Post-mergers: Emerging scenario in Nigeria’s banking sector

Sanusi Lamido sanusi, CBN Governor

Following recent post mergers in the industry, competition for blue chip companies’ account, rationalise expenditures and industry positioning is anticipated following the emerging banking landscape, writes ALEXANDER CHIEJINA

Globally, economies and financial markets were challenged in 2011 following the eurozone debt crisis and its undercurrents which swept through emerging and developed markets albeit in varied dimensions.

Heightened sovereign risks for debt-ridden Greece sent shivers down the spines of European banks and the global corporate world with substantial exposures to the Euro. However, the United States of America continued to witness calls for reduced budget deficits amidst rising unemployment and worsening sovereign ratings.

Going home, the Nigerian banking sector had come a long way; from the near death experience it had during the depth of the global financial crises in 2008. At that time, there was limited visibility on the impact of the market collapse on banks’ balance sheets.

Furthermore, Nigerian banks were among the most profitable in the world before the 2008 banking crisis with Return on Equity (ROE) on average exceeding 25 percent for most of them with prospects that ROE will recover to a more sustainable level. Resurgence in the banking sector has seen assets and profits recover to beat pre-crisis levels as wide-sweeping financial reforms improve the nation’s investment image.

A report by FSDH securities, a capital markets services firm, late January 2012 revealed that the total value of the Nigerian banking industry’s assets increased by 7.62 percent to N15.74trillion ($96.6billion) by December 2011, as against N14.63trillion ($89.8billion) in December 2009. In the same period, customer deposits is said to have improved by 5.42 percent to N10.99trillion ($67.4billion).

Meanwhile, profits is believed to have improved, with First Bank of Nigeria registering an increase to N49bn ($300.7million) before tax in the third quarter of 2011, up 20 percent from the same period year in 2010. Likewise, Zenith Bank announced last October that its pre-tax profit rose 28.04 percent to N50.13billion ($307.6million) in the nine months to September 2011, compared to N39.15billion ($240.2million) in the same period of 2010, while Stanbic IBTC Bank’s profits rose 10 percent in the first nine months of last year.

Analysts see this growth as a sign that banking reforms introduced by the government following the margin-lending crisis in 2009 are having an impact. Then, the Central Bank of Nigeria (CBN) had to pump $4billion into nine of 24 banks, including the three newly-nationalised banks in 2009 to keep them afloat. The nationised banks include Afribank, Bank PHB and Spring Bank which are now named Mainstreet Bank, Keystone Bank and Enterprise Bank respectively.

Meanwhile, as part of recovery efforts which extended to the enactment of term limits for chief executives, the apex bank compelled rescued lenders to recapitalise with institutions that wanted to operate in country. The international banking license were required to hold at least N50billion ($306.8million); domestic banks requiring N25billion ($153.4million); and regional banks, N10billion ($61.4million).

This new regime model introduced by CBN in 2011 was aimed at enforcing banks to divest non-core banking business lines or create holding companies if they wish to offer other services to ensure that financial institutions do not use customer deposits to finance risky investments.

The repelled Universal Banking Model was part of strategic initiative to reform the nation’s financial system to enhance the quality of banks, ensure financial system stability and promote evolution of healthy financial sector.

Following this latest development, competition in the Nigerian banking landscape has been anticipated to become vigorous this year if indicators from operators are anything to go by. There has been increasing expectation from bank customers in terms of service delivery in the recent, coupled with CBN's reiteration on financial inclusion.

These have raised the bar of competition amongst commercial banks in the bid to retain their hard-won customers and even to attract new ones. The apex bank took a definitive step towards the desired goal as the apex bank, continues its pursuit for financial inclusion policy, which seeks to protect the bank customer.

A top manager in one of the banks told BusinessDay that relevant divisions have lined up series of in-house trainings for the first quarter of next year, aimed at equipping staff with current demand trends in the business, adding that things are likely to take more competitive tone this year.

