James Eedes examines how the younger, more dynamic banks line up competitively against their well-established, but antiquated, peers and finds much talk but a lack of clear strategy.

In Nigeria’s post-consolidation banking environment, the battle to stand out from the crowd is intense, even desperate, especially among the industry’s top tier. Logos have been overhauled, brands updated and promotional campaigns launched. But, for the moment at least, it is little more than brand advertising – eye-catching certainly but giving scant information to customers about products and services.

This reflects two features of the market in the immediate aftermath of consolidation. First (as expanded on in more detail elsewhere in this report), the market is very underdeveloped and that constrains the products and services that banks can offer, consolidation notwithstanding. The second feature is related to the first: Nigeria’s banks are now heavily overcapitalised, a consequence of the policy imperative to compel consolidation and force out the small, weak banks that posed such a risk to the system. The new minimum capital requirements were not based on an optimum capital adequacy ratio but rather were designed to set the hurdle high enough to achieve the desired degree of consolidation.

Strategy is unclear

The result is that banks are sitting on cash – in many cases far more than they are accustomed to managing. So far, banks are not making the mistake of recklessly growing assets through imprudent lending, although it is premature to conclude that no banks will succumb to this in the future (they have not had the time for such folly yet). What is happening is that investment is going into marketing, information technology, facilities and recruitment in a manner that looks ominously to be lacking in clear strategy and direction.

Few banks can articulate a coherent strategy, a master plan that emphasises their competitive strengths and identifies their points of differentiation in an over-traded market. Where there is a strategy, it is often more a loose set of wishes to target every segment. In some cases, such as GT Bank, which is strong in the corporate sector, managers are prepared to gamble an established profile and reputation in a given market segment to pursue other opportunities where they have little expertise.

With Central Bank of Nigeria (CBN) governor Charles Soludo stating unequivocally that he favours further consolidation, albeit at the behest of market forces, there is a clear sense of urgency among banks not to be an also-ran only to become an acquisition target later.

At this early stage, the market is dividing into a group of aggressive, relatively new players, led by Zenith Bank, and the old, established brands such as First Bank and Union Bank. The former want to leapfrog up the ranking in size and scale by being aggressive and innovative. The latter have the size and scale but need to transform antiquated systems and moribund organisational culture to face up to new competitive pressures.

And then there is a gaggle of banks chasing to keep up.

Going to the market

Zenith Bank has thrown down the gauntlet. With other banks still catching their breath after the consolidation deadline passed, Zenith went back to the market with its second record public offer, on this occasion to raise N50.70bn ($397m). The move will more than double the bank’s existing capital base, with some of the proceeds to be invested in branch expansion and information technology and the balance to go to working capital. On conclusion, and with the offer appearing to be well subscribed as The Banker went to press, Zenith will top the market in terms of shareholders’ capital with about N90bn, within sight of the N130bn required by the CBN to participate in the management of Nigeria’s foreign reserves.

Local analysts have praised the move but it is unclear how Zenith intends to earn an acceptable return on equity. For its half-year results to the end of December 2005, Zenith reported assets of N370bn, implying a mediocre capital/assets ratio, which will only worsen after its latest round of capital raising. Even if it does manage to participate in reserve management, the modest fee income can hardly justify the jump in equity.

Zenith’s MD and CEO, Jim Ovia, is bullish: “The future prospects of the bank are hinged on the need to maintain our position as a leading financial services provider in Nigeria while expanding our operations internationally. Factors driving this include globalisation, which fuels our customers’ need for cross-border transactions; the integration of the economies of the west African sub-region; and our strategic intent to be the quintessential financial services provider in Nigeria and the sub-region.” Last year, the bank won The Banker award of Bank of the Year in Nigeria for its benchmark initial public offering.

Eyes on the crown

In truth, Zenith wants to put daylight between itself and its rivals. It walks and talks like the market leader with easily the most gleaming corporate headquarters, an important variable in a country that is status conscious. Whether the many large-format plasma screens dotted around the reception are the best use of shareholders’ funds is a moot point.

It is a far cry from the headquarters of Nigeria’s venerable grand dames: First Bank and Union Bank, which are located in the distinctly third world Marina district, away from the more salubrious Victoria Island where Zenith and most of the newer banks are located.

First Bank does not plan to relinquish its market leadership without a fight, though. It has announced plans to merge with Ecobank, a privately held group with operations in 13 west and central Africa countries, including Nigeria. This will transform First Bank into a serious regional player with a substantial African footprint.

However, Union Bank, which was historically Nigeria’s biggest bank by assets, appears to have been knocked sideways by the consolidation process. In February, a new managing director, Bartholomew Ebong, was named to replace incumbent Godwin Oboh, who had been in the post for 35 years. Although the succession plan was said to have been a happy affair, for a bank seemingly bereft of ideas and energy, it was overdue.

United Bank for Africa (UBA) is a hybrid of new and old, and is an interesting contender for market leadership. The new UBA is a merger of the old UBA and Standard Trust Bank. The motivation for the deal, says head of strategy Kennedy Uzoka, was not to meet the new minimum capital requirements, which both banks could have achieved in their own right, but rather to enjoy the synergies of UBA’s well-known brand with Standard Trust’s modern systems. “The deal makes UBA the largest bank in Nigeria by assets and branch network. We have retained the UBA brand because it is so respected and trusted; in this market, it is not just how good your systems are that matters, it is also about legacy and goodwill,” he says.

“We have to get a big bank [the old UBA] thinking like a small, customer-centric bank,” adds Mr Uzoka. That is a similar challenge to the one facing the likes of First, Union and the country’s other old lady, Afribank. But Mr Uzoka believes that the new UBA has the edge because the change is being driven by the more dynamic Standard Trust systems, know-how and corporate culture, which is being infused through the group. “Being innovative is innate. We have a CEO who has done this before,” says Mr Uzoka. Group CEO Tony Elumelu hails from Standard Trust, as do a number of other senior executives.

Still, no chances were taken and consultants McKinsey were brought in to smooth the integration. The newly merged bank had the luxury to cherry pick the best of the pre-merger banks’ systems and processes, with a view to creating a flexible and scaleable operational infrastructure.

It is because of this care to properly integrate the combined resources of the merging entities that Mr Uzoka believes UBA now has the capacity and management systems to compete successfully in all segments. “Zenith is very aggressive but if something happens to [CEO] Jim Ovia, that is the end of the bank.”

Trailing behind

Some of the trailing banks appear to be established on solid foundations. Diamond Bank has a conservative track record, which has helped it to secure credit lines from development finance institutions and it seems likely to stick to this approach. Fidelity MD and CEO Reginald Ihejiahi is adamant that he will avoid the herd instinct to simply follow the competition. IBTC CEO Atedo Peterside is frank about the market’s limitations and is conservative about his bank’s prospects.

Such banks are the bedrock of a sound banking system but they still lack the size and scale, and willingness, to innovate and intermediate aggressively. The likes of GT Bank and Access Bank are hungry and willing, and both are keeping close tabs on Zenith. But ambition can quickly turn to vanity (the wish to be the biggest).

There is a sense that senior executives are talking loudly and not necessarily following that with actions. With the dust not yet settled after the frenetic consolidation process, managers are trying to work out what their competitors are up to. Partly because they themselves are not yet sure of the strategy to follow and partly not to give anything away to competitors, managers are energetically talking up bold, ambitious and wide-ranging plans that are likely to see substantial refinement if banks wish to be profitable and sustainable in the future.

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