Category: Business

Despite its enormous potential, agriculture suffers from funding in Nigeria. Banks run away from supporting the sector, citing among others, risks, high interest rate, short term nature of sources of funds and lack of access to technology. But things, according to the Managing Director of Sterling Bank Plc, Mr Yemi Adeola, are looking up. He told Group Business Editor AYODELE AMINU that lending to the sector has risen following the introduction of some schemes by the Bankers’ Committee. He also spoke on the benefits of Sterling/Equatorial Bank merger and how regulatory challenges worldwide have been putting lenders on their toes.

Lending to the agricultural sector of the economy is ridiculously low at less than two per cent. Why are banks shying away from lending to this sector given its potentials?

Agriculture is indeed the backbone of the Nigerian economy and today contributes about 42 per cent of the country’s Gross Domestic Product (GDP) and accounts for roughly 75 per cent of the non-oil sector’s GDP.

Regrettably, in spite of this agriculture accounts for only 1.7 per cent of total lending by banks. I will give you a few reasons why this has been the case: first, banks have operated in a high interest rate regime, coupled with the short-term nature of the sources of funds to banks. Second, agriculture has been viewed as a ‘high risk’ venture given its peculiarities such as susceptibility to unfavourable weather conditions. Third, infrastructural deficiencies and hugely limited access to improved technologies limits agricultural production considerably.

However, with the introduction of the various intervention funds and credit enhancement initiatives by the Central Bank of Nigeria (CBN), Bank of Industry (BoI) and the Federal Ministry of Agriculture (which have made lending to the sector bankable and profitable), I can say confidently that lending to the sector has increased and we expect to see greater participation of banks over time. Schemes such as the Nigerian Incentive-Based Risk Sharing in Agricultural Lending (NIRSAL) and the Commercial Agriculture Credit Scheme (CACS) have gone a long way towards empowering farmers around the country and have made possible things, which a few years ago could only be imagined. I am happy to say that Sterling Bank has grown this segment of its loan book to almost 5 per cent of total loans. Also, we have in place a competent management team looking at this segment carefully and working with borrowers to explore the innumerable opportunities available.

Today, Sterling Bank ranks as one of the most prominent banks providing financing collaboration with stakeholders in the Agricultural sector through strong partnerships with the Federal Ministry of Agriculture, the CBN, BoI, and other international development finance institutions.

The oil and gas sector, in addition to capital market used to be the two major two sectors that enjoyed funding from the bank. What is the situation today?

Sterling Bank has over the years helped to promote economic activities by optimally extending its resources to identified sectors where it will make a meaningful impact and support economic development. Two of the sectors that benefited hugely from the bank’s lending activities in market. Lending opportunities increased in the wake of the Capital Market explosion that witnessed the emergence of a vibrant market towards the end of the last decade. Also, deregulation of the downstream market of the Oil & Gas sector coupled with the improved financial strength of banks attracted the banks to these sectors.

The continued increase in funding to the capital market was buoyed by the huge inflow of foreign direct investment into the sector, which stimulated the market and encouraged equities trade and bank’s channeling of excess liquidity to the sector. This continued unabated until the market began to overheat and eventually crashed in 2007/2008 with its negative impact on the banking system. The oil & gas sector equally witnessed sudden and sharp drops in international energy prices with consequent depreciation of the naira, which dealt a heavy blow to the downstream sub-sector. Thankfully, the impact of the meltdown of these sectors on Sterling Bank was minimal, due to our limited exposure to them.

While Sterling Bank has continued to grow its oil & gas business to date, the same cannot be said of the capital market because of the dearth of economic activities and market appetite to warrant such support. Today however, oil and gas ranks high in the lending portfolio of the bank. Other sectors that the bank has continued to support include small and medium enterprises (SMEs), manufacturing, agriculture, power, telecoms, infrastructure and project finance among others.

How will you assess the banking industry in the first 10 months of the year? Has the recent banking sector reforms paid off?

So far, we have witnessed a sector-wide return to solid profits supported by the clean-up of balance sheets led by the Asset Management Corporation of Nigeria (AMCON) in 2010/11 and the return of risk appetite, which has boosted lending. We have also observed early signs of returning investor confidence mostly in the portfolio segments. This has reflected in the improving valuation of listed equities.

2012 has not been without some pain as some of the policy initiatives have put significant pressure on profitability. An example of such measures is the sharp increase in the Cash Reserve Requirement (CRR) to 12 per cent – the highest in a decade as the CBN struggles to contain inflation. The impact of the funding costs of most operations has been significant. This is one example of some of the current challenges facing the sector.

The pace of regulatory changes both domestically and globally continues to severely challenge operators and attaining a satisfactory compliance status in relation to these regulations is often quite demanding of management time and corporate resources. Nonetheless, one must commend the actions of the domestic regulators who have tended to be significantly ahead of the curve when compared to other jurisdictions.

But the current positive perception of the sector by stakeholders across the board stands as proof that the right choices have been made.

In spite of the publicity that heralded the introduction of the CBN’s cashless policy in Lagos, one cannot really say that the policy has fully taken off. Who do we blame for this…the banks or the bank users?

Our data suggests otherwise. We have seen our branches in Lagos drop from our list of top cash users since the introduction of the policy – a clear sign that people are responding. We expect that it will take some time before total cash in circulation drops to the anticipated level but the early signs are quite promising. Our progress in providing alternative payment channels has been slow as the reliability of the available communication solutions continues to be a challenge. We are, however, evaluating an industry-wide solution (at Bankers’ Committee level), one that should significantly improve our ability to serve our customers better.

