Group Managing Director/Chief Executive Officer, First Bank Nigeria Plc, Mr. Bisi Onasanya, believes that with return to profitability by Nigerian banks, there is need for the financial institutions to fashion out financing models to support the real sector of the economy. Onasanya, who spoke with Festus Akanbi and Obinna Chima, however stated that the real sector needs to be better to be attractive to banks
Looking at year 2012, how has the Nigerian economy performed?
I think the starting point should be to look at the global economy and it is after looking at that, that you can in relative terms look at how the Nigerian economy has fared. The global economy has been having its own challenges in recent times. The crisis in the euro zone, the political challenge in the Middle East, the fluctuation in oil prices, the election and the slowdown in the United States, of course, the fiscal cliff that we are all talking about and the slowdown in China. So when you look at all of that, it tends to show that the global economy is not on the upside, but on the downside.
Virtually every major economy in the world is on the downward side and that explains why Nigeria has had its own share of the problem. We have grown at about 6.6 per cent in 2012 as against about 7.4 per cent in 2011. So when you look at it in relative terms, growth has been slower than we achieved in the past. But when you look at it within the context of the global economy, Nigeria is still one of the best performing economies in 2012. That was why I started from the global economy. In relative terms, we have not done poorly even though the year-on-year growth has been slower. Now, we have seen some attempt to further diversify the base of the Nigerian economy from the oil sector. So, we have started seeing the impact of the non-oil sector of the economy gaining more prominence than it used to be. But as it were, the results that would have been recorded by way of the improvement in the contribution of non-oil to the Gross Domestic Product (GDP) slowed down significantly as a result of some internal financial issues. The impact of that we would see further as we move into 2013. So that slowed down the attempt to deepen the Nigerian economy and diversify it further.
But as we move into 2013, it is important that we address some of those issues and see how we can improve on the existing efforts to deepen and diversify the economy. Oil price has been stable and that is very good for us. So, to that extent, the oil sector still continues to be the dominant player in the Nigerian economy. The financial sector had a very good year and I believe that with the half year numbers reported by Nigerian banks and the third quarter numbers also, the banking industry has done very well. I think this year has been a year in which the effects of the central bank’s policies came much more to the fore as the impact on the banks was very positive. All banks came out of the red for the first time after the crisis, including the intervened banks. We have started seeing all banks recording good profit and that is very positive. That has also created a financial services industry today that is ready to play a prominent role in the development of the Nigerian economy which was essence of the central bank’s transformation agenda which believes that if banks are weak and are not strong enough to support the economy, it becomes a limiting factor on how far the economy could grow. But the impact of the crisis and the spontaneous and positive action of the central bank which we must commend them for, helped significantly in creating a banking industry today that is strong enough to support the Nigerian economy.
There have been complaints this year that the tight monetary condition may have resulted in the contraction in economic growth which you mentioned earlier and there have been calls for the central bank to relax its tight monetary stance. What is your take on that?
As a matter of fact, I think if the Central Bank of Nigeria (CBN) had listened to somebody like you (points at the interviewer) who felt that they should bring down interest rates at the last (MPC) monetary policy committee meeting, it would have been a misinformed judgment. You can see that by the inflation figures that were released this week, inflation went up above the 12 per cent line. You cannot have an economy that is sustainable where you have a negative interest rate regime. What it means is that if your base interest rate is lower than your inflation rate, then you don’t have positive interest rate and a lot of factors would fall out of place. You will not be able to attract foreign investors and it means that the yield is negative.
To the extent that we are still not able to bring inflation rate down, the interest rate regime of the CBN today is still supportive and it is still in order. As a matter of fact, textbook economics would tell you that your interest rate should be above your inflation rate. Today, if the CBN decides to take a factual decision based on available statistics, what they would do is not to bring down interest rate, but to take it up. However, I believe that what should happen is for us to wait and watch the sustainability of the inflation numbers as they come forward. I believe that the numbers would slightly go up higher than it is today, maybe in the first quarter and let’s see what happens in the second quarter. If that pattern emerges and becomes a trend that we can say has come to stay, it would be difficult and dangerous for anybody to propagate that interest rates should come down. We need to understand also that Nigeria traditionally does not have a low interest regime simply because we are not able to control our inflation.
There are efforts today to bring down interest rate, but the efforts should be concentrated first on bringing down inflation before we start talking about bringing down interest rate. I understand the fact that it is desirable for the economy to borrow at low interest rate, but we need to understand that in the context of the Nigerian economy, what is more important today is to make sure that our exchange rate is stable and low enough to sustain the economy. The reason is very simple. We have a very high import component of our cost. So, irrespective of what your interest rate is today, if the exchange rate continues to go up, the impact on inflation will be much higher than we are seeing today. I therefore support the present efforts of the central bank in first of all tackling the exchange rate problem to make sure that we have a stable and sustainable exchange rate. When you do that, the impact is felt on other sectors of the economy including bringing down inflation rate. When inflation rate becomes lower than it is today, it therefore forces the central bank to bring down interest rate. You shouldn’t take interest rate alone in isolation and say you want to bring it down, that would be very academic and can distort the entire system.
