By Chinenye Anuforo
The Group Managing Director of Afrinvest (West Africa) Limited , Ike Chioke, beleives that the country is not out of the woods yet, even though, it was said that recession was over. “Three lessons from the episode are obvious: there is a need for a wider diversification of government revenue and exports; institutional constraints need to be speedily removed, and there is an urgent need to increase investments in infrastructure in order to boost entrepreneurship and gain more to achieve competitiveness”. he stated.
At a press conference heralding the launch of its Banking Sector Report: “Nigeria Re-opens for Business”, its Group Managing Director, Ike Chioke, said despite early warning that banks should keep credit expansion minimal, the exposure of pre-existing loans to high risk sectors will continue to pressure asset quality in the year.
“However, we expect asset quality metrics to improve in 2017 against the backdrop of steps being taken to restructure loans to challenged sectors as well as some of the noticeable improvements in the General Commerce and Manufacturing sectors which have been buoyed by developments in the FX market”, he said.
Overview of the banking industry
Nigeria’s financial market remains a sweet and attractive spot for both foreign and local investors. Although performance in the past year had been hampered by foreign exchange (FX) challenges, the improvements that have been witnessed since the introduction of better FX management policies suggest that the market still has potential to attain new heights. The country may have lost some of its luster in the past years, but in our view the glass is half full and filling up, albeit slowly.
Clearly, the depreciation in currency affected all of the banks. Obviously, some other key sectors that had trouble when you have devaluing currency, magnifies the problem. For instance, those that extended foreign currency loan to the power sector and oil and gas sector which is traditionally foreign currency loan denominated, then the devaluation magnifies the problem. There are some banks that have depressed capital adequacy ratio and are looking for ways to boost their capital. But on the flipside, some of the tier one banks that have more foreign currency deposits that are risk assets, benefited from the devaluation and you see them booking foreign exchange gains. The likes of GTB, Zenith, UBA, Access Bank belong to that group.
So, what we see is a continued widening of the gulf between the tier-1 and the tier-2 banks. Once upon a time, tier-one banks accounted for about 60 to 65 per cent of the market share of the banking sector. In the universe of 14 banks we covered in this report, we have seen that percentage rise to over 70 per cent.
So the tier-1 banks continue to grow, often at the expense of the tier-2 banks. You might also recall that some of the members of the Monetary Policy Committee of the Central Bank have observed that some of the tier-2 banks might be challenged. While one may say that the system itself is sound, but if we have multiple tier-2 banks that are challenged, and if all of them were to go down at the same time, you could have a pack of a systemically important bank. The fact that we had foreign exchange illiquidity in 2015 which became massive in 2016 constrained growth across all industries particularly in the manufacturing sector. But it supported and spurred growth in agriculture and more investment, because for the first time in recent years, we had pricing parity. The cost of production in Nigeria did not make our goods too expensive. So, we had a lot of people invest in agriculture.
However, it created problems in the power sector because a lot of people had borrowed money in foreign exchange to build gas pipelines, gas processing systems to deliver power to the power stations and now the power stations cannot pay for that. Again they have massive loans that are not performing.
But luckily, some of these bottlenecks have been resolved and we have seen that the positive profit momentum which most of the banks registered has given them some buffer to get away with some of the ailing problems that we mentioned. CBN has also been constructive and supportive. However, we are not totally out of the woods yet. The key question is, how do we bring back growth? Paradoxically, while we had illiquidity last year in the foreign exchange market, this year we are having illiquidity position in the naira market. There is dollar in the market. Exchange rate has stabilized after coming back from about N400 officially and N520 unofficially, to well below N360 and people are even talking as low as N330. Now dollar is available but people are looking for naira. CBN policy that requires putting cash down before getting dollars were designed to reverse speculations.
Are we likely to see a situation where tier-1 banks will take over the market?
No, there must be specialization for everybody. The banking industry is growing and we have seen double-digit growth over all. It’s just that the tier-1 banks are growing faster. So it could be a tier-2 bank that may see its business double. There will be areas of specialization. Even in Afrinvest, there are certain transactions we prefer we rather work with tier-2 banks because they are more specialized in that area and get decision making faster. So, you will always find space for each of the banks.
What is your outlook for the banking industry in general?
