Nigerian exuberance is infectious. Just ask one of the bankers running the handful of foreign banks in the country. Nigeria is the market that “could turn the lights on for Africa,” says Standard Chartered country chief Simon Millet. “We are certainly moving in the right direction,” says his counterpart at Citigroup, Emeka Emuwa.
Both Mr Millet and Mr Emuwa are well versed in talking up the opportunities in the country, having had to convince their respective head offices to stump up the cash to meet the new N25bn ($190m) capital requirement. When the weighty capital requirements were announced in mid-2004, the foreign banks argued for exemption on the basis that their international shareholders provided sufficient financial clout. But no exceptions were made – Citigroup put in $93m to reach the target, Standard Chartered $140m and Stanbic Bank, owned by South Africa’s Standard Bank Group, $180m. “It was a relatively simple decision in the end,” says Greg Brackenridge, head of Stanbic Africa. “We are a pan-African bank and we can’t do that without having a significant presence in Nigeria.”
Key location
For any bank pursuing a continent-wide strategy, Nigeria (GDP: $94.3bn) is a key market, along with South Africa (GDP: $234.1bn) and Egypt (GDP: $90.7bn). Combined, the three countries account for half of Africa’s GDP and provide important geographic footprints in the south, north and west of the continent. Nigeria’s growth rates of about 7% in the past few years have made it the fastest growing African economy of significance.
The market also offers similar opportunities that foreign banks have seized in other African markets – significant oil and gas operations and a growing mining industry in a resource-hungry world. The triumvirate that do operate in the Nigerian market are among the most widely established banks in Africa – Citigroup has operations in 17 African countries and Standard Chartered in 12. Standard Bank is in 15 African countries outside its South African home. To improve their focus on the continent, Citigroup and Standard Chartered have both moved their African head offices to Johannesburg in recent years, into which the Nigerian businesses report.
Dominant force
EcoBank, a west African regional bank operating in 13 African countries, also owns a mid-sized bank in Nigeria, which is in the process of being sold to First Bank. The deal with First Bank will end with First Bank’s shareholders becoming the dominant shareholders in the EcoBank holding company, which has its head office in Lomé, Togo.
In Nigeria’s colonial years, foreign banks dominated the market but successive military governments forced foreign banks out of the country in the 1980s. In 1996, as the end of the military era approached, the law was changed to allow foreign banks to take majority stakes in local banks, and Standard Chartered re-entered shortly after. It had had a long history in Nigeria as a major shareholder in First Bank, the biggest Nigerian bank, which it sold out of in 1996. Citibank has had a shareholding in Nigeria International Bank for 20 years, which has recently been increased to an 80% stake. It still uses the NIB brand but the Citigroup brand is being pushed harder to ride the cache the foreign brand carries in the Nigerian market. Standard Bank has had an interest in Nigeria since it bought the ANZ Grindlays African network in 1992.
Other global banks with African ambitions are noticeably absent. Despite the obvious opportunity the consolidation exercise presented to buy into a Nigerian bank, none did. After Barclays’ purchase of South Africa’s Absa last year, it has said Nigeria is a natural next step in its ambition to be a pan-African player (Barclays has a representative office in the country). Absa, which will become the conduit for all its African operations, has long harboured an ambition to establish a presence in Nigeria but has yet to land the right deal. For now, it has its hands full settling into being a subsidiary of Barclays, including buying out Barclays’ operations in 11 other African countries.
Other South African and international banks have also expressed interest. JPMorgan has been talking to Zenith Bank about a possible joint venture, although no final deal has been announced and the structure for such a deal is unclear. JPMorgan Chase manages Nigeria’s foreign reserves, which are expected to reach $42bn this year, but only keeps a representative office in Nigeria. The central bank of Nigeria has announced that it wants local banks involved in reserves management if they can build domestic capital of more than $1bn (a figure no bank is close to achieving) or can set up joint ventures with foreign banks. JPMorgan would want to protect its turf.