First Bank recently adopted the Holding Company (HoldCo) structure, what are the benefits of this to customers, shareholders and other stakeholders?
Let me seize the opportunity to confirm that First Bank’s adoption of the HoldCo was not because it was imposed by the central bank. We took a strategic decision in 2009 as a Board and felt that we needed to do certain things to strengthen the banking business and the entire group. That was to ensure that we ring-fence the banking business and deepen market penetration and specialization in other areas. What do we expect? Let me start from the various stakeholders.
For the shareholders of the bank, the HoldCo structure permits them under the CBN regulation to continue to derive the benefits of our non-banking businesses which are doing very well as good investments. This means that we are able to retain non-banking businesses which ordinarily by CBN regulation, we are not allowed to hold as a bank. Take investment banking for instance, we are not allowed as a bank, under CBN rules, to retain that business. But that is a profitable business that gives a very good returns-on-equity. So with the HoldCo, we are allowed to retain that, same thing also for the insurance business. The good thing about the way we did our HoldCo is that there is no change in the structure of our shareholding. There is no restructuring of the shares and there is no price adjustment. Our shareholders are getting equal number of shares in the Holding Company as in the bank.
For the customers of First Bank, it gives them better assurances that the bank is completely ring-fenced and the deposits are completely ring-fenced from the other areas of the group. Take investment banking or insurance, if anything happens to those lines of business, the customers of the bank cannot lose their deposit because it was not in any way used to finance or support those other businesses. In addition to that, it enables me as the GMD/CEO of the banking business to focus my attention and run the bank and avoid the distraction of having to worry about how the insurance or investment bank are running. Now, I can dedicate more time to running the bank and implementing the very good policies that we have in place. That would only result into better improvement, leaving me out of the other business es and encouraging me to run the bank, can only result to better performance and improvement. The bank is up for superior performance and I think the shareholders would benefit from that.
Almost one year into the cashless policy, how will you say the policy has performed?
For anybody who had apprehension before the policy was implemented, I think it has become clear that, that is the right thing to do. Today, the public has become better informed and they have seen that it is too risky and inconvenience to carry cash around. I think the fact that the population in Lagos has imbibed the policy makes it easier for everybody. In fact, people don’t see it anymore as punitive not to carry cash; they see it as lot more convenient. People have been able to use the tools at their disposal now. People now do their transactions on the mobile phone.
The initial apathy that people had was that they were worried whether it would work or not. People now use telephones and mobile banking to do their transactions and their counterparts confirm the money. We in First Bank have developed and reinvigorated various electronic platforms to make them much user-friendly and much more robust. We have invested a lot of money on technology to make sure that they work. If you can sit in the comfort of your office and transfer money through internet banking, isn’t that more convenient than carrying cash? So, we have seen the impact and it has helped in deepening financial inclusion and financial literacy.
On the part of First Bank and in compliance with the agreement to remove the N100 ATM charge, I want to confirm to you that First Bank was the first to comply with the removal of the N100 charge for third party customers using our ATMs with effect from midnight of Monday 17th December and you can verify that. So the benefits are beginning to come. There have been some challenges which are not insurmountable. The erratic nature of telecommunication has made it difficult for Point of Sale (PoS) terminals to be reliable at all times, but it can be better. As we move forward to address the causes of those problems, the need to roll out to other centres outside Lagos would be more imminent. I foresee a situation whereby State Governors beyond Lagos, would be appealing to the central bank to make their States the next point of roll out. Even the issue of armed robbery has reduced. But the reality is that nobody expects anybody today to hold too much cash.
What is the contribution of First Bank to the drive for financial inclusion by the CBN?
Firstly, for people who were apprehensive of using their card on First Bank ATM because they are not First Bank customers, now they are free to do their transaction on any ATM without being charged N100, that is part of our contribution to deepen financial inclusion. Secondly, First Bank was one of the first set of banks that introduced microfinance banking into Nigeria. Our microfinance bank is one of the best, in fact it is a model and that microfinance bank is doing microfinance banking the way it should be done. That was why we realized that you cannot do microfinance banking under the same structure that you do commercial banking. That was why we structured it as a separate business. In addition to that, about three months ago, First Bank rolled out our “Firstmonie” product, which is a mobile money product.
