanners in all the ports in Lagos have broken down completely except only one in Apapa which could not handle all cargo in the port and that is why many cargos are routed to physical examination.
‘’Scanners are not working; only one is working in Apapa, no one in Tin Can. The issue of scanners has to be settled and we have engaged government on it.’’
Advising importers and customs agents to adhere to the import guidelines, he said that the security of nation as the nation approaches the general elections in 2019 would not be compromised as the Service is working with other government agencies to protect the territorial boundaries of the nation.
UBA Foundation reading through regions in Africa
As part of its mission to improve the lives of communities in which the United Bank for Africa operates, UBA Foundation said it has continued to encourage African youths to adopt the culture of reading through its ‘Read Africa’ initiative.
Read Africa aims to rekindle the reading culture amongst young Africans. Designed and introduced in 2011 by the UBA Foundation, the initiative has donated hundreds of thousands of books to African schools since its inception.
This past week, The Foundation took its initiative to the francophone city of Libreville to the students of the George MABIGNATH high school in Gabon.
The launch of Read Africa in Gabon saw in attendance, the author of the selected book Sidonie, written by famous Gabonese writer Chantal Magalie MBAZOO.
It was a colorful ceremony that witnessed the CEO of the Foundation, Bola Atta reading to and interacting with the students in high energy in the presence of their Principal, Mrs. Boudounghou Biboutou Isabelle and other staff members.
Bola Atta summarized the Foundation’s initiative saying, “At the UBA Foundation, we are committed to improving the lives of the youths on the continent and one of the ways we can achieve this is to help you read more. I am here to talk to you a little about the importance of reading and how it can radically change your life. Reading encourages you to dream, it expands your knowledge, your vocabulary. It is a path to achieving your ambitions”.
Chioma Mang, the CEO of UBA Gabon also reiterated the mission of UBA and emphasized the bank’s commitment to the Gabonese community. “ I love children and I am happy to be here with you all today. I’d like to encourage you to read very well so that you can reach great heights in your life like me. UBA is going to be there for you all the way. You can count on us”, she said.
The Read Africa initiative then moved on to Zambia to the Horizon Secondary School in Lusaka where the Director in the ministry of higher education in charge of Vocation, Education and Training, Mr. Alex Simumba, thanked UBA and the Foundation for the good work that is being done across Africa. He said, “To UBA Foundation, we thank you for your support to the institution today. We welcome this and many more collaboration in the field of literacy and other higher education programmes. We also further encourage other private sector organisations to take a keen interest in such programmes because the youths who are receiving these literary materials will be benefitting greatly from them,” he said.
Shell has disbursed N1.88bn to GMoU clusters in Delta State
The General Manager, External Relations, SPDC, Mr. Igo Weli has said that Shell Petroleum Development Company, (SPDC) is still active in Delta State noting that the oil giant has executed a lot of projects in the state.
According to him, the oil giant has disbursed a total sum of N1.88 billion to Global Memorandum of Understanding (GMoU) in clusters.
Igo Weli, who disclosed this when he spoke with newsmen in Warri on Thursday, revealed that the GMoU funding covers the three clusters currently active in Delta State since the inception of the concept in 2006, adding that Cluster Development Boards (CDBs) like their counterparts in other parts of the Niger Delta, are implementing health and educational projects among others.
During the media presentation of the 2018 Shell Nigeria Briefing Notes to Journalists, he also disclosed that Shell has established a Professorial Chair at the Federal University of Petroleum Resources, Effurun (FUPRE,) as it continues to operate in the state and contribute to its development.
Weli explained that the Professorial Chair in Light Weight Automobile Engine Development was activated at FUPRE in December last year and is the latest of six established by SPDC JV, noting that the Chair at Effurun is expected to contribute to the growth of local content in Nigeria’s automobile industry.
He added that in a bid to boost employment especially among youths, more than 700 young men and women have benefited from Shell’s LiveWIRE initiative between 2003 and 2017.
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