In the post-consolidation era, stronger capitalisation of the banks will result in stiffer competition. Stuart Theobald sizes up the players, old and new.

The Nigerian banking industry has undergone a revolution. Only now is the dust settling following the December 31, 2005 deadline for banks to meet new minimum capital requirements, which resulted in 89 banks being slashed to 25.

The transformation came about through a deluge of capital injections from shareholders, mergers and acquisitions, and the closure of 14 banks that failed to meet the capital hurdle. Many records were broken in the process. The banks managed to raise $3.2bn in new equity on the Nigerian Stock Exchange, far more than most had thought the local bourse was capable of. And the frenzy of deal-making made many advisory firms rich. But three months after the banking industry crossed its Rubicon, the long-term future of the industry is far from clear.

It is difficult to confirm figures for the 25 banks in the new-look sector – no-one has yet published full-year financial figures and the Central Bank of Nigeria (CBN) is busy with an audit of all the banks’ capital. It is fair to speculate, however, that Nigeria now has one of the most highly capitalised banking industries in the world. Based on different sets of figures given to The Banker, the banks have an estimated $6bn in capital to assets of just over $32bn, implying a capital assets ratio of almost 20%. In addition, the industry is very liquid: only 20% of assets are loans.

Although the sector has doubled the capital on its aggregate balance sheet, it is still small, even in an African context and particularly in relation to South Africa, the continent’s biggest economy and most sophisticated banking system. South Africa’s Standard Bank has roughly an equal amount of shareholder funds and three times the assets of the whole Nigerian sector.

Struggle for returns

Historically, Nigerian banks have been highly profitable but the post-consolidation industry will struggle to deliver the same high returns to which shareholders have become accustomed. According to Nigerian research and rating house Agusto & Co, the industry delivered an aggregate $800m of pre-tax profits in the last pre-consolidation reporting period on $3.8bn of capital, although the bigger banks boasted even stronger returns. According to another analyst, 70% of gross earnings were from interest income. To maintain that return on capital in the post-consolidation phase, the banks will have to run hard to boost revenues.

“The banks have got used to making a 50% return on equity every year,” says Ike Chioke, head of corporate finance at London and Nigeria-based stockbroker Afrinvest. The banks have probably left those levels behind for good.

The new crop of Nigerian banks are a mixed bunch. “The top 10 banks didn’t really merge. They acquired banks,” says Taiwo Kasali of Agusto & Co. Zenith Bank, Oceanic, Afribank and GT Bank did not make any acquisitions but used the consolidation phase to raise extra capital. The other large banks – Intercontinental, First Bank, Union Bank and Wema Bank – made smaller acquisitions. At the top end of the market, there was only one large merger, that of United Bank for Africa (UBA) and Standard Trust Bank to form the largest bank in the country by shareholders’ capital and the second largest by assets.

A shuffled pack

First Bank retains its long-held number one position in terms of assets but UBA now overtakes it on shareholders’ capital. First Bank is in the process of a merger with Ecobank that will substantially increase its size. It has also historically led the market in profitability, followed by Union Bank, Zenith and Oceanic. But Zenith Bank is on its way to achieving its unashamed ambition to be the biggest bank in Nigeria through a N50bn ($280m) public offer – the largest single capital raising in Nigerian history. A mid-tier group of banks, including Diamond Bank and First City Monument Bank, also made select acquisitions.

The four foreign-owned banks, Citigroup, Standard Chartered, Stanbic Bank and Ecobank, chose to ship in capital from their head office balance sheets, although Stanbic attempted a merger with Oceanic Bank that may still come to fruition.

The most intense action during the consolidation phase took place outside of the top 10. A number of banks were formed from the merger of numerous smaller banks. For many, it was the only way to survive. Some attempted to raise capital but failed to generate enough on their own, leaving mergers as the only option. Those that could not tie down a deal with a merger partner faced certain demise under caretaker managers. Many of the 14 banks that did not make it were involved in planned mergers that dissolved in the days before the deadline.

It is a common fear that the merged banks that survived did so through tenuous business combinations that will not stand the test of time. Some are a case of “a few weak banks coming together to form a bigger weak bank”, according to an independent analyst. It is likely, though, that at least some of the newly formed banks will succeed and pose a serious challenge to the top 10 (See table of banks).

New-found sanity

All that can be said with certainty is that the horde of smaller banks that cavorted around the industry of old has been consigned to the history books. “There’s far more sanity now with fewer banks,” says Afribank CEO Patrick Akinkuotu. With the sanity comes a commitment to transparency, corporate governance, improved systems and technology, and substantially better oversight by regulators.

Many banks have chosen to go back to the drawing board to recreate their businesses from scratch with new brands and business areas. Access Bank, for example, was traditionally a respected and aggressive competitor in corporate banking. It has acquired two small retail operations and is now gearing up for retail banking, complete with a high profile (and costly) rebranding and advertising campaign.

Sterling Bank has been formed out of five banks, the largest of which makes up less than one-third of the new institution. It has adopted a new name and plans to become a full-service bank with strengths in international trade finance, stock broking and consumer banking, reflecting the niches of its constituent parts. The story is the same for the newly named Skye Bank.

