When Nigeria’s banks have finished reporting their 2012 results in the coming weeks, they will likely have gone a long way to proving that their recovery from the 2009 crisis, which brought the industry to its knees, is complete. That crisis, which forced the government to bail out almost half the country’s lenders and set up a state-owned bad bank to take on billions of dollars of non-performing loans (NPLs) from across the sector, was still being felt in 2011, when several institutions made losses.
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But analysts are optimistic that the latest results will mark a turning point. Bolaji Balogun, managing partner of Chapel Hill Denham, a local advisory firm, says it is feasible that eight or nine banks will announce pre-tax earnings of more than $100m, while three could pass the $500m mark, which would be a first for the country. “I think we’ll see some sterling numbers,” he says.
A healthy picture?
The outlook for this year seems rosy too. Nigeria’s economy is expanding at about 7% annually in real terms, while inflation, having been 16% three years ago, is close to single digits and falling. Moreover, the removal of bad loans by the Asset Management Corporation of Nigeria (Amcon) has put the banks on a firm footing.
“Interest rates are trending down and disposable income across the country seems to be increasing,” says Yinka Sanni, chief executive of Stanbic IBTC Bank, a subsidiary of South Africa’s Standard Bank. “And Amcon’s intervention in the past three years has paid off. With virtually all the toxic assets taken off banks’ books, most have returned to growing their assets.”
Foreign investors mostly agree. “The banking system is well on the way to recovery after a major systemic shock,” says Mark Richards, head of financial services at private equity group Actis, which owns a 15% stake in Diamond Bank, a Nigerian mid-tier lender. “For the survivors, the market looks an attractive place.”
Nonetheless, analysts warn that this year conditions could get tougher. In 2012, most banks’ provisions for bad debts were low thanks to them having clean balance sheets in the wake of Amcon’s purchases. And treasury bill yields were high, often more than 16%. As such, Nigerian lenders, almost without exception, piled in to the sovereign bond markets. “Last year was fairly easy for the banks,” says Yvonne Ike, Renaissance Capital’s chief executive for west Africa. “They had a nice interest rate environment, with high government bond yields. They had to do very little to generate returns.”
Tougher 2013
That benign environment is already changing. Bankers admit provisions for NPLs will probably rise back to normal levels in the next two years, while treasury rates have fallen heavily in the past few months. And an annual charge on banks to make them pay for the government’s intervention and reduce the burden on taxpayers – the so-called Amcon levy – will increase this year from 0.3% of their assets to 0.5%. As a result of such conditions, Ronak Gadhia, an analyst at securities firm Exotix, believes return on equity (ROE) for the five biggest lenders by assets – First Bank, Zenith, United Bank for Africa (UBA), Access Bank and Guaranty Trust Bank (GTB) – will fall from his forecast of 22.5% for 2012 to slightly under 20% this year.
All of these factors could force banks to become more innovative. “This year we’ll know the banks that have sustainable, good businesses,” says Mr Balogun. “Everyone is going to have to go out and actually lend [to the private sector]. We’ll see if the lessons around credit have been learnt, which banks have strong customer bases and which banks know how to control costs.”
For the time being, most lenders will continue to buy plenty of government bonds, which were still yielding as much as 11% in mid-February. But to make the trade work as well as it did last year, they are trying to raise more and cheaper deposits with which to fund their purchases. UBA’s chief executive, Phillips Oduoza, says this is part of the reason there has been a "paradigm shift" in the purpose of his bank’s branch network. “Before now, we’d been using branches to generate deposits and assets,” he says. “But now their focus is primarily on deposit mobilisation. Our people are measured along those lines.”
Targeting the private sector
Banks will, however, be under pressure to lend more to the private sector if they are to sustain their profit ratios and net interest margins (NIMs). Loan growth has been weak since the crisis, which is hardly surprising given the huge spike in bad assets during that period. Last year it was probably about 12%, far lower than the 15% to 20% many commentators had predicted and with the bulk of credit going to blue-chip borrowers such as oil and gas firms and large manufacturers.