Away advantage
The three international banks in Nigeria are focused on the multinationals, large local corporates, international donor organisations, NGOs and the public sector, and provide correspondent banking services to Nigerian banks. The foreign banks also have an advantage in trade finance, able to act on both sides of most transactions. Indeed, trade finance is a core part of all of the foreign bank’s business. Standard Chartered particularly believes the growth of Nigeria’s trade with China and eastern Asia represents it with a major opportunity. Foreign banks are also the starting point for major financing deals that are typically done in partnership with their offshore balance sheets and skills, particularly in oil and gas. The non-oil private sector is also providing opportunities such as telecoms and a few industrial sectors led by local conglomerates. Project finance for cellular operator MTN has set new heights for the industry – three $100m-plus funding deals arranged jointly by Citigroup and Standard Bank London, the London counterpart to Stanbic Bank.
Citigroup is focused on wholesale and corporate banking while Standard Chartered provides some consumer banking. Standard Chartered has 14,000 consumer clients and aims to increase its consumer bank to half its business in the next two to five years. Citigroup was the eighth most profitable bank in absolute terms in the country before the consolidation exercise, earning $50m in 2004 off assets of $650m. Standard Chartered made about $12m (off assets of $289m) while Stanbic broke even ($113m), according to figures by local research and rating house Agusto & Co.
“We see our Nigerian operation in terms of origination, not just the revenue that we make there,” says Mr Brackenridge. “We look at our business in terms of what is the wholesale revenue we make out of Nigeria as a group given that we also provide correspondent banking to local banks there. In the previous limited model, Nigeria was a happy investment.” Much the same can be said for Citibank and Standard Chartered, which target global clients with operations in Nigeria, although their bigger Nigerian operations account for more of the group-wide business done with Nigeria. Mr Brackenridge says a “significant” proportion of its business in Nigeria is on the back of South African clients – a major source of non-oil foreign direct investment into Nigeria.
Unlike the other foreign banks, Stanbic Bank initially tried to buy into a local bank. It went quite far down the road in negotiations with UBA, before UBA decided instead to do a deal with Standard Trust Bank – making for one of the largest mergers of the consolidation phase. Stanbic then pursued talks with Oceanic Bank but could not complete the due diligence of Oceanic’s purchase of International Trust Bank or agree on a price. Eventually it shipped in capital off its London balance sheet just before the deadline for new capital requirements.
Mr Brackenridge says he hopes to reopen negotiations with Oceanic in March, once Oceanic has bedded down the ITB purchase. Should Stanbic fail to do a deal with Oceanic, Mr Brackenridge says it will consider other acquisition targets in the market, with an organic expansion strategy the last resort. It has an ambition to be one of the top five Nigerian banks with a significant retail operation – using the skills it honed in South Africa to do retail banking across the income spectrum – so a partner with an existing branch network is clearly preferred to rolling out a branch network from scratch. Mr Brackenridge says Standard has no intention of repatriating the capital that it has put into the business should it do a deal.
Closed door
The new minimum capital requirements mean an international bank would have to start with $190m in capital just to open up shop, effectively “closing the door to foreign banks” says one local investment banker. That tempers foreign enthusiasm, as does the weak infrastructure, poor legal environment and a perception of corruption. Despite a politically driven war on corruption, one international banker says back-pocket payments are still expected by some domestic corporates. Recently, security issues have dogged the main oil region in the Niger Delta, where a number of foreigners have been kidnapped and facilities targeted. Political risk is also still an issue. Nigeria’s much-praised economic reform programme has been driven by president Olusegun Obasanjo, who is due to step down next year. There is no obvious successor, and the losers in the reform process are still a viable political force.