Even if you don’t have a bank account, if you have a mobile phone number, simply by dialing *894#, you automatically become an account holder and have an account in which you can do all your transactions. You can pay your bills, you can top up your telephone, you can pay your children fees and you can shop. So, what this has done is that we have taken banking away from those that have the opportunity of having bank account, to people who don’t have bank account but have some form of electronic equipment in their hands. Lastly, we recognize the fact that if people don’t have account and they have access to use some of those electronic touch points, the first time experience would influence what they do with those channels. So we spent a lot of money and time on building those platforms. We have revitalized our internet banking and made it user-friendly. As I speak to you, we are rolling out a new and world class standard internet solution which we are implementing today.
You can sit in the comfort of your office and do transfer to local recipients and even to foreigners. So, we have all of those things. Our mobile money product is one of the best and it is fast growing, as at today we have over 750 agents worldwide. We have done about 9,500 transactions and each transaction on an average of N3, 500. We have rolled out close to 2,000 ATMs. Today, First Bank has the largest ATM network in Nigeria. We also have over 18,000 PoS terminals. The total industry number of PoS terminals is 40,000 for Lagos and First Bank alone has 18,000 of those PoSterminals. Also, one out of every three ATM cards in use in Lagos today, in fact in Nigeria, is a First Bank card. So, we are not just looking at profitability, we are looking at how we can help to deepen financial inclusion in Nigeria.
Since the shortlisting of the preferred bidders for the power generation and distribution companies, we learnt that First Bank has been talking to some of the power investors on how to finance the deals. What stage are you now in your discussion with them and what role will the bank play in this?
Let me use this opportunity to dispel the rumors going on that banks are not lending. First Bank is lending and I can confirm to you that for some of the consortia that won the bid for the sale of some of the power companies, First Bank has been supporting them. We issued preferred bidders’ Bond for some of them and we are financing some of them. So, we are very much in the game. However, we are very meticulous; we are not into every consortium. We have identified the parties that are credible and we are working along with them, together with their technical partners to make sure that we take them and hand-hold. What we are putting on the table with the consortia that we are dealing with, is not just funding. We are also involved in the technical side of it. So, it is not just First Bank alone that is involved in this.
We are also hand-holding them with our investment banking outfit by providing financial advisory services for some of them. We have also had the opportunity to make our input known to the federal government in terms of what we expect. A lot still needs to be done as we go ahead with privatization and a lot of resources are required. We have made suggestions and agreed with the central bank at the last Bankers’ Committee retreat that the proceeds of the privatization should be used in fixing the transmission problems that we have. It is one thing to talk about privatization; it is the best thing that we have to do.
Those assets have to be taken out of government agencies today and brought into the hands of the private sector because if we get it right in the power sector, the entire Nigerian economy would be transformed. So, a bank like First Bank cannot afford to sit aloof and not join in making sure that, that sector is transformed. But it goes beyond the sale, we are not just into it today to assist them to get those assets under the procurement arrangement, we want to be there with them in terms of putting in the necessary structure for capital expenditure commitments that they have done and appropriate management to make sure that the operations are done in a very efficient manner and that there is synergy in it. We are in it and in some of the transactions, if we need to, we would partner foreign agencies.
We learnt that banks are considering providing a syndicated loan for some of the power investors, will First Bank not be involved in that arrangement?
Let me say this, some projects that First Bank believes in, financing or funding the transaction will not be a challenge. We have the biggest balance sheet in Nigeria and we have the biggest loan book in Nigeria. So what is appropriate in terms of financing structure will be put in place. For some of the transactions, we will finance alone, for some we already have parties outside Nigeria who are waiting to partner with First Bank in doing the large deals. What is important is to make sure that we pool our resources together. Banking has become globalized and so these transactions are not just available for Nigerian banks. There are foreign banks and foreign Development Finance Institutions who also want to be part of the transaction. On a risk-sharing basis arrangement, we would do those that we are comfortable with, within the limit of our capital adequacy and liquidity. Banking is not about banks being greedy, you must know when to stop, and you must know when to have indigestion and to know when to share the risk. Every tenet of banking would be put in place in deciding how we finance those transactions.
Can you shed more light on the preferred bidders bond that was raised for some of the consortium you are working with?
Customer confidentiality will not permit me to name them. The stage in which the process is today is that the preferred bidders are required to post a preferred bidders’ Bond. That is to show that they are able to pay and we have been with a couple of consortia in which we have issued that preferred bidders’ guarantee. In fact, some of the transactions we have on the table, rather than wait for the elongated time to make the final payment, some of them are saying they want to pay fully and take over the assets. But in doing all that we have done, we have taken everything into consideration, including compliance with our risk management framework, risk assessment criteria and they are transactions that we feel very comfortable with.
The process for the sale of the three banks wholly owned by the Asset Management Corporation of Nigeria (AMCON) will commence by June next year, will First Bank bid for the acquisition of any of them?
