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AfricaApril 1 2007

Still on the road to better results

Bank consolidation continues and capital adequacy has improved but what is needed in the sector is a new culture that will attract new customers to boost the bottom line. Nick Kochan reports.
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Nigerian banking is on the move, and optimistic as never before. Institutions are fewer but stronger, managers more aggressive, customers more responsive to banking messages, and markets more liquid and better disposed to banks.

The challenge now is to translate the promise into reality. How can they move from today’s optimism into tomorrow’s bottom line results? To achieve this, these bankers must study and apply the management of change. The past must be understood, but bottom line profits will only grow if the new customers see a different and more energetic sector.

This requires developing cultures that differentiate the newly merged organisations from those that preceded them. Separating the past from the present is of the essence. The consolidation process was not merely important as a way of strengthening the capital base of each institution, but was also a catalyst for managers to take forward the entire sector. To that extent, bank consolidation has been instrumental in the capital market reform that is set to free up local stock and bond markets and expand liquidity. This is the basis for the burgeoning of Nigerian retail banking.

The past year has been spent not merely raising capital on the back of the acquisitions in a bid to take the new enlarged banks forward, but also setting up and applying systems to control the expansion in staff headcount. At the same time, technology has been introduced to harness many platforms and products. Glitches have undoubtedly occurred and not all staff have fallen in line or understood the intention. But the process has been an overwhelming success, one that some would say was overdue.

The credit for consolidation is given to the Central Bank of Nigeria, which used its authority to reshape the sector. Banks were folded into other banks at the instigation of the authorities. Unity Bank, for example, is the result of the merger of nine banks. Other institutions were allowed to decide their own route and made a head start in the new and invigorated Nigerian marketplace.

Solvency improves

The consolidation process was based on one key criterion: solvency. Each bank that was to survive into the newly constructed banking sector was required to have capital amounting to N25bn ($180m). Foreign banks were recapitalised by their parents to ensure a place at the top table of Nigerian banks.

A total of 25 banks out of 95 have survived the central bank’s scythe. They have more than N780bn ($6bn) in capital and assets of N4900bn. Foreign direct investment worth more than N35bn was injected into the Nigerian economy at the end of consolidation period: the country received $7bn in total.

The banks are able to leverage their balance sheets as never before. Cumulative lending of the top eight banks represents less than 30% of assets. Loans on average represent only 44% of total deposits. A single obligor limit of 35% of shareholder funds has been a key constraint on lending, as most banks have historically operated from an under-capitalised balance sheet. This has particularly affected banks’ roles in major investments, such as project finance of new power plants, telecommunications networks and upstream hydrocarbon networks.

The capital market has been another beneficiary of the consolidation process. Local markets have welcomed each bank issue with greater enthusiasm than the last one, and have shown no sign of a loss of appetite. Nigerian capital markets were valued at N1900bn in July 2004, but this had grown to N4000bn in August 2006 and is still growing.

“There are more opportunities for funds raising, but they will not be plain vanilla. They will require creativity and involve tapping other kinds of funding sources,” says Reginald Ijehiaji, managing director at Fidelity. “We are looking at all options, including Eurobonds, preference shares, straightforward equity. It is a much more varied market space than we had in 2004. We would like to be a full-service bank. The economy is not at a level of depth or liquidity that would support a niche play by any serious bank. Capital will always trade at a premium in Nigeria because we have resources; but to make those resources usable, you need the capital to support businesses in various sectors.”

Challenges ahead

While capital markets have strengthened, banks themselves face one glaring challenge: to raise their lending in line with the strength of their balance sheets. Lending represents less than 20% of their aggregate assets, indicating a narrow base of profit-earning capacity. Longstanding problems with non-performing loans explain this structural imbalance, but Nigeria’s real industry and infrastructure have a hunger for investment, and banks are likely to come under pressure to supply it. The test for the sector will be its capacity to produce and sell retail products.

The upshot of consolidation is a banking market driven by aggressive competition. The process of selection that determined the survival of 25 banks does not guarantee their independence, and some banks have taken the logic of merger even further to ensure their market positions. First Bank of Nigeria, for example, is reportedly in the process of merger with Ecobank Transnational Incorporated, whose subsidiary in Nigeria, Ecobank Nigeria, is one of the 25 survivors of consolidation. The proposed new entity, already named First Ecobank, will be one of the largest banking groups in west and central Africa, with a global branch network of more than 546, a capital base of more than N100bn, an asset base of N850bn and a workforce of nearly 10,000.

IBTC Chartered Bank, the merger of Investment Banking Trust Company, Chartered Bank and Regent Bank, is in talks with Standard Bank of South Africa through its Nigerian subsidiary, Stanbic Bank. The two institutions have signed a memorandum of understanding, indicating a merger between IBTC and Stanbic. Atedo Peterside, founder and CEO of IBTC, tells The Banker that he is extremely confident about the deal’s success. However, the passage to merger has been so extended that some observers wonder whether it will ever be consumated. IBTC’s share price has powered ahead since Stanbic first expressed an interest, to Stanbic’s chagrin.