While bankers say the figure for 2013 will be higher, they remain cautious about expanding their loan books. “The banks need to be careful,” says Mr Oduoza. “If they become bullish, we could see the same problems as in 2008 and 2009, with NPLs rising.”
Their wariness is down to the fact many of the problems that have long blighted the credit market in Nigeria, including the existence of a large informal economy and lack of properly audited companies, remain. Policy-makers realise that without structural reforms to the economy, businesses will inevitably struggle to raise funding.
“Even when banks have the capital and liquidity, they’ve got to have sound counterparties out there,” says Sanusi Lamido Sanusi, the governor of Nigeria's central bank. “Banks’ ability to diversify their portfolios depends on a number of things. You can’t get them to lend to the manufacturing industry if manufacturers aren’t viable because there’s no power, security or infrastructure.”
Which sectors to lend to?
Bankers are optimistic, however, that progress is being made when it comes to government reforms of the power, agriculture and upstream hydrocarbon sectors, which include privatisations. “The reforms will boost business for our industry,” says Bola Adesola, chief executive of Standard Chartered Nigeria. “Whatever their outcomes, banks will identify opportunities.”
Reforms are at their most advanced stage in the power sector, where attempts to divest state-owned generation and distribution companies and increase Nigeria’s paltry electricity output are well under way. Banks are lining up to advise and fund potential buyers. “We think the power sector is the next big game,” says Mr Sanni of Stanbic IBTC. “It looks like the country could finally get it right when it comes to selling those assets and increasing electricity supply.”
Nigerian banks’ exposure to agriculture amounts to less than 5% of their loan books, despite it being the biggest employer in the country and accounting for 40% of gross domestic product (a far higher proportion than oil). Banks are often blamed for the agricultural industry’s backwardness and the fact Nigeria is a heavy net food importer. But they have argued that it would be reckless to give loans on a large scale, especially in a high-interest-rate environment, to a sector that is unproductive and dominated by smallholder farmers lacking irrigation and fertilisers.
The government seems to have recognised this, and one of its priorities is to provide banks with incentives to lend more. These include schemes to share credit risks with them and provide insurance to growers and agribusinesses. The ministry of agriculture, which bankers say they have had a far better relationship with in the past two years than any time previously, is also working to develop value chain businesses such as food storage, processing and transportation companies.
“There’s been a transition from people expecting the banks to fund agriculture at sub-10% levels to them understanding the risks involved and what needs to be done to get the banks lending,” says Ms Ike of Renaissance Capital.
Agricultural lending has thus increased in Nigeria over the past 18 months, albeit with most credit going to agribusinesses rather than farmers. “We believe agricultural bank loans could rise to 10% or 15% of total lending in the next three to five years,” says Jibril Aku, head of Ecobank Nigeria, the country’s sixth biggest lender by assets. “That would be phenomenal for a sector which has had little support from the banking industry in the past.”
Retail potential
Consumer lending in Nigeria is low, particularly by the standards of big emerging markets. The mortgage market is tiny, hindered by land laws that make it hard to confiscate homes when borrowers default and because banks struggle to access long-term financing in the absence of a deep domestic corporate bond market. High interest rates do not help, either.
Mr Sanni of Stanbic IBTC, one of the few Nigerian lenders to offer mortgages and other asset-backed consumer loans, says the situation became more difficult in July last year when the central bank increased banks’ cash reserve requirement from 8% to 12% to reign in excess liquidity. “That added about 400 basis points to most of the retail products we offer,” he says. “[As such] we have been more selective of whom we lend to.”
Among the few other lenders doing much to exploit rising demand for consumer credit is Diamond Bank. Alex Otti, its chief executive, says he sees retail deposits, which today make up more than 60% of his total deposits, compared to 50% in 2009, as the ‘life blood’ of the institution. Although it is adding to its branch network of 220, its ability to take on more retail customers has stemmed in large part from the use of delivery channels such as the internet and mobile phones. This has proved lucrative, with Diamond Bank’s NIM and profitability ratios being among the highest in Nigeria.
