Commercial banks have billions of their capital trapped in loans to power, oil and gas sectors following the downturn in Nigeria’s economy. The lenders’ dilemma might worsen should the economy plunge into recession as being predicted. COLLINS NWEZE examines the interplay of business interests and the critical decisions the banks must take to remain healthy.
INDEPENDENT Shareholders Association of Nigeria (ISAN) President Boniface Okezie is not happy with the state of local banks. His grouse is not with the banks, but with the government and financial system regulators. Both have depleted lender’s revenue sources through diverse policies.
Okezie, who has investments in almost all the commercial banks, told The Nation that with the economy likely to relapse into recession by the end of this quarter and unfavourable regulatory and government policies in place, the banks should prepare for hard times.
The over N800 billion invested by the banks in the power sector following a directive by the government is at risk as operators struggle with cash crunch and low gas supply, making it difficult for them to meet their obligations.
Besides, the removal of commission on turnover by the Central Bank of Nigeria (CBN) is expected to cost the banks more than N120 billion annually on revenues. The banks’ contributions to the Asset Management Corporation of Nigeria (AMCON) and Nigeria Deposit Insurance Corporation (NDIC) levies, estimated at N150 billion; implementation of Treasury Single Account (TSA) and high Cash Reserve Ratio (CRR), are some of the policies hurting banks profitability and liquidity positions.
Already, the lull in economic activities has triggered a drop in customers’ deposits in banks. A data from the CBN showed that between April 2015 and April 2016, the total customers’ deposits with the commercial banks fell from N18.54 trillion to N17.51 trillion, representing a N1.03 trillion decline. The banking sector’s total assets also dropped by N154 billion from N27.58 trillion to N27.43 trillion within the same periods.
The National Bureau of Statistics (NBS) said inflation rose to 15.6 per cent in May from 13.7 per cent in April due to high petrol and electricity prices.
A review of banks’ results in the first quarter ended May 31, showed widespread decline in almost all indicators.
Ecobank group’s profit after tax (PAT) dropped 35 per cent to $81.4 million and FCMB Holdings’ PAT also declined by 93 per cent year-on-year to N420 million.
Fidelity Bank’s results came in weaker than expected with its PAT dropping by 99 per cent year-on-year to N71 million. FBN Holdings equally announced its unaudited results for the three months ended March 31, 2016. The Group’s PBT stood at N22.1 billion, down 18.2 per cent year-on-year from N26.9 billion in March 2015, while the PAT stood at N20.7 billion, down 8.3 per cent year-on-year from N22.6 billion within the same period. Similar weak performances were seen across all other lenders.
Okezie said these performances will worsen as the economy inches closely to recession after monthly oil revenues dipped from $1.2 billion per month last December to $500 million in May.
The Director-General, Debt Management Office (DMO), Dr. Abraham Nwankwo, explained how the country got to its present situation. In the second half of 2014, he said, petroleum export dependent countries, including Russia, Saudi Arabia, Kazakhstan, Nigeria, Angola and Venezuela, were shocked by a drastic fall in prices at the international market.
The price of oil, which averaged $110 per barrel from 2010 to mid-2014, fell from $114 per barrel in June 2014 to $38 by December 2014; and by February this year, the price hovered around $30 per barrel, a situation that led to economic downturn. The situation was exacerbated by capital flight and speculative attack on the local currencies, ignited by the downturn.
Hard impact on the country
The Federation Accounts Allocation Committee (FAAC) has reported a 50 per cent drop in the major source of government’s revenue compared to the pre-crisis period and the drop in the annual amount available for sharing among the various tiers of government, estimated at $16 to $20 billion. The drop in FAAC revenues led to the inability of about 30 out of the 36 states to honour recurrent obligations, including salaries and pension liabilities, as well as capital obligations.
The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, explained that a recession occurs after two consecutive quarters of negative growth. The country’s actual growth rate of its Gross Domestic Product (GDP) in first quarter was (-0.36 per cent) and second quarter estimate has been put at (-1.5 per cent). The index is expected to plunge the economy into recession.
Rewane, who disclosed that the last time Nigeria experienced recession was 2004, added that oil price decline of 56.39 per cent from the peak in 2014; sharp oil production drop of 26.3 per cent; underinvestment over foreign exchange policies and repercussions from Niger Delta Avengers sabotage are largely to be blamed for the ongoing economic woes of the country.
The analyst also listed budget delays and squabbles; the impact of spending now almost late; drying up of new investments; wiping out of trade credit flows (approximately $10 billion and Net Foreign Direct Investment), which is down to $1.5 billion (6.25 per cent) as other factors hurting the economy and banks’ performances.
