Oloketuyi: Banks Must Create Niche Markets



The Managing Director/Chief Executive Officer, Wema Bank Plc, Mr. Segun Oloketuyi spoke on the current situation in the banking sector, positing that banks can only overcome the current macroeconomic challenges by properly defining their target markets and developing niche markets. Obinna Chima presents the excerpts:

To what extent has the withdrawal of public sector funds through the implementation of the Treasury Single Account (TSA) affected your operations?

I think over N2 trillion left the banking system for the Central Bank of Nigeria (CBN) as a result of the TSA. So without doubt, the TSA has impacted the volume of deposit in the system. Deposit is our raw material. So, certainly, if the sector lost N2.1 or N2 trillion, it would impact, but, by how much?  That can be measured on the impact of individual institution. It is going to impact us