Investigations by BusinessDay across the banks reveal that many of them are becoming customer-centric in a bid to bear with CBN strategies for effective demand. While it is believed that some banks are viewing their lending policies in a bid to justify their promise to the banking public, financial experts are of the opinion that s believe that augurs well with the sector, especially if the apex bank would keep the commercial banks on their toes, in terms of delivering what they are licensed to deliver.

Moves by the several banks to become compete to increase share capital is against the background of promise of the apex bank to develop strategies that will encourage effective demand for financial services.

Meanwhile, the setting up of the Asset Management Corporation of Nigeria (AMCON) brought about greater co-operation between the regulators and the operators, improving corporate governance, commencement of International Finance Reporting Standard (IFRS) reporting, and increased linkages between the banking sector and the real economy, are positive indicators that is expected to boost earnings sustainability into the future.

Competition heightens

Unlike 2010 whereby CBN paid greater attention to cleaning the balance sheet of banks, 2011 witnessed the adoption of mergers and acquisition strategy by banks to enable them beat the recapitalisation hurdle set by the apex bank.

Three of the erstwhile rescued banks - Finbank Plc, Intercontinental Bank Plc, Oceanic Bank International Plc, Union Bank Plc, and Equitorial Trust Bank Limited, scaled through the recapitalisation exercise following unanimous agreement with their respective shareholders who endorsed their merger and acquisition deals with First City Monument Bank (FCMB), Access Bank Plc, Ecobank Transnational Incorporated, Africa Capital Alliance and Sterling Bank Plc, in that order.

As experts strongly believe that the mergers and acquisition in the industry in 2011 will intensify competition, rationalise expenditures and industry positioning with only 20 banks,  some acquirer banks are strategizing with the intent of expanding their target markets to include blue chip companies which until now was the preserve of First Bank, Zenith, GTBank.

Previously, mid-to-small-scale banks are expected to leap into the big banks league, thereby creating more top-level concentration, as size, liquidity, capital, and efficiency will define the champions in the emerging banking landscape, with the healthy banks having the first mover advantage.

Meanwhile, analysts believe that competition for accounts of blue chip companies is expected to force down the pricing of loans and other services currently enjoyed by such companies. It may however lead to innovative bank services.

Femi Ekundayo, former president, Chartered Institute of Bankers of Nigeria (CIBN) believes that a situation of fewer but stronger banks is better for the economy as a size of between 15 and 20 is still adequate for Nigeria.

“Surviving banks can increase their number of branches and ATMs to fill the gap. However, the rate at which acquiring banks are laying off staff of acquired banks and replacing them with their own cronnies should be moderated as it is not healthy for the economy,” Ekundayo stated.

Echoing his sentiments, Johnson Chukwu, managing director and chief executive officer, Cowry Asset Management limited opined that the acquisition and integration of Intercontinental Bank, Oceanic Bank and FinBank into Access Bank, Ecobank and FCMB respectively will definitely lead to a change in the industry’s landscape.

Chukwu disclosed some challenges inherent in the macroeconomic environment which the banking industry will have to contend with includes high cost of funds occasioned by the withdrawal of foreign currency credit lines by offshore banks and consistent rise in interest rate at which the Federal Government borrows from the money market.

“Other factors are the probability of higher rate of loan delinquency, attributable to exorbitant pricing of risk assets (to compensate for high cost of funds) and high inflation rate, which could lead to business failure,” he concluded.

Analysts at FSDH limited stated in their outlook that “We anticipate the following outcomes for the banking industry in 2012. Attractiveness of banks valuation and earnings would attract investors into banking stocks. 

Low non-performing assets/loans, more disclosures as banks adopt IFRS, improved earnings due to more reliance on Public, Private Partnership (PPP) in resolving the infrastructural problems in the country.”