Nigeria also recorded a negative trade balance of N184 billion ($925 million) in the first quarter, from a trade surplus of N364.6 billion ($1.83 billion) in same period of last year; there was sharp decline in exports of 34.6 per cent compared to 7.8 per cent decline in imports, which was the first quarterly trade deficit in at least seven years.
Former Executive Director, Keystone Bank, Richard Obire, said banks can only have more money to grow their businesses in a growing economy. According to him, every business has the ambition to grow year-on-year, but that would be difficult to achieve under a shrinking economy.
To him, all forward-looking banks should look at what would protect their revenues, by identifying and focusing on the healthy side of the
He said: “For me, the brewery sector has done exceptionally well in the face of the ongoing downturn in the economy. The agricultural, and Information Communication and Technology (ICT) are fast growing sectors that banks can tap into.
“The Fast Moving Consumer Goods sector is also a critical sector that lender can key into because despite the state of the economy, people must eat.
“The non-oil sector is also areas to watch, because of their capacity to generate foreign exchange for the economy. The downstream oil sector has huge prospect given the increased cash-flow that came with the over 67 per cent hike in petrol prices. The upstream sector should be avoided for now.”
Obire regretted that the banking sector lacks the strategy to create new investment opportunities, but are always looking out for short-term opportunities to explore and make immediate profits.
He said although the power sector is facing a huge challenge, but it also presents huge business opportunities for lenders to explore.
Obire said: “It is only the power from traditional sources that are facing problems. What about developing and funding the non-traditional sources like solar energy. Banks can go to countries where the solar option has worked and see how it was financed for the purpose of adopting same strategy here. That would present a new opportunity for such bank to earn sustainable revenues.
“The power sector is crying for new investments. Millions of Nigerians and industries are zealous to pay for power. Capital will flow to opportunities that are well established but it is unfortunate that our banks are lazy and not creative.”
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the weaker external sector performance reflects the sustained pressure in the overall economy worsened by sub-optimal monetary policy responses.
He said: “We maintain that the continued delay by the CBN in fixing the currency market crisis will continue to worsen key macroeconomic indicators notwithstanding the anticipated fiscal impulse. Recent attacks on oil production assets by Niger Delta Avengers suggest a weaker outlook for trade balance so long as export base remained dominated by crude oil.
“Also, the implementation of the 2016 budget which is based on a daily crude production of 2.2mbpd may be threatened even though recent efforts to strengthen independent revenue are commendable,” he said.
Chioke said on the whole, since the metrics for the performance of the 2016 budget on the basis of 80 per cent non-oil revenue appears as a fluke, weaker outlook for domestic oil revenue raises credit risk premium on government’s massive borrowing plan for the fiscal year.
Bank chiefs speak
Heritage Bank’s Executive Director, Service Bank, Niyi Adeseun, said the economic meltdown being experienced has no peculiarity with the country, but added that the lender is confident of the future.
“Our hope for the future is very bright. I tell you, where there are challenges, there are always opportunities. The last time we had economic meltdown was in 2008, now is 2016. This whole thing started in 2014 but we saw it coming,” he said.
The bank chief said that now is a production time, not a consumption time.
“For us in terms of the future, we are not scared. We need to wear a protective shield. We need to ensure we are protected and ensure that our capital is protected by not booking bad loans,” he said.
Adeseun said that with the decline in crude oil prices, there is need for the country to be more serious on diversification of its economy.
His words: “We have to quickly get into diversification of the economy. We allowed country like Ivory Coast to beat us with cocoa production. It should not have happened. Nobody knows how long it would take to diversify the economy, but the fact is that if everyone gives support to government, and government brings the right incentives, it will be achieved.”
According to him, every lender has to be watchful of developments in the economy and it has to take the right steps to ensure low production costs because revenues do not come forcefully. He disclosed that most banking institutions got the significant part of their revenue base from the retail segment of the market, and his bank will not be left behind.
Between 2011 and 2016, Skye Bank’s total credit to the manufacturing sector amounted to over N3 trillion; First Bank’s loans and advances to the customers, including the manufacturing sector amounted to about N4 trillion, while United Bank for Africa’s contribution between 2014 and 2015 was over N1 trillion.
Skye Bank’s Group Managing Director/Chief Executive Officer, Timothy Oguntayo, his bank has not only provided the enabling environment for Small and Medium Enterprises (SMEs) to thrive, but has been in the forefront of extending credit facilities to the operators as well as real sector businesses.
