The Acting Managing Director, Coronation Merchant Bank, Mr. Banjo Adegbohungbe, is a thorough bred finance industry professional who has over two decades of cognate experience.
In this interview with select business journalists including Daily Sun, Adegbohungbe said the introduction of the OTC long-dated FX futures presents real opportunity to attract foreign direct investments (FDIs) into the Nigerian economy in the long term.
Speaking on the sidelines of the bank’s breakfast session in Lagos, he stated that the policy framework created by Central Bank of Nigeria (CBN) has allayed fears that the Naira could be devalued and called on investors to take advantage of the low yield environment to invest in Treasury bills, among others.
Key highlights of breakfast session
I think the most important one is that we addressed investors’ concern as to whether or not there is going to be devaluation of naira this year. We have provided a lot of clarity on what the measures the CBN has put in place which we feel are based on the stability of the foreign exchange market in the medium -term especially in 2020.
Another key takeaway is that the introduction of the OTC long-dated FX futures for a longer period of five years which means that is an opportunity for foreign direct investment to grow. We have talked about how to experience the shift from foreign portfolio investment (FPI) which is very good for the shift to help us to support the currency but over time, what we actually need is foreign direct investment (FDI) and we think it is a good initiative by the CBN in a long -term goal to attract foreign direct investment.
This is because we think that foreign direct investment is important for Gross Domestic Product (GDP) growth and is important to create jobs. But we should be aware that when we are talking about FDI as a country, we are competing with other emerging countries in Africa- It is not just about Nigeria alone. We have several other emerging markets that are also coming up with their own initiative needed to attract investors. So, we think that the long-date FX future is a good initiative which in the long term tends to attract foreign investment into the country. Finally, as regards the fixed income market, we explained that there are opportunities for investors to take advantage of the yield curve that we see.
Economy’s outlook for 2020
We think that there are several measures put in place to address the challenges and if you look at the country’s track record in terms of past crisis, we have been effective at deploying home -grown solutions. If you think about the country as a market, we are the largest market in sub-Sahara Africa, and we have several individuals and sectors of the economy when people are doing well. Now, we are having challenges. It is not the type of challenges that matters but what we do to address those challenges. What we are saying is that the country is making effort to overcome these challenges but we think that in short-medium term, there are opportunities that investors should take advantage instead of spending time focusing on the challenges and shift their mind sets and look at the emerging opportunities that exist. Optimistic is a very strong word but we are not pessimistic. We think there are opportunities investors should take advantage of and we are in a unique position to guide them.
CBN focusing more on foreign investors
I wouldn’t quite say that but what I think is that we are trying to balance both. There are number of things put in place that have improved domestic investment in Nigeria. For example, several intervention funds of the CBN for local manufacturing companies can now have access to loan at a low interest rate and long- term funds. These cut across several sectors like agriculture, SMEs, creative industry, manufacturing, among others.
If you look at the exposure of these intervention funds, we are talking in terms of billions of Naira and a lot of them that have taken advantage of that to access funds are not available in the banking sector. Then, it makes them build their factories, fund their operations and pay salaries of workers. There has been a multiplier effect from that. If they expand productivity, they create more jobs, earn more salaries and spend their money in moving the nation’s economy. So, there has been a multiplier effect in that regards. For local investors, there have been opportunities just that people like to highlight their risk. A lot has been done to encourage local investors in sub-sector of the economy and I think when you look at contribution of these sectors to GDP, you will see the impacts.
For the foreign direct investors, Nigeria is not unique in that regards as every country wants to attract foreign investments because at the end of the day, you’ll need the combination of both domestic and foreign investments in your country. If there weren’t incentive in place, you will not find a company like Dangote building refinery, fertilizer plants among others and there are several sectors people are making significant investment. There are several factories springing up close to the refinery. If the refinery comes on stream as planned, in the next five years, the landscape there will totally be transformed and the multiplier effect will be significant. Don’t forget that some of these challenges are long term challenges and we need a solution that has a long term prospective but don’t forget that Nigerians are impatient as we always want a short- term results. But we need to take time to see those benefits.
If you take a look at the foundation on ground, considering the suitability, we will get the results. It will take some time to see that impact and since the impact is much smaller, it is easier for me to make an investment and plan ahead. I think we should balance these opportunities and not say opportunities are created for some people. By the way, we need to encourage foreign investors to come and do business and at the same time create opportunities for local investors and for those who have long term view on the direction of the economy.
Low yield in T-bills not affecting lending rates
From our experience, the reverse is the case of what we are experiencing on the lending side. It is true that the deposit rate always adjust faster when there is shift either downward or upward. Deposit rates adjusted much faster but lending rates adjusted significantly as well. If you talk to corporate bankers, they will tell you that their lending rates have dropped significantly from a year ago. If you talk to finance directors of these corporate companies be it those in Oil & Gas, telecommunication among others, and ask them if their interest rate was the same thing a year or eight months ago, they will tell you there has been a drop. They are taking advantage of these rates to make investment decision that they wouldn’t have made before the reduction in interest rate.
On the other hand, the implication also is that the availability of liquidity has increased lending which the CBN quoted recently reached N2trillion within a short period of time. The overall pricing has shifted and everybody is trying to lend to a group of potential obligators from a risk stand point and as a result of that, the reality is the leverage of pricing has shifted from the bank to customers. The banks have to think about creating more value for customers which is beyond the pricing.
Pricing is not deleveraging anymore in this environment. The real leverage is whether you can create value for customers.
There are several factors that affect the performance of the market. If you remember last year, the performance was significantly affected as a lot of foreign portfolio investors pulled out of equities, some of the local money managers like the PFAs and institutional investors in the market also switched from equities to money market and fixed income, so the dominant factors that affected the market in 2019 was that investors (both local and foreign) switching from equities to asset classes, fixed income and money market.
But I think with the OMO policy, it has meant that investors have to take a second look at equities and if an investor decides to take positions in undervalued stocks, then it is a positive sign for the market. So I think we will still see some sort of rebalancing but we should not forget that if we take a long term view of the market, its value was really hit last year, so we should see a positive correction or some sort of recovery as there are some fewer asset classes for local and foreign managers. Therefore they have to put money into equities but then you have some selected stocks better than what you have in T-bills, this obviously creates the opportunity for people to go selected equities, if people continue to do that, then it is likely we will not see the type of crash we saw in 2019 but i think from a long term perspective, we still ponder on whether foreign investors will stay significantly in equities because we think they will stay but with selected stocks. There are some sectors that are facing headwinds and so people are going to be selective but we will still have a gradual recovery.
Meeting LDR before end of Q1
The quantum of loan growth that is required to meet the LDR for the entire industry is quite significant and we should not forget that people have to still be able to lend in a sustainable way and make sure that they do not create any bad loans.
So, everyone is conscious of that and now having said that, i think at the time the CBN came up with the directive, the LDR for the industry was a little higher than 50 per cent and so now it is higher. For a bank like us, when you look at the proportion of our own loans to the entire industry, it is quite small and so we are growing from a low base which means that it was a lot easier for us than some of the larger banks who have loans or balance sheet of N2 trillion to meet LDR.
For some, you have to grow up to N400-500 billion, so for us, growing from a very small base, it is not as challenging as other larger banks and we did see significant loan growth last year and we are anticipating that would be the case in this year regardless of the LDR policy. The reality of the advent of the policy is that everyone will give his or her best to comply and so we will see no really 100 per cent compliance but it will improve over time.