They also anticipate that “The CBN’s policy on cashless economy should drive more non-interest income for banks and growth in risk assets in order to generate income”

In the same vein, analysts at Renaissance Capital disclosed that “The Access Bank/Intercontinental Bank merger will produce a bank which will rank third by assets and deposits respectively and in the tier 1 bracket. The Ecobank Nigeria/Oceanic Bank merger will produce a bank which will rank fifth by assets and deposits respectively, and in the tier 1 bracket. The FCMB/Finbank merger will produce a bank which will rank eighth by assets and deposits, respectively, and the biggest tier 2 bank.”

“This,” analysts said, “would result in changes in the banking landscape, where the tier 1 bracket will expand to comprise seven banks from four; the tier 2 bracket will shrink from eleven banks to seven; and the tier 3 bracket will contract to seven banks from nine, with Tier 1 controlling 65 percent and 66 percent of assets and deposits; Tier 2 controlling 25 percent and 23 percent of assets and deposits; and tier 3 controlling 10 percent and 11 percent of assets and deposits.”

Position on the African continent

Eleven Nigeria banks have been ranked among the top 50 banks in the African continent, according to The Banker magazine. The banks which made it to the top 50 African banks include Zenith, FirstBank, Guaranty Trust, Access, UBA and Fidelity. Others are First City Monument, Diamond, Skye, Stanbic IBTC, and EcoBank Nigeria. Interestingly, Nigerian banks beat other African countries in the number of banks it had in the Top 50 African banks as published by The Banker magazine in its January 2012 edition recently released.

The Banker which recently retained its world’s number one monthly publication position above Bloomberg Markets, Euro-money and Harvard Business Review by Global Capital Markets Survey through a study by Think Media, an independent company that researches readership of financial publication listed 11 Nigerian banks in the Top 50 Banks in Africa.

According to Kunle Ogedengbe, country representative, The Banker, Nigeria was closely followed by Egypt with 10 banks but the inclusion of Africa Export-Import Bank, a continental bank, as Egyptian bank added to the number of Egyptian banks from 10. Other top banks in the Africa continent came from South Africa which maintains leadership of the continent’s banking industry, Morocco, Libya and Nigeria made up the first ten banks in Africa.

With banks from Nigeria, South Africa and North Africa still dominating the Top 20 with only one lender, Togo-based Ecobank coming from outside the Top 20, of those places, African banks have be seen to have made tremendous improvements.

For Paul Wallace, The Banker’s Africa Editor, “African banks have grown rapidly in the past few years. Based on the 2010 results, nineteen of them have Tier 1 Capital of more than $1 billion, a level that roughly marks the cut-off point for the world’s biggest 500 banks”.

Wallace added that this is an impressive rise for Africa which as against the time it had only 10 banks with $1 billion of Tier 1 capital or more at the end of 2007.

“Moreover, 31 lenders on the continent now have capital strength of $500m or more, compared with just 13 in 2007,” he reiterated.

While more Nigerian banks seem to have finally shaken off their crisis of 2009, especially with the merger of Access Bank and Intercontinental Bank as well as Ecobank Nigeria with its merger with Oceanic Bank, it is believed that these banks will rise to the top based on assets.

Other Nigerian banks that made good outings in different streams of The Banker’s ranking for distribution at the WEF Annual Meeting in Davos, Switzerland include Sterling Bank, Wema Bank and Unity Bank. The Nigerian banking industry is said to have the highest return on asset and capital asset ratio of 2.07 percent and 16.59 percent respectively among the big top banking countries including North Africa countries and South Africa.

Fate of nationalised Banks

The August 5, 2011 revocation of the banking licenses of the three commercial banks by CBN and the Nigeria Deposit Insurance Corporation (NDIC) as well as the introduction of the 'bridge bank' concept, led to the birth of Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Limited, respectively.

Meanwhile, in mid 2010 when the government created the Asset Management Corporation of Nigeria (AMCON), the aim was to stabilise the financial system by buying up non-performing loans and toxic debt from Nigerian banks. Since then, AMCON has bought approximately $9.5bn of non-performing loans, bundling them together and eventually releasing them on the debt market over three tranches.