He said the lender has been involved in the process of optimising value and benefits from the agricultural value chain by extending credit facilities to operators in the agro allied industry, ranging from cocoa processing, flour production, and animal husbandry, among others.
These projects, he said, are located in the six geo political zones of the country. Some of these companies do not only produce for local consumption but also export, thereby earning foreign exchange for the country.
Investors react
Investors’ passion for new investments had dropped after the 2008 global recession as between 2008 and 2009, investors in the local stock market witnessed significant erosion in the value of their investments as the market lost N7.24 trillion from a high of N12.64 trillion.
Already, investors and big businesses are worried that with plunge in crude oil prices and government’s refusal to devalue the naira are not in their favour.
This has led to the exit of many foreign companies. Truworths International Ltd., a South African clothing retailer, has closed its last two outlets in the country, just as Iberia Arline has also pulled out of the country.
The Spanish national carrier, explained that its exit followed the financial predicaments brought upon it by the forex policy, which prevented it from repatriating its proceeds for many months now. Virgin Atlantic and many others have left the country due to same reasons.
The International Air Transport Association (IATA) called for countries with tight currency exchange rate controls including Venezuela and Nigeria to release $5 billion worth of local ticket sales revenue owed to foreign airlines, or risk losing their services.
IATA said that airline revenues worth $5 billion were currently being blocked by countries, with Venezuela and Nigeria the biggest culprits, effectively withholding $3.78 billion and $591 million respectively. Sudan, Egypt and Angola are also blocking the repatriation of airlines’ earnings.
“The efficient repatriation of revenues is critical for airlines to be able to play their role as a catalyst for economic activity,” IATA’s Director-General Tony Tyler said.
Lufthansa, it was learnt, has been unable to access $20 million of ticket revenues in Nigeria because of forex controls and could cut capacity if that amount grows, sources have said.
Investors are also concerned that the JP Morgan’s exclusion of the country from its bond index, and are concerned about whether or not they will be able to repatriate the earnings from their investments, given the current controls on the exchange rate.
Alexander Ajayi, Group Managing Director, Financial Trust Company, said aside lifting the foreign exchange restrictions, deregulation and privatisation of the economy remained the way to go.
He said: “The private sector should drive the economy. The government has to raise debts, firms and industries have to get listed to raise more capital. Cost of debt is very expensive but people need to list. No efforts are being made to get some of the unlisted giants come to the market. So, the primary market has to be energised.”
The CBN had in 2014, set up a N220 billion Micro Small and Medium Enterprises (MSMEs) fund as part of its developmental role and mandate of promoting a sound financial system.
The gesture was in recognition of the significant contributions of the MSME sub-sector to the economy. It said the sub-sector is characterised by huge financing gap which hinders the development of MSMEs.
CBN Governor Godwin Emefiele said the broad objective of the fund is to channel low interest funds to the MSME sub-sector of the economy through banks to enhance access by MSMEs to financial services; increase productivity and output of microenterprises; create jobs; and engender inclusive growth.
He urged financial institutions to support government’s efforts at diversifying the economy from oil by growing the non-oil export segment of the economy adding that the non-oil sector remains the future for the economy and businesses.
Mass sack inevitable
Despite moves by government to halt ongoing job loss in the banking sector, lenders will continue to downsize their workforce until there is full economic recovery, Obire and Okezie agreed.
Overall, 20 commercial banks are expected to sack at least 10,000 out of their estimated 110,000 workers before the end of the year as the impact of trade balance deficit recorded in the first quarter begins to reflect on the economy.
On June 1, Ecobank Nigeria Limited relieved 1,040 of its over 9,000 workers over what its management called poor performance. Three other banks – First City Monument Bank Limited (FCMB) Limited, Skye Bank and Diamond Bank had earlier sacked 600 workers. More banks are expected to follow suit in the second half of the year.
The mass sack affected almost all categories of workers.
Explaining the development, Ecobank’s Managing Director Charles Kie said: “We understand that people are our key asset, so we have emphasized the need to reward our best performers, continue to re-invigorate our people while also opening up new opportunities for talented, committed people to join us as permanent employees.
“At the same time, based on our repositioning plan, we had to disengage some staff while ensuring that, in line with industry standards, they are treated fairly.”
The DMO chief suggested a way out in the face of the prevailing recession and intimidating internal and external imbalances, a package of structural turnaround propelled by massive investment in physical and social infrastructure development.
He said diversification of the economy, competiveness; export-market resilience and self-sustaining growth remain the solution for the country.
