Nigeria’s banks stood out from their African peers for all the wrong reasons during the 2009 global downturn. While the majority of lenders on the continent came through unscathed, the Nigerian banking system imploded as oil prices collapsed and foreign investors fled the country.
Yet just two years on, Nigeria has revitalised its banks to an extent that would make governments in the West – many of whose financial systems are once again teetering – envious. The final hurdle was cleared in late September when the five lenders that still needed to meet the government’s deadline to recapitalise by the end of the month agreed to takeovers by rivals and private equity investors.
Change for good
Nigeria’s banks have changed substantially since mid-2009, when the central bank ordered an audit of all 24 of them and had to inject N600bn ($3.9bn) of Tier 2 capital into the 10 that failed. Margin lending, which had been rampant and was at the heart of the problem when Lagos’s stock exchange crashed along with oil prices, has been slashed. And governance has been strengthened after the audits discovered widespread accounting fraud and poor risk management. As part of this, chief executives have been limited to tenures of 10 years.
The quality of banks’ assets has improved significantly. The majority of institutions are expected to cut their non-performing loan ratios to 5% by the end of 2011 (the failed ones had bad assets equivalent to 45% of their combined portfolios in 2009). Most of this has been possible because of the purchase of N1700bn of delinquent loans from across the sector by the Asset Management Corporation of Nigeria, a state-owned bad bank set up last year. “The whole industry appears to have been derisked to a very large extent,” says Phillips Oduoza, chief executive of United Bank for Africa (UBA), one of the top four lenders in the country.
Banks’ balance sheets have been strengthened along with their loan books. The biggest ones now have capital adequacy ratios (CARs) of about 19% to 24%, well above the central bank’s minimum requirement of 10%. “I don’t think we’ve been in this place for a long time,” says Sanusi Lamido Sanusi, the central bank governor. “The changes we’ve made to the industry have been far ahead of the rest of the world.”
Moreover, lenders are once again making large profits. Their returns on equity are forecast to average about 15% in 2011. This is still below the levels of 20% to 25% typical at the peak of the banking sector boom in 2007. But those profits should be obtainable again in the next two years, says Jibril Aku, head of Ecobank Nigeria.
No more speculation
One of the government’s main objectives when cleaning up the financial industry was to keep banks supplying credit to businesses and stop them speculating in the form of proprietary trading and margin lending. “At the heart of the crisis, apart from the serious governance issues, was the reality that the financial system had to go back to intermediation – the creation of income and jobs – as opposed to just speculating on asset prices,” says Mr Sanusi. “One of the legacies I’ve always said I want to leave as governor of the central bank is to move banks away from lending for speculation to lending for the real economy.”
In the immediate aftermath of the crisis, commercial lenders shrunk their loan books as they sought to fix their balance sheets, forcing the central bank to set up funds targeting industries such as agriculture and manufacturing. But that has changed this year, thanks to the banks being healthier and robust real gross domestic product expansion of 7.5%. Supply of credit grew almost 10% in the first seven months alone.
Lenders have strengthened their balance sheets to such a degree that increasing capital or deposits – their main form of funding and which are rising quickly – is no longer high on their agenda. Analysts believe most of them will not seek to raise subordinated debt or equity as long as their CARs stay above 15%, which is likely to be the case, given projections for loan growth, until at least early 2013.
Instead, the priority is finding assets to take on, which is proving difficult. “We could grow our deposits a lot quicker if we wanted to,” says Segun Agbaje, chief executive of Guaranty Trust Bank (GTB), another of the big four. “But we don’t have a deposit problem. What we have is a problem of finding quality risk assets. We don’t have enough quality credits coming through.”
It’s basically a borrower’s market, at least with regards to good quality credits… These days they will send you a term sheet and say: 'Take it or leave it'
Corporate scramble
The lack of high-rated assets has led to a scramble in the corporate banking sector, the biggest source of profits for Nigerian banks in the past year. There is no shortage of demand for funding among big companies. Many are increasing their borrowing to expand their operations, which have benefited from strong economic growth. But because such credits are few and far between, they are frequently able to name their price when they seek financing. “It’s basically a borrower’s market, at least with regards to good quality credits,” says Bola Adesola, head of Standard Chartered in Nigeria. “These days they will send you a term sheet and say: 'Take it or leave it'.”
Banks are particularly active in the oil and gas, telecoms and manufacturing sectors. Producers of consumer goods such as processed food and beverages are among the manufacturers in need of credit, while the telecoms firms – who between them have about 80 million mobile phone subscribers – are constantly looking to expand and upgrade their networks.
The upstream oil industry was largely the preserve of foreign banks up to 2004, local ones being too small and lacking the foreign currency needed to take part. But that changed in 2005 when new regulations prompted mass consolidation, which reduced the number of lenders in Nigeria from 89 to 24. Many now have balance sheets of more than $15bn, which gives them the clout to win market share.
Wale Tinubu, chief executive of oil company Oando, one of the country’s biggest companies, says foreign banks can usually offer longer-term funding than Nigerian ones. But they are no longer any more competitive when it comes to short- and medium-term debt in naira or dollars. “Local banks are aggressive,” he says. “They are able to offer us dollar financing on similar terms to the foreign ones.”
The corporate market is set to get even more frenzied following the consolidations stemming from the crisis. Of the rescued lenders, four are being bought by local rivals, which will decrease the number of banks in Nigeria to 20. The top tier – which includes First Bank and Zenith as well as GTB and UBA – will expand to six once Access Bank and Ecobank complete their respective takeovers of Intercontinental and Oceanic (see chart). “We are bracing for the competition,” says UBA’s Mr Oduoza. “These combined banks will have the branch networks and the scale [to compete with the big four].”
