A decade ago, Nigeria had almost 90 banks. Two rounds of consolidation since then — the first happened in 2005 in response to a hike in capital requirements, while the second came in the wake of the country’s 2009 financial crisis — have seen the number drop to few more than 20. As well as creating lenders with far bigger balance sheets, the changes have resulted in a more concentrated banking sector. The top five lenders in the country, a group comprising Access Bank, First Bank, Guaranty Trust Bank, United Bank for Africa and Zenith, own about 60% of overall assets.
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Some foreign investors have suggested Nigeria will soon go the way of South Africa, where the four largest banks have an 85% market share. For them, Nigeria’s mid-tier and small lenders will struggle to survive, and several will be taken over by bigger rivals in the next few years.
Local analysts tend to dismiss such a scenario, though, and insist that the bulk of today’s banks will be around for a lot longer. They point out that far from being in distress as they were during the crisis, Nigeria’s mid-tier and small banks for the most part now have capital adequacy ratios of 15% or more, well above the minimum requirement of 10%. And regulators are in little mood to encourage the creation of many more big lenders.
“I’m concerned about the concentration of the banks at the upper end because very large institutions tend to lend to large multinational corporations and invest in government securities,” says Sanusi Lamido Sanusi, governor of the central bank. “They don’t have time for the middle, which is where economic growth happens and jobs are created. I don’t think we’re looking for any more institutions that would be too big to fail.”
Banks seem happy to oblige. Most are concentrating on organic growth, rather than increasing their market share by going on takeover sprees. Ecobank Nigeria bought Oceanic, a rival, in 2011 in a deal that saw it move from being a small player to the sixth biggest in the country by assets. But Jibril Aku, its chief executive, says the bank is not looking at another acquisition, even though it has set itself the tough task of being one of Nigeria’s biggest three lenders within a few years. “We can do it organically,” says Mr Aku. “We think it can be achieved through aggressive deposit mobilisation and investment in instruments such as treasury bills. We’ll also push our loan book.”
Underpenetrated market
Bankers’ faith in their ability to grow organically is based in large part on the country being a long way from saturated as a financial market. “Nigeria is highly underpenetrated,” says Ronak Gadhia, an analyst at securities house Exotix. “There’s a lot of scope for growth.”
Out of a population of 160 million, there are only about 30 million bank accounts, some of which represent duplicate customers. Bolaji Balogun, managing partner of Chapel Hill Denham, a local investment bank, says an indication of the potential number of bankable people is given by the fact there are almost 110 million mobile phone accounts in the country.
“If you assume that a mobile phone is a banking channel and even if you net out the duplication [as many Nigerians have more than one phone], it suggests there is still a big opportunity for banks to take on more customers,” he says. “There are potentially another 30 or 40 million bank accounts. Somebody’s got to take that business.”
Nigeria’s banks are trying to do just that, and are focusing heavily on luring more low-cost deposits from unbanked Nigerians as well as existing customers. Doing so is crucial for their plans to expand their loan books and grow organically.
Alex Otti, the chief executive of Diamond Bank, a mid-sized lender, cites innovative methods of capturing more low-cost deposits as one reason why his bank has one of the highest net interest margins in the country. “Our balance sheet is driven largely by an impressive growth in customer deposits, which are our lifeblood,” he says.
Putting liabilities to use
Even when banks manage to build a hefty deposit base, they still need to go about putting it to use. Nigeria’s top tier lenders are often less nimble and innovative than their rivals when it comes to offering customers loans, particularly in the retail market. Diamond Bank’s success is in no small measure down to its clever use of delivery channels other than branch networks. Analysts cite it as one of the savvier users of internet and mobile banking, as well as point of sales terminals.
Other mid-sized institutions have managed to create niches in various market segments. Stanbic IBTC Bank, a subsidiary of South Africa’s Standard Bank, has been focusing on secured personal loans such as mortgages and car loans, which few other lenders offer. Its chief executive, Yinka Sanni, says this is a key part of the bank’s attempt to tap Nigeria’s middle class, especially people in formal employment.
Retail lending, while lucrative, remains risky in Nigeria. A lack of credit bureaux makes it difficult to assess the credit history of potential borrowers, while an inefficient legal system means it is tough to realise collateral on defaulted loans. Bankers are confident, though, that recent moves to create a biometric identification system and properly functioning credit bureaux will further open up the segment to banks, not least mid-tier ones. “The system will be much safer for us,” says Ecobank’s Mr Aku. “We’ll know that if a customer burns his credit, he won’t be able to get credit at any other bank because he’s on the biometric system.”
Smaller players also have opportunities to expand their corporate banking businesses. The government’s privatisation drive is expected to result in plenty of lending opportunities in the next two years, including in the power sector. Few bankers think that only the top five will be the ones to benefit.
Plenty of industries, meanwhile, are underfunded. Agriculture is the most glaring example. Despite accounting for about 40% of the economy, it makes up less than 5% of banks’ lending books. The government, as part of widespread agricultural reforms, wants lending to farmers and agribusinesses to increase substantially over the medium term.
Banks should be able to benefit handsomely, say analysts. They add, though, that given the agricultural sector’s uniqueness, when it comes to winning market share, the size of a lender’s balance sheet will matter less than its ability to quickly create a specialist team. “If a farmer or agricultural company wants to borrow, you can’t assess it like you would a telecommunications firm,” says Bola Adesola, head of Standard Chartered Nigeria. “It doesn’t work that way. Having specialised agriculture credit officers makes a difference. You need bankers who understand things such as animal husbandry and cocoa farming.”
Bright future
Mid-tier banks could even consider expanding abroad, as all of the big five have recently done. Among those that are locally owned, Diamond Bank, which operates in Benin, is the only one to have a banking licence elsewhere in Africa. Were more to expand into neighbouring countries, they might be able to capitalise on rising trade within the region.
Togo-based Ecobank, which operates in 33 African countries, says its presence across the continent is a key selling point with Nigerian corporate customers. Mr Aku says his bank is increasingly facilitating oil trading between Nigeria and other west African countries in which it has a licence, such as Senegal, Ghana and Côte d'Ivoire.
Nigeria’s mid-sized banks are confident they can continue to thrive. “While size is important – and we are not losing sight of that – the quality and the efficiency of the balance sheet is more important,” says Mr Otti of Diamond Bank. “Any advantage through scale can be lost to inefficiency. Competing against bigger banks is not and never will be difficult for us.”
Given Diamond Bank’s success in building its retail market share, something which has seen its profitability ratios rise to among the highest levels in the country, few analysts disagree. “There’s clearly a lot of scope for growth in Nigeria,” says Mr Gadhia of Exotix. “It’s just a question of whether the banks will be innovative enough and willing to lend outside their comfort zones.”