According to the regulators, the action was taken earlier than the then September 31 deadline, 2011 because the then troubled financial institutions did not show any capacity to beat the deadline. The nationalised banks were thereafter sold to the Asset Management Corporation of Nigeria (AMCON).

While depositors for the first time had no real reason to fear as the central bank proved to be one that defends the course of those that put monies in the banks because of the confidence they had in the apex bank that gave the banks their licences.

This was made possible after the ‘bad bank’ recovered N400 billion from bank debtors, who in the past 

would melt into thin air with nobody going after them. AMCON promised to recover at least N1 trillion this year, thus effectively recovering about 50 percent of total toxic assets.

Speaking with newsmen at the end of the Bankers Committee meeting recently in Lagos, Mustapha Chike-Obi, Managing Director/Chief Executive, AMCON, stated that the nationalised banks were be managed and stabilised and then sold to interested investors.

Chike-Obi added that debtors were coming forward without being prompted, to pay up or restructure their debts. Impressed by this development, AMCON is yet to go all out to acquire the collateral of the debtors.

For chronic debtors who have refused to pay, he pointed out that they will be made to honour their obligations, one way or another. He affirmed that the nation’s banking industry had successfully been 

reformed as there were no more in crisis following CBN intervention and the actions of AMCON.

Oceanic Bank, Intercontinental Bank, AfriBank, Bank PHB, FinBank, Spring Bank and Union Bank were encumbered by heavy non- performing loans and could not perform their intermediatory roles, until AMCON took over their toxic assets in exchange for bond valued at about N3trillion.  AMCON was expected to recover the outstanding debts from the banks’ debtors.

Expressing satisfaction with the current performances of the three nationalised banks- Enterprise Bank, Mainstream Bank and Keystone Bank, the AMCON boss observed that it was too early to judge them, since they commenced business only in August 2011. Already, AMCON has injected well over N600 billion into the three banks.

In confirmation of the performance of the three banks so far, eight foreign and local investors, including private equity investors, are currently showing interest in the three banks. The good news is that some locals are beginning to look in the way of the nationalised banks while awaiting guideline(s) for planned sale of the three nationalised banks by AMCON.

Commenting on the issue, Alex Otti, Group Managing Director/Chief Executive Officer, Diamond Bank, hinted that when the guidelines for the sale of the nationised bank is released and fits the bank’s strategic interest, it would indicate interest in any of the three banks.

“So, if you ask me, I will say these are early days, but we should wait and see how things unfold. We don’t even know what the rules and guidelines are going to be. So I think it is a bit early to start to talk about the banks that are going to be interested in the nationalised banks or not,” he added.

Banks                                  Business                      Model

1        Access Bank Nigeria Plc               International                           Bank

2        Afribank Nigeria Plc                      National Bank                         Bank

3        BankPHB Plc                                 International                            Holding Company

4        Citi Bank                                        National                                    Bank

5        Diamond Bank Plc                         International                             Bank

 6       Ecobank Nigeria Plc                      National                                    Bank

7        Equitorial Trust Bank                    Regional                                   Bank

8        Fidelity Bank Plc                            nternational                              Bank

9        Fin Bank Plc                                   Regional                                   Bank

10      First Bank                                       International                            Holding Company

11      FCMB                                             International                            Holding Company

12      Guaranty Trust Bank Plc               International                            Bank

13      Intercontinental Bank Plc              National                                    Bank

14      Oceanic Bank Plc                           National                                    Bank

15      Skye Bank Plc                                International                             Bank

16      Spring Bank Plc                              Regional                                    Bank

17      Stanbic IBTC Plc                            National                                     Bank

18      Standard Chartered Bank              National                                     Bank

19      Sterling Bank Plc                            National                                     Bank

20      United Bank for Africa Plc              International                             Holding Company

21      Union Bank Nigeria Plc                   International                             Bank

22      Unity Bank Plc                                  Regional                                   Bank

23      WEMA Bank Plc                              Regional                                   Bank

24      Zenith Bank Plc                                 International                            Holding Company

 

Source: FSDH Research Investigation