There is plenty of scope for other lenders to build their retail bases, which the central bank is encouraging as a way to deepen financial inclusion. There are only about 30 million account holders in Nigeria, despite its population being 160 million. Given the expense of building branch networks and the difficulty of reaching people in rural areas with them, most banks see mobile phones as the best way to gain new customers. “Mobile banking should be the easiest way to penetrate the unbanked population,” says Mr Oduoza of UBA, which has the most branches in Nigeria. “Mobile phones will always be a better channel for reaching people than branch networks or anything else.”
Lenders are also working with the central bank to reduce the dominance of cash transactions in Nigeria. As part of this goal, banks are trying to modernise the interbank settlement system and are introducing more cards and point-of-sale (POS) terminals. Some progress is already being made, with POS transactions having increased rapidly in recent months. If this continues, it should help improve Nigeria’s reputation for having a technologically backward banking sector relative to those in some other frontier African markets, notably Kenya.
Mid-tier specialisation
With Nigeria’s five biggest banks owning about half of the sector's total assets, many analysts say that the other 17 deposit-taking lenders in the country will find it ever harder to survive. They cite that the mid-tier banks tend to have lower interest margins and ROEs than their larger rivals, not to mention higher cost-to-income ratios.
But few local bankers believe a spate of acquisitions is likely in the near term. They argue that with Nigeria being such a big and unsaturated market, there is little reason to suggest only top-tier lenders can thrive. As Diamond Bank has shown with its push into retail banking, those that use innovative means of capturing new clients will not necessarily be hindered by their size. “The market is still attractive enough for the top 10 or 12 players to do well,” says Mr Richards. “It is not a case of a top tier only. I think there will be more specialisation over time, with some banks focusing on the retail market, others on corporate clients and some on small and medium-sized enterprises.”
At least some takeover activity is expected in the next 18 months, however. Amcon wants to privatise three mid-sized and small banks nationalised during the crisis – Keystone, Mainstreet and Enterprise. While it is not yet known if they will be merged or kept separate, government officials claim plenty of banks are interested in buying them, including foreign ones. Among them could be South Africa’s FirstRand and Absa, both of which have said they are considering starting retail operations in Nigeria.
Nigerian banks’ valuations remain low compared to those of their peers in Kenya and South Africa. Few lenders trade above their book value and only one, GTB, trades at more than two times its book value. “Valuations are low because of the aftershock of the banking crisis and because there’s limited domestic liquidity,” says Mr Richards.
He thinks, however, that they will rise over the next 12 to 18 months as local pension funds, which are currently big buyers of government bonds, become more interested in equities. He is not alone, with most analysts predicting that the 2012 results will boost foreign and domestic investors’ appetite for banking shares.
Stronger, more profitable
Few Nigeria watchers dispute that the central bank’s measures to revive the banks in the wake of their crisis, which included clamping down on margin lending and fraudulent practices, limiting the tenure of executives, and shielding depositors from another crash in the capital markets by banning universal banking models, have resulted in a far safer and better-managed system. It is also one that is becoming highly profitable again. “The Nigerian banking sector is without doubt very solid in its entirety,” says Ms Ike of Renaissance Capital. “Capital adequacy ratios are in their 20s, cost-to-income ratios are in the mid-50s and the industry’s ROE is more than 20%.”
Moreover, she thinks Nigeria’s banks can catch up with those from South Africa, the largest on the continent. “I believe that in three to five years, they will be head to head on some performance indicators – including revenues and profits – with the big South African lenders,” she says.
Growing their assets quickly enough to achieve that should not be a problem, given Nigeria’s rapidly rising economy and the vast number of people yet to enter the banking system. Sustaining low levels of NPLs, which have blighted lenders in the country for decades, will be crucial. But so far the evidence suggests that banks have learnt their lessons from 2009 and are in no mood to repeat their mistakes.