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That is why, despite the massive culling of the industry, it is likely to be far more competitive in the future. “If you have N25bn in capital, it makes you a serious player,” says Emeka Emuwa, country chief for Citibank. Banks that manage to bed down their mergers will be tougher competitors for the large historic banks and foreign banks alike.

Wider focus

The competition will naturally force the banks into a wider focus of business areas. Until now, the industry has largely been one-dimensional: all of the banks have corporate and commercial banking at the heart of their balance sheets. Almost no consumer lending takes place. Instead, the banks make high returns by financing select multinational and blue-chip Nigerian businesses and sitting on government paper.

The older, larger banks (including UBA, First Bank, Union, Afribank and Intercontinental) have historically spanned investment through to retail banking, while others have focused on a niche. The larger banks have used their retail bases to raise deposits to fund their commercial lending, although only First Bank and Zenith have deposit bases of more than N200bn.

The hope is that the industry will have the capacity to break beyond its traditional focus on the oil and gas sector, from which it feasts off the crumbs left by large offshore financing deals. “The key areas of the economy have not been addressed: the industrial sector, the agricultural sector, the bits that affect Nigerians day to day. Outside of the energy sector, there has been almost no lending”, says Afrinvest’s Mr Chioke.

When it comes to major project finance deals, local banks have not been part of the action. “I don’t think Nigerian banks are doing 2% or 3% of the business in oil and gas,” says Mr Akinkuotu.

A hope for the post-consolidated sector is that the banks will have the capacity to do big-ticket financing to the oil and gas sector. Banks are limited to 35% of shareholders funds in any single exposure, so the biggest bank could now lend $132m. But the local banks have been building capacity for syndicated lending in partnership with foreign banks – in the past two years a few $1bn deals have been done.

Liquidity abounds

Nigeria’s banks are highly liquid, compelled by regulations to hold 40% of their deposits in liquid assets. Most balance sheets are dominated by government paper: mostly short-term treasury bills issued by the central bank and gradual government bonds on one to five-year terms. Liquidity is provided by a system of five discount houses that trade government paper with the banks, and act as intermediaries between banks and the CBN for its open market operations. Each discount house is owned by a consortium of banks. No secondary market exists to trade government bonds.

The liquidity factor is a feature of banks’ deposits. Few deposits are made on terms – a reflection of past lack of faith in the stability of the banks. “The only long-term funds we have is our own equity,” says Atedo Peterside, CEO of IBTC Chartered Bank.

IBTC, like others in the industry, attempts to term-match its assets and liabilities, so the only funds available for longer-term lending are its own capital, which is a heavy cap on the size of deals it can do. “There are no long-term deposits in Nigeria. Long-term products would not fly. It will take a while before you can sell the concept, no-one trusts the market enough to give you a two or three-year deposit,” says Mr Peterside.

The CBN estimates that 75% of the industry’s deposits are on terms of less than 30 days. The only long-term finance to which the banks usually have access is from development finance institutions such as the International Finance Corporation, Germany’s DEG and the Netherlands’ FMO, all of which have extended lines to some of the Nigerian banks. Most loans in the industry are on 90-day terms for working capital or trade finance, particularly imports. Political pressure is now on the banks to expand this focus to other economic sectors.

The NPL landscape

With so much pressure to find new assets, non-performing loans (NPLs) are an inevitable risk. The sector’s NPL profile is mixed. Industry figures are difficult to come by, but the sector breaks down into two camps: the older full-service banks with older books and newer banks that have cherry-picked corporate and high net worth clients. The older banks are said to have books in the commercial parts of their businesses with NPLs as high as 35%. Those will have been provided for in terms of CBN rules that the banks fully provide for NPLs after one year. The younger banks appear to have NPLs of about 8% with loanbooks to multinationals and high net worth individuals sometimes as low as 1%.

That experience has made the banks more keen on multi-nationals than the so-called real economy. Intercontinental Bank, for one, intends to focus more effort on multinationals and less on domestic corporates, says CEO Erastus Akingbola. Yet the most profitable business has to be in commercial and retail where margins are much higher. And the statistics suggest that there is room for more lending at every level. The CBN estimates that total credit extension in the Nigerian economy is only 20% of GDP, a long way off South Africa’s 100%.

Branches open and close

There are about 3300 bank branches in Nigeria, concentrated in the urban areas. The consolidation process will have made many of those redundant but many new ones are also being opened. The industry remains highly branch-focused where most deposits are sourced. Historically, the branches were not linked in real time, which is a symptom of the weak telecoms infrastructure of the past. Many banks have used the consolidation period to upgrade their IT systems and the larger ones now boast that their branch networks are all online. First Bank estimates that between 400 and 500 new ATMs will be installed this year while all of the banks are building branches across the country, which is one way to put the newly raised capital to work.

Branches are seen as pools for deposits while lending is done from the head office. The sector used to rely on public sector deposits – particularly the weaker banks – although the CBN now regularly recalls public deposits to keep the banks on their toes.

The government’s vision for a dynamic, competitive and modern banking sector has begun to materialise. The challenge for the banks that have emerged as large players out of the consolidation process is to prove that they capable of taking on the old, established incumbents. The talk is ambitious and some of the plans are impressive but it is still early days in Nigeria’s effort to establish a world-class banking industry.

Emeka Emuwa, country chief for Citibank

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