I can tell you that certainly we would not. The reason is very simple. It is easy to do an acquisition, but it is much more difficult to assimilate and absorb the transaction. As you would know, 80 per cent of Mergers and Acquisitions tend to fail. You know we were there before, we started looking at a particular bank in the first phase of the sale of the banks and we found out that it didn’t work and from that moment we decided as a corporate organisation that we would focus on growing organically. The good thing about it however is that despite the fact that we did not acquire that particular bank at that time; we had a financial model which we prepared as part of the discussion in taking our decision of what impact that acquisition would be on the bank. When we aborted that transaction, we still decided to continue with that model.
I can confirm to you that despite the fact that we did not buy that bank, we have attained the numbers which we would have attained if we did the transactions and that for me, is incredible. So, as a disciplined and focus management, if we continue and maintain our organic growth strategy, we would be there, without having to spend too much money and effort. So, in short and straight answer, we will not be looking at any of those banks in Nigeria. I have not ruled out any transaction outside Nigeria.
What is your forecast for year 2013?
For the economy, I don’t see the oil price falling below $100 as far as commodity pricing is concerned and the Nigerian economy is to a large extent, based on the prices of commodities. So in terms of revenue from oil, I don’t expect significant decline except that we need to do a lot more on the issue of security so that it does not affect the production side. It is going to be a very tough year. I will say that 2013 would be tougher than 2012 because apart from the crisis in Europe and the economy becoming a global economy and we haven’t seen all of it come out yet. We have also not seen the full impact of the flood and we cannot predict what the impact of the social unrest and security issues would translate to in terms of oil production and its impact on revenue. When you put all these things together, I expect inflation numbers to rise above the present level early in 2013.
What happens thereafter is a factor of if the trend would continue into 2013. It would be a tough year, but I believe that the government is already putting plans in place to address some of the problems that would have made it worse. We have seen a government today that has put on the table performance measurement for ministers. Ministers now realize that they are accountable because we have the Presidency working with National Planning Ministry, tracking the performance; we have started seeing some traction. Look at the Lagos-Ibadan expressway for instance, look at what is going on at the airports and I see some of those things mitigating the impact of what would have been a very bad 2013. But I think that with the good relationship that exists between the monetary and fiscal authorities, we should be able to manage ourselves out. For the banking sector, having fixed the problem in the sector, with due accolades to the central bank, all banks are now solid.
However, it is important that banks address the very delicate and complex balance between liquidity management, capital adequacy management and interest rate risk management. In doing all that, it is only the banks that have enough skills and discipline to strike that delicate balance between those three parameters that would make the difference in 2013. There are so many financing opportunities in the market today, but my advice to the banking sector is that they should not be greedy, they should know exactly what their limits are and they should put their skills in structuring deals and transactions, partnering with each other to fashion out financing model for the privatization model that is going on presently to support the real sector of the economy. Let me cease this opportunity to say that the real sector needs to do better for the banking sector to come out and support it.
There is no sub-sector of the economy that should be doing better than the rest of the economy. The rest of the economy needs to come up to be able to sustain the good performances that we have seen in the banks. But if banks are run efficiently and professionally the way it has been after the CBN intervention, I expect the banking industry to be significant benefactors in 2013. Banking stocks would therefore go back to drive positive performance on the Nigerian Stock Exchange (NSE). Like I always say, we should not depend on the banking sector alone to drive the rest of the economy. So certain things that are being done presently to change the structure and improve the performance of other sectors of the economy need to continue along that path for that growth and improvement in the banking sector to continue.
Are you comfortable with the current valuation of banking stocks on the NSE?
Nigerian banks are undervalued; there is no doubt about that. We have seen transactions come out of even Ghana, when Ecobank bought a particular bank in Ghana and they paid close to two times price to book. Nigerian banks are trading between one time and 1.5 times price to book. There is no doubt in my mind that benchmarked against the rest of the world, Nigerian banks are significantly undervalued. However, the positive side of it is that the whole world knows that these banks have potentials and that is why you have seen significant inflows coming into the capital market to acquire these stocks at their present value.
I expect that as the rest of the economy grows bigger, Nigerian population will also be able to take advantage of that. When the results for the year-end begins to come and we begin to see the dividend yields coming close to the yields that you get on government securities and the additional advantage of capital appreciation, the market will then begin to understand that this is the time to go into banking stocks. Nigerians I think are still being concerned about the money they lost during the capital market crash. This means that a lot of people are still holding back. The push that we are seeing today is coming not necessary from the Nigerian investors. It is just a few institutional investors, but more driven by foreign inflow which is good because that also has impact on the foreign exchange because that has helped the CBN in managing the forex reserves and the exchange rate. But I think that going into 2013, people would be much more comfortable than they are today, to invest in the Nigerian capital market.