No presence
Another reason few international banks have entered the market is that in practice it seems you do not need a domestic presence to do a roaring trade off the Nigerian economy. Foreign bankers regularly sweep through town, suitcase in hand, to catch a piece of the large oil and gas industry financing that remains almost entirely an offshore affair. Shell, Elf, Total and Chevron Texaco have made major investments in the country that has proven reserves of more than 35 billion barrels and much exploration still being carried out. Foreign bankers talk excitedly of opportunities coming in Nigeria’s planned infrastructural investment in power generation and distribution, gas production, oil refining and petrochemicals, and the massive opportunities that would come with transport and other infrastructural development through public-private partnerships.
With foreign exchange reserves expected to reach $42bn this year, the capital for major projects is certainly available and the political minefield around infrastructure spending is being navigated. The economic reform process has also slated 1000 state-owned entities for privatisation, with the biggest deals still on the table. To participate, foreign banks do not need a full branch set-up. South Africa’s First National Bank is looking for partners in Nigeria through which it could land deals for its Johannesburg balance sheet.
“Being on the ground makes a difference – you’re more in the face of the customer,” says Mr Emuwa. “In any deal that needs a local and a foreign currency component, we are in a stronger position.” That can make a critical difference when it comes to getting ahead of global competitors for big ticket financing deals. With the Nigerian economy having hit a major growth phase, and government making all the right noises about reform continuity, it is easy to see why the foreign banks agreed to pump cash into their Nigerian businesses. While the capital injections mean the foreign banks’ performance is probably below the hurdle rates normally expected by their head offices, Mr Emuwa says it is just a matter of time for the capital to be put to good use. “The only problem for foreign banks has been their own perceptions,” he says.
Regulators believe the current banking reform process will culminate with the purchase of one or two large Nigerian banks by foreign players. Already, the CEOs of local banks talk of their willingness to entertain advances from foreign banks, although usually in a joint venture model that keeps control in Nigerian hands – a tendency that has put an end to mooted deals in the past. Some deals have also been scuppered by overly ambitious owners. “If you were to tell somebody that there is value on the table based on a combination but to get there you are going to have leave or share some of that control, most people would not even look at that,” says one local investment banker.
The waiting game
The chaotic consolidation phase, while presenting opportunities for purchases, has also discouraged some. “In this situation it is quite valid for an institution to say that they will wait for the industry to settle down and avoid the pain of the structural adjustment the industry is undergoing,” says Mr Brackenridge.
As the foreign banks compete with global household names for big ticket project finance, locally they are set to face stiff competition for the blue-chip Nigerian corporate market. Foreign banks carry great cachet in Nigerian business circles, reflecting Nigerians’ admiration of international brands. Having a foreign bank handle your business is considered a sure sign of how much weight a company carries. Access Bank even had HSBC handle its acquisition of two smaller banks during the consolidation process on a global mandate. Respect for intellectual property, however, is another matter – a local bank named itself Société Générale, despite having no connection to its French namesake. It has limped into liquidation after the consolidation phase.
While competition over debt financing comes down to a question of price, the foreign banks also compete on product innovation. Citigroup and Standard Chartered are the only two banks offering client-specific treasury services in Nigeria, ranging from cash management to hedging for large corporates, and Stanbic is intending to do the same. “We are now able to bring in more innovation because of the reforms and deregulation,” says Mr Emuwa. “We can leverage off experience in other countries.” For example, Citigroup has recently introduced systems to provide real-time cash management for large corporates, integrated into their back offices.
But local banks are pushing hard to match their innovation, and with 22 local banks with at least $190m in capital each, foreign bankers are expecting a tougher challenge from the home side. “We’ll see to what extent they’ll get onto our turf this year,” says Mr Emuwa.
On sober analysis, his and other foreign banker’s territory is safe, particularly when it comes to large structured deals. And as other foreign investors arrive to take advantage of the potential in the Nigerian economy, they are likely to depend on existing relationships with foreign banks. For the local banks, there is still a lot of ground to be made and much thinking to do about next-round merger opportunities.