The benefits of the policy when fully achieved would be increased convenience, additional service options, cheaper access to out-of-branch banking services, and reduced risk of cash-related crimes to the individual. For financial institutions, it would increase access to capital, reduce revenue leakage, cash handling costs, drive incremental investments in alternative channels and lead to product innovation. Without the policy, the banks might not have found compelling business reasons for doing so.

That said, it is probably sensible to wait a while longer before reaching any conclusion on the long-term impact of the policy.

Nigerian banks used to do well in the area of consumer promo. Why are they shying away from investing in consumer products these days?

Promos are a means to an end, a way to promote specific objectives. We continue to run product promotions to enhance our retail customer base as this remains our core objective. You may see fewer promos when it comes to consumer lending as banks strive to strengthen their risk management framework before pushing lending products, especially those targeted at the mass market.

Going forward, we expect to see more targeted product promotions as banks define their market segments based on their risk appetite. The fallout of the financial crisis in the industry was a tightening of banks’ risk management frameworks and a re-alignment of their individual risk portfolios. We are unlikely to get to the days of endless and unrelenting offers of unsecured consumer credit that created unsustainable household debt in the western market.

In line with our retail strategy, Sterling Bank has a bouquet of promos in the pipeline targeted at specific segments of the retail market to encourage the culture of saving particularly among the younger generation. One of such is the Savers promo, which is currently running.

To what extent has the gains of the business combination between Sterling Bank Plc and Equitorial Trust Bank Plc (ETB) reflected in the new Sterling Bank?

The business combination with ETB is a significant milestone in Sterling Bank’s drive towards building a globally competitive retail franchise. We almost doubled the size of business with the addition of over 300,000 active customers. We also grew our total assets from N350 billion to nearly N600 billion, added 80 active branches to our network and increased our staff strength by 1,300. As a result of the expanded footprint, we have now succeeded in refocusing our attention on alternative channels, nearly doubling our Automated Teller Machines (ATMs) in one year.

We have also leveraged our expanded presence to grow our business in the first nine months of the year. Our gross earnings rose to N51 billion, almost twice the amount generated in the same period last year while interest income rose by 110 per cent year-on-year resulting in a 64 per cent improvement in profit after tax

If you look at our third quarter results, we grew loans and advances by 23 per cent to N230 billion on the back of our enhanced presence in the corporate banking segment. Following our successful integration, we grew our deposit to an all-time high of N434 billion last quarter.

In your unaudited result for the first nine months of the year, profit before tax jumped from N3.01 billion to N4.77 billion, while after taxes, net profit distributable to shareholders increased from N2.74 billion to N4.49 billion.What should your shareholders expect when the full year result is ready?

Our philosophy is to think long-term. We avoid the temptation of judging our progress on short-term parameters such as quarterly numbers. We are building a sustainable business that will contend for a leadership position in our chosen market.This requires a long-term view. Despite the long-term focus, we are pleased with the near-term progress recorded on on-going initiatives and are convinced that things will get even better as we consolidate on their early gains.

That being said, our quarterly and yearly numbers are certain to continue on the upward trend in the foreseeable future.

We expect to translate more of the enhanced revenue into shareholder value during the final quarter of the year on the back of the third quarter momentum. As an institution, we are focused on delivering sustainable value to our shareholders but the details will become clearer after year-end. The combined franchise has enhanced earning capacity and efficiency is just beginning to kick in.

To what extent have you been able to combine Equitorial Trust Bank customers with those of Sterling Bank and what is your customer base?

The integration of the erstwhile ETB with Sterling Bank was a success by all parameters. Our processes, products and branches were harmonised seamlessly and became functional across the enlarged entity on April 1, 2012 – five months after the announcement of the merger in October 2011.

What is most satisfying for me as Chief Executive Officer is that my team accomplished these by relying almost completely on internal resources and without compromising our risk management and operating processes.The record-setting speed and efficiency of the integration process is unparalleled in our industry and is unlikely to be surpassed for some time.

We successfully migrated over 300,000 customers from ETB to our network in April 2012 and we are well on the way to achieving one million active customers. We remain deeply grateful to all our loyal customers who stayed true to the Sterling brand during the minor disruptions witnessed in March 2012 when we integrated our systems. We have reached out to many of these customers during the various customer events to show our appreciation and we certainly look forward to broadening this cherished relationship.

Sterling Bank used to be a fringe player before last year’s merger with ETB. How strong is the brand now in terms of coverage and net worth?

In most African countries, a bank with over $4 billion in assets and 180 branches will be among the top three. It is a testimony to the size of the Nigerian market that we are classified as a mid size bank. With N45 billion in capital and a workforce of 2,800 professionals, Sterling is fast becoming systematically important. We are certain that in a few years, we will be a source of national pride and a globally respected financial brand. We have done the groundwork and the results should become apparent to the public in the near future.

In the first nine months of your operation this year, loans and advances improved from N164.3 billion to N229.43 billion. What is the target set for the full year and how realistic is the target?

We have already achieved a 23 per cent growth in loans and advances this year and this is consistent with our guidance to the market for 2012. However, we remain open to tapping exceptional opportunities that are available within the boundaries of our risk appetite. We are however, mindful of the consequences of aggressive loan growth. The repercussions can be disastrous – hence our strategy of a moderate growth in risk assets for the rest of the year.