Others think more foreign lenders will enter the corporate market in the coming few years, enticed by Nigeria’s rapid economic growth and being able to provide the advisory and investment banking expertise that most local banks lack. “We expect an increased foreign presence to tap into the huge opportunities in the sector,” says Bisi Onasanya, First Bank’s chief executive. “This will prompt stiff competition in vanilla lending to large corporates and increased specialisation [as banks try to meet] the increasingly sophisticated needs of customers.”
Margin squeeze
One of the immediate effects of greater competition is likely to be a squeeze in net interest margins. This would put pressure on Nigerian banks, which benefit from high ones of between 7% and 8% and from which they derive the bulk of their profits (they generate little in the way of fees).
The banks most at risk of losing market share will take little comfort from rising interest rates. The central bank hiked them from 9.25% to 12% on October 10 to counter inflationary pressure. But this is unlikely to lead to margins widening much. “When the central bank raises rates, the banks don’t benefit significantly,” says Mr Oduoza. “The major companies can resist any increase in lending rates.”
There is still plenty of scope for banks to expand their corporate businesses, however. One of the reasons for this is the government’s attempts, prompted by a rising import bill for food, to increase agricultural production. Getting banks to lend more to the sector is key to achieving this. Agriculture, despite accounting for 40% of economic output, makes up just 1.5% of banks’ portfolios.
Banks have been reluctant to lend to farmers because of the risks involved. In Nigeria, most are smallholders and lack access to irrigation. And farming, which does not deliver quick returns, usually requires long-term funding, which local lenders, reliant on short-term liabilities such as deposits, struggle to provide. “It’s tough,” says GTB’s Mr Agbaje. “It’s a totally different ball game [to other types of corporate lending].”
The central bank wants agricultural lending to increase by $3bn in the next decade and for it to make up at least 7% of commercial lending in the country. As such, it now provides banks with long-term, low-cost funds specifically for on-lending to the agricultural sector. It thinks this will reduce banks’ break-even lending rates from 14% – which many farmers cannot afford – to 7.5% to 9%. “With the intervention funds, agricultural lending has become more attractive,” says Mr Oduoza.
Other opportunities exist in Nigeria’s nascent mining sector. Largely neglected since the discovery of oil in the late 1950s, it is being rapidly developed. Iron ore exports should start next year, followed soon afterwards by those of coal and gold.
Lenders remain wary of small and medium-sized enterprises. The sector was responsible for the majority of bad loans during the 2009 crisis. Such companies are still risky credits. Most do not have proper corporate governance structures in place – some do not even have auditors, which is a prerequisite for banks to provide them funding.
As banks, we haven’t been doing a good job… The telecoms companies have shown us that we really don’t know the potential of Nigeria’s middle [and working] class
Retail banking
Retail banking presents major opportunities, especially given the growth of Nigeria’s middle class in the past decade. For most lenders, corporate banking accounts for well over half their revenues and assets. All are focusing more on the retail sector. But it remains largely untapped, with more than 70% of Nigerians being unbanked. This is expected to change as the government tries to create a ‘cashless economy’, which will encourage Nigerians to open accounts, reduce banks’ high costs of processing and handling cash and lead to more electronic transactions.
The retail banking market is getting more sophisticated. Banks are expanding their debit and credit card businesses; mobile banking, especially important for people in rural areas far from branches, has been established; and consumer loans, such as mortgages and car loans, are becoming more common. Credit bureaus, a crucial tool in retail banking, are slowly being established.
Bankers admit, however, that they have not been rigorous enough exploiting Nigeria’s massive consumer market – with 155 million people, it has the continent's biggest population by far. They cite the mobile phone companies, which have built up their huge subscriber bases in just 15 years, as an example to follow. “As banks, we haven’t been doing a good job,” says Mr Agbaje of GTB. “The telecoms companies have shown us that we really don’t know the potential of Nigeria’s middle [and working] class. There’s still a huge amount to be done on retail banking.”
Few Nigerian banks have major operations abroad. Some, such as GTB and Zenith, have subsidiaries in west African states such as Ghana, Sierra Leone and Gambia. But only UBA, which operates in 19 African countries, including the Democratic Republic of Congo, Kenya and Zambia, has a significant presence outside the region. Mr Oduoza says he wants the bank to get an Angolan licence soon and eventually increase the proportion of its assets outside Nigeria from about 15% currently to 50%.
Yet most others say their focus will remain Nigeria, whose economy dwarfs those of elsewhere in west Africa. “Nigeria’s so big that, if we’re successful here, I can’t see a day when our international arm will make up more than 10% to 15% of our total asset base,” says Mr Agbaje.
Opportunities abound
Nigeria’s banks face plenty of challenges. Investors remain wary of them – their stocks are yet to recover to their pre-crisis levels and have underperformed the rest of the market this year. They operate in a country in which the vast majority of people are impoverished and some 40% are illiterate, which hinders their attempts to grow their operations, especially their retail arms. The shoddy state of infrastructure throughout Nigeria makes banks expensive to run and is a big reason why they have average cost-to-income ratios of 65%, higher than those in many other west African countries.
Yet Nigeria remains hugely enticing for banks. Despite these problems and the intense competition, profitability is high. “We have net interest margins of 8% and return-on-average equity of 25%,” says Mr Agbaje. “I don’t know many places in the world where you can say that.”
Given Nigeria’s rapidly expanding economy, fuelled by its large population and abundance of natural resources, such levels of profits should be sustainable for years to come. “It’s the gap between where Nigeria is and where it could be that makes it so attractive,” says Standard Chartered’s Ms Adesola.
