Nigeria’s banks have endured a challenging year. Recent regulatory changes, imposed by the Central Bank of Nigeria, have weighed heavily on the sector’s profitability. These measures, including increases to the banks’ cash reserve ratio and a cut in the commission on turnover, were intended to diversify the income streams of the country’s lenders while reducing their risk profiles. Yet, they have also dampened the banks’ short-term outlook.
“The next 12 months will be challenging for Nigeria’s banking sector,” says Herbert Wigwe, group managing director and chief executive of Access Bank, Nigeria’s fifth-largest lender by total assets, according to The Banker Database. “Regulatory headwinds have forced the country’s lenders to realign their balance sheets to meet stricter operating and reserve requirements, which have hit the profitability of the sector. Nearly N130bn has been taken out of the profits of the entire industry through these changes.”
Despite these challenges, the country’s lenders are still buoyed by the strong growth fundamentals of the Nigerian market. With the International Monetary Fund expecting growth in gross domestic product to reach about 7% in 2015, coupled with a favourable demographic profile, the medium-term outlook is more promising.
Compelling prospects
For Access Bank, this environment offers compelling growth prospects despite the near-term impediments. In June this year, the bank issued a seven-year subordinated $400m Tier 2 Eurobond. This was the largest Tier 2 bond issuance by any Nigerian bank and forms part of Access Bank’s broader corporate strategy to raise $1bn in capital from local and international markets. The latest transaction will be used to support Access Bank’s growing presence in the retail sector, while bolstering its activity in the corporate banking sector.
Access Bank is also looking to the longer-term potential presented by the recent acquisition of its domestic peer, Intercontinental Bank. The deal, completed in 2012, staved off further turmoil during Nigeria’s financial crisis as Access Bank stepped in to secure the ailing institution from collapse. The success of the acquisition has been widely praised in light of the scale and complexity of the deal.
“The consolidation process is complete; we are one bank with one team and one culture,” says Mr Wigwe. “Access Bank spent two years on the integration process and devoted a lot of time to customer analytics and segmentation to determine the best way to respond to and support our increased customer base.”
Retail expansion
Significantly, the transaction has provided Access Bank with new opportunities to harness over the longer term. “Access Bank was largely a wholesale commercial bank before the acquisition,” says Mr Wigwe. “Since then, we have been developing our presence in the retail space. We’re now looking to diversify our concentrations on the asset side in terms of those we are lending money to. The success of this deal will allow Access Bank to grow more swiftly in a highly competitive market.”
The acquisition has presented Access Bank with a significantly larger customer base. From 1.5 million customers before the deal, it now has closer to 7 million, of which 4.5 million came from Intercontinental Bank. This growth has been a substantial driver of the bank’s retail focus.
“Moving from a predominantly wholesale commercial bank to an integrated retail lender was always going to be a demanding transition,” says Mr Wigwe. “Yet, we have achieved considerable success in this respect. Access Bank has developed a sophisticated approach to analysing customer segmentation for our retail operations, as well as the development of services and products tailored to the various economic and cultural demographics in the country.”
AMCON bond holdings
The execution of this strategy is positioning the bank well for longer-term growth, particularly following the December 2013 redemption of its Asset Management Corporation of Nigeria (AMCON) bond holdings. The bonds, inherited from Intercontinental Bank, were essentially illiquid and a product of the central bank’s broader efforts to stabilise the banking sector during the 2009 financial crisis. These efforts materialised through the creation of AMCON, a state-backed bad bank that injected capital to weaker institutions through bond issuances.
“In relative terms Access Bank has already endured a period of constrained lending due to the difficulties surrounding our illiquid AMCON bonds. Now these have been cleared, we are able to lend more and accelerate our growth,” says Mr Wigwe.
“We’re going to pursue an organic growth trajectory. We are yet to optimise our raw customer base and existing network and banking infrastructure, so this will be our focus for the next five years. We want to become the world’s most respected African bank.”