Considering the risk highlighted above, we take a look through our crystal ball and present our expectations for the performance of the banking sector. Despite forward guidance of banks to keep credit expansion minimal in 2017, we believe that the exposure of pre-existing loans to “high risk sectors” will continue to pressure asset quality in the year. However, we expect asset quality metrics to improve in 2017 against the backdrop of steps being taken to restructure loans to challenged sectors as well as some of the noticeable improvements in the General Commerce and Manufacturing sectors which have been buoyed by developments in the FX market. We expect Industry gross earnings to remain buoyed by higher interest income on account of the high interest rate environment as well as improved non-interest income from trading inflows as well as fees & commission. Although forward guidance from majority of the banks, indicates the reluctance to extend credit, we believe that the any moves to unify the FX market will lead to a nominal expansion in loans, given the proportion of foreign currency loans. As already noticed in 2016, banks are more willing to direct funds towards investment securities as opposed to credit extension given the risk environment and we believe this will continue till the end of the year and possibly H1:2018. The depreciation in the domestic currency resulted in higher Risk Weighted Assets on the books of the banks. Hence, capital adequacy ratios of some of the banks fell towards threateningly low levels. Consequently, we expect such banks to approach the market in order to raise capital to shore up capital buffers. The improvements in the FX market, have reignited appetite for Eurobonds issuance. As a result, a number of Tier-1 banks have raised Eurobonds in 2017; Zenith and UBA raised US$500 million each with both issuances oversubscribed by 3.0times and 2.4times respectively. Fidelity and Guaranty have Eurobonds that will be maturing in 2018 with expectation of possible refinancing through new issuances. Furthermore, Fidelity on October 13th 2017, successfully issued $400.0million via Eurobonds at a coupon of 10.5per cent.
Specifically, why did you arrive at the conclusion that Nigeria is ripe again for business?
We arrived at the conclusion that “Nigeria has reopened for Business” because of a number of reasons. Nigeria has survived a turbulent phase from 2014 when the economy began to witness an economic downturn to the emergence of green shoots since Q2:2017. Three lessons from the recent episode are obvious: there is a need for a wider diversification of government revenue and exports; institutional constraints need to be speedily removed, and there is an urgent need to increase investments in infrastructure in order to boost entrepreneurship and gain more to achieve competitiveness. The government has released an Economic Recovery & Growth Plan (ERGP), a Medium Term Plan for 2017 – 2020, amongst other efforts aimed at dealing with short to long term constraints to achieving economic prosperity. Nigeria is yet to record a quantum leap in crop production yields nor production per capita despite improvements in global farming techniques and technology which have buoyed productivity elsewhere. Nevertheless, the renewed drive to boost productivity in the sector has attracted big-ticket private-sector investments with the most prominent in recent times including the 120,000MT per annum WACOT Rice Mill commissioned in Argungu, Kebbi State in August and 750,000MT per annum OLAM Integrated Poultry Facility (consisting of Feed Mill, Hatchery and Breeder Farms) in Kaduna State. We are of the view that the reinforcement of these initiatives and policies will further revive and improve productivity in the agriculture sector and enhance food security.
With a current population of over 180 million, which is expected to double by 2050, Nigeria has a burgeoning middle class that is expected to give impetus to growth in consumption levels. The oil rich nation also plays host to a diverse wealth of natural resources that are capable of driving its economy, if properly exploited and managed towards self-sufficiency.
Beyond the obvious resource attraction, oft-ignored advantages include its teeming diaspora and locally based human capital as well as an increasingly socially conscious and upwardly mobile youthful demographic now demanding better governance and quality of life via every available social media platform. Following the success of the 2015 elections – which bore a historic landmark through the affirmation of the hopes of a better, more functional and unprejudiced government – public interest, particularly amongst the youths, in issues relating to governance and civic responsibilities has been on the rise.
Everybody is applauding policy makers that Nigeria grew 0.5 percent. But remember that once upon a time, we used to grow at 6.5 to 7 per cent per annum. So how do we turn that positive growth and catalyze it to get us back to the growth of plus 6 and perhaps tending towards 10 per cent. With the population growth rate of 2.8 per cent per year, 180 million people targeted to get to over 300million people by 2050, the challenge is that Nigeria is regressing. Our needs are growing further than the income we are putting on the table. Our report is urging that for us to achieve that social contract or promise that government has made to its people, we need to do further reforms in the power sector to make it work for everybody; further reforms in the oil and gas sector so that we can’t wait for a commodity to pay for everything.
We also need further reforms in the agric sector even though we have seen a positive trajectory since last year. Agriculture can really be the breadwinner for this country and from there you can build a lot of industries and agric businesses out of it. If we get these four sectors right, then Nigeria will indeed be setting the stage to begin yet again, a growth trajectory and the challenge will be for the authorities to maintain and sustain that growth trajectory so that we get back to growing as fast as the population growth rate; or even doubling or tripling that.