Standard Bank has said it would inject some funds into the merged entity, further boosting the bank’s competitive position. The bank will retain its listing on the Lagos Stock Exchange. Stanbic has sought on different occasions to merge with a number of local banks, including UBA and Oceanic Bank, to no avail.

Merger trend

The urge to merge in Nigerian banking is permeating the sector from the bottom to the top. Numerous smaller banks among the 25 survivors are believed to have sought to merge to achieve economy of scale. These attempts have been largely unsuccessful.

Relationships between international banks have flourished in the new climate. ING Bank has links with Access Bank, HSBC with First Bank, Commerzbank with Oceanic, and JPMorgan with Zenith Bank. And an international consortium, led by Actis Capital, recently agreed to inject $130m into Diamond Bank.

Actis is a leading private equity investor, focusing on the emerging markets, with funds under management of $3.4bn. It has its origins in the Commonwealth Development Corporation, but today’s investors are the British and Canadian governments and 32 international financial institutions. The partnership is expected to help Diamond to access long-term debt funding and Tier 2 capital by leveraging on Actis’s international alliances.

Honeymoon season

The market’s restructuring has given rise to a honeymoon in which banks are regarded as Nigeria’s flavour of the season. This has given them an opportunity to tap the capital markets with abandon. Zenith Bank, one of the country’s more ambitious players, has increased its capital base to N93.8bn after a public offering in early 2006.

One commentator said: “Zenith is operating like a bank of the future. It is opening branches at strategic locations both within and outside the country.” Zenith is recruiting management expertise from international banks to facilitate business growth.

Union Bank of Nigeria has shareholders funds of more than N110bn, making it, at least for a period, the country’s most heavily capitalised bank. It achieved this through a rights issue of N55bn last year.

Another aggressive player in the new issues market is United Bank for Africa (UBA). It has launched an issue to raise N54bn through a hybrid offer. Part of the issue will be offered to existing shareholders and part to new subscribers.

Big players emerge

In this environment where big is best, UBA gained distinction as the first Nigerian bank to have a balance sheet with N1000bn. It recently took over the private sector deposits of Trade Bank, which had gone into liquidation. It has a branch network of about 500, making it one of the largest in the country. It posted a N12.8bn profit in 2006. Its deposit base has soared over a year by 278%, from N205bn to N776bn, while gross earnings rose by 247%, from N26bn to N90bn.

UBA grew by about 243% between 2005 and 2006. Total assets rose from N249bn in 2005 to N851bn in 2006, the highest growth in the industry. Cash and short-term funds accounted for the almost three-fold increase between 2005 and 2006. High levels of cash and short-term funds made an impact on the liquidity ratio, which was 88%, against an industry average of 72%. The bank focuses more on liquidity than profitability in its balance sheet management. Loans and advances only contributed about 13% of total assets, which grew about 59%, from N67bn to N107bn. The deposit base grew 269%, from N205bn to N757bn. Cheap funds accounted for about 46% of total deposit liabilities. The bank will need to put more effort into ensuring growth of its cheap funds. The ratio of demand deposit to total deposit was 34%, against an industry average of 51%. Savings were 12% against an industry average of 20%.

UBA was the first Nigerian bank to issue a global depository receipt. In 2005, it merged with Standard Trust Bank, becoming the first successful merger. Gross earnings in 2006 were N86bn, against N26bn in 2005. This N60bn increase (231%) is far higher than the industry average of 52%. Net earnings closed at N32bn, an increase of 191%, much higher than the industry average of 40%.

UBA group managing director Tony Elumelu has been quoted in the local press as saying that the additional capital will go to funding the bank’s strategic expansion programme, especially in Africa. “The fresh capital will be deployed to fund branch expansion and upgrade branches,” he says. UBA will be installing more ATMs at its branches and introducing more technology into its banking platforms.

The bank also wants to expand its operations further into west Africa and the Francophone zone. “The Nigerian banks are working very hard to keep up with the Joneses. There is no armchair banking. Competition is getting keener by the day,” says Mr Elumelu.

Growth strategy

Another player in the capital markets is Oceanic Bank International, which has raised N55bn. This is not likely to be the last issue from Oceanic because CEO Cecilia Ibru has said she plans to grow the capital base to N133bn. Oceanic is planning to grow its 180-branch network to 300 branches by the end of 2007. It is also an important player in the government’s state-run Small and Medium Industries Equity Investment Scheme and has dispersed N2bn. The bank’s gross earnings have grown by N20.37bn, from N24.31bn in 2005 to N44.68bn in 2006, an increase of 84%. Profit before tax stood at N11.61bn, 60% up on 2005. The bank posted an after-tax profit of N9.56bn, up from N5.9bn, for 2005. The balance sheet stands at N466bn, an increase of 65.91% on the N281bn of 2005.

