Tag: coronation

The competition in the banking sector will be so fierce this year that lenders with low capital base will be hard pressed and not be able to issue new loans. In an interview with COLLINS NWEZE, the Head of Research, Coronation Merchant Bank Group, Guy Czartoryski, speaks on interest rates and the challenge posed by drop in Treasury bill (T-bill) yields to banks’ profitability this year.

What do you think about the level of competition in the banking sector and what are you expecting to drive it going forward?

The banking sector is competitive, and it is interesting to see how quickly internet banking and mobile banking apps have become widespread across the industry. The key differentiator is quality and reliability of service. But, ultimately, competition among banks is about which ones select customer loans better than their peers, which ones manage costs better, and which ones generate and retain their capital better. At the end of the day it is about building capital because without sufficient capital you cannot go out and lend money to your commercial customers. We believe 2018 is going to be a year in which the better-capitalised banks get stronger, particularly if they meet demand for customer loans. And poorly-capitalised banks are going to get left behind.’

Banks have continued to lend at high interest rate and short term. How can this trend be reversed?

The good news for bank customers is that rates are coming down. However, the issue with long-term financing does not go away unless one adopts creative solutions. Long-term projects require careful structuring, with customer and supplier commitments, off-take agreements, guarantees, hedging against financial risks, and confidence that management can attain key deliverables. And, at the end of the day, putting sufficient equity into a business protects it from an excessive burden of debt.

What impact does the drop in T-Bills yields have on banks’ earnings?

The drop in T-bill yields is clearly a challenge for banks in 2018. Modeling it out for the nine banks under our coverage, we anticipate that the drop in T-bill yields will occasion an average 15 per cent drop in Profits Before Tax in 2018. In our report ‘Nigerian Banks, Winners and Losers in 2018’, we described this as something that banks will struggle to avoid this year. And we have already seen some evidence of this happening in the first quarter 2018 results. We argue that the banks need to go out and make fresh customer loans in order to replenish interest income this year, though clearly not all of them have enough capital to do this.

What is your advice to banks on loan creation given the rising level of non-performing loans (NPLs)?

We are actually quite optimistic about this. The NPLs at a few banks have risen, but in some cases this was because there was a technical opportunity to take the hit in the form of International Financial Reporting Standards (IFRS) 9, and some of the stronger banks did just that when they announced first quarter results.  But the underlying pressure on NPLs is easing when one considers that oil is trading around $70 per barrel and that loans to the oil industry were the major sources of NPLs. Economic growth, too, eases underlying NPL pressure and so does currency stability.  Our advice is to begin creating new customer loans again, even if this means leaving behind risk-free yields on T-bills. There is surely appetite for commercial lending in the corporate economy.

What segment of the economy has the greatest potential for growth and return on investment?

We would highlight two sectors: trading and manufacturing. It was probably significant that, after the foreign currency rates converged in mid-August 2017, the Trade sector of the economy picked up in the fourth quarter of 2017, after a long recession. That suggests to us that supply lines of manufacturers’ inputs are becoming more reliable, if only because the foreign exchange component is more predictable than it was a year ago.  We have seen the sales of consumer-facing industrial companies really soar, and this has been a remarkable feature of the economic recovery.

What prospects do you see in the equities market in the year?

We had a huge rally in 2017 which persisted into January of this year.  In those circumstances, it was not altogether surprising that institutional investors, in particular foreign institutional investors, should take profits during the first quarter of this year. Going forward, it is a matter of being selective, buying a combination of cheaply-valued stocks whose earnings are going to be alright, and moderately-priced stocks whose earnings are going to grow. There are still opportunities to make money but we do not expect another huge rally.

How is Coronation Merchant Bank handling competition as more entrants come into the market?

As a bank, we always focus on what we are doing right and then try to leverage that to stay ahead in the industry. Our vision has always been to create an oasis within the industry, renowned for doing things right and get it right the first time. We strive to achieve this by demonstrating innovation in developing solutions to diverse customer problems, differentiating ourselves from competition with creative products and service offerings, and proactively initiating change and improvement measures.

For example, we creatively introduced a credit enhancement mechanism known as Liquidity Back-Stop Facility to the commercial paper offering of a leading Real Estate Company in Nigeria. Our collaboration with the client in providing the backstop facility is the first of its kind in Nigeria and its ingenuity boosted the investment grade of the commercial paper to “A-”, despite the issuer’s “Bb-”Agusto rating – representing a six notch improvement. The significant improvement in the rating made the pricing of the offer attractive to both the Issuer and the investors as the Issuer was able to lower its cost of borrowing by 600 basis points invariably reducing its cost of capital. It thereby created immense value for its shareholders. Novel products like these speak to our ability to develop innovative solutions through creative products and customised service offerings.

Our unique value proposition is to deliver world class solutions like this to our esteemed clients in a cost-effective manner whilst leveraging our local extensive knowledge and technology. Our aim of attaining industry distinction is evident in our first-rate service orientation and efficient information technology platform to supports our business operations.

Your bank plans to raise fresh capital. Is it an indication that you would want to expand your credit base?

We obtained the approval of the Board and the shareholders to raise additional capital at the last Annual General Meeting in line with the bank’s funding plan to finance our growth aspirations. The capital raising exercise will be done in series of tranches subject to the approvals of relevant regulatory authorities. We will continue to update our stakeholders as we proceed with the process.

What are the prospects for the naira and exchange rate in the year?

We expect to release our Macro Report in June and our views on the Naira and exchange rate direction will be discussed inside.