Total deposits of N310bn were 85% higher than in 2005. Overheads have grown by 66% as the bank has embarked on a number of projects to modernise its branch network and headquarters. Between 2002 and 2006, the asset base grew by 643%, while its deposit base grew by 594% and its loan portfolio by 833%. The growth of overheads may have come as a result of the huge cost associated with consolidation. Overhead expenses chopped about 46% off gross earnings.

Ms Ibru attributes the performance “to solid management, a continuous quest for innovations, and human capital development all geared towards value-added customer service delivery”. All these were achieved through rigorous training and refresher courses. The bank adhered strictly to its core values, called TEAMS (transparency, equal opportunity, accountability, merit and service excellence). Transparency is at the core of Oceanic’s values, says Ms Ibru.

Headcount down

Consolidation has resulted in a reduction of the headcount at Nigeria’s banks, with some adopting quite ruthless policies, including firing staff over the age of 50. Oceanic expanded its branches by 80% in 2006 and has been seeking to employ entry-level graduates into its management to rejuvenate its workforce. It is aiming to position itself in investment banking and, to that end, has set up an investment banking department. It has also set up Oceanic Registrars, an area boosted by banks’ roles in capital raising. Oceanic aims to develop itself into a financial supermarket.

Ecobank Transnational Incorporated has announced plans to raise N38bn from the capital markets. This is designed to finance its growth strategy in the region, as well as technological investment.

Afribank has said it plans to raise N50bn in the local capital markets, taking its total capitalisation to N80bn. There is talk of a link-up with an international bank, following an announcement that it was talking to three international banks. But, pending a conclusion to these talks and to talks with other local banks that want to merge, Afribank is expected to go out into the capital markets alone. One source says: “We can grow organically or inorganically.”

In November 2006, Intercontinental Bank raised about N50bn through a hybrid offer to existing shareholders and new subscribers. About half of the proceeds of the issue, roughly N27bn, is to be used to beef up the bank’s working capital; N16bn is to be used for e-channel development; and N4bn is earmarked for increasing the branch network by 34 branches – 17 branches will be established in Lagos.

Shareholder funds at Intercontinental Bank are likely to grow to N130bn, and this puts it in the league of banks that can manage a portion of the country’s external reserves. These stood at $43.392bn at February 2007. Erastus Akingbola, group chief executive of Intercontinental Bank, says the offer will ensure the bank plays a role in big ticket transactions in oil and gas, and telecommunications. “Our aim is to attain a $1bn capitalisation to enable us to handle big ticket transactions that had been the preserve of our international counterparts.”

Foray into Europe

The sector put its toe in the Euromarkets water, when Guaranty Trust Bank issued a Eurobond for $300m. The GTBank bond, which has a five-year term, was an instant success, achieving a $532m (173%) subscription level on the first day of trading. Tayo Aderinokun, the bank’s managing director, says the bond will satisfy the credit needs of the high end of the energy sector. The funds will be lent in foreign currencies to the bank’s corporate customers, who are major players in energy, telecommunications and engineering.

Mr Aderinokun was quoted as saying: “Corporations that will qualify are those in the high end energy sector, liquefied natural gas projects, telecoms and manufacturing. They are essentially independent power plants that require huge investment in foreign currency and also the capacity to pay back in foreign currency.

“It increases the size of our balance sheet, so we have more funds to do our regular business. Secondly, as we can play more actively in a segment of the market that was formerly reserved for offshore international banks, we will extend our relationships with those companies.”

Most Nigerian banks will seek to expand their regional presence. The larger banks will look for a regional dominance. Nigeria has become a key market in Africa, alongside Egypt in the north and South Africa in the south. It has the capacity to generate about $50bn-worth of oil exports annually. Its import bill amounts to about $25bn, hence there is attractive trade finance in the form of letters of credit, correspondent banking relationships, agro-finance and factoring.

Cost cutting

The cost structure of the top three banks prior to consolidation was extremely high by international standards, representing between 55% and 77% of gross revenue. High reserve requirements, poor access to depositors and limited loan activity accounted for this. The impact of economies of scale, arising from bank mergers, should enable the newly enlarged banks to cut back on costs and overheads and import new technology. The financial market is expected to reduce average operating costs from 55% to 45% of revenues over the medium term. This will still exceed the average in Organisation for Economic Co-operation and Development countries of 41%.

Corporate governance has risen higher on the agenda, as the banks have consolidated under the watchful eye of the central bank. Regulatory and supervisory bodies, such as the Nigeria Deposit Insurance Corporation, the Economic and Financial Crimes Commission and the Nigeria Drug Law Enforcement Agency, have started paying closer attention to corporate governance in banks. This is expected to counter a long history of abuse of shareholder and government interests. Improving governance will strengthen the sector’s international reputation. Ownership of a significant amount of a bank’s shares will no longer guarantee board or management control. This can only be guaranteed by operating within the code of good governance and meeting shareholders’ expectations.

Atedo Peterside: confident about the merger of IBTC with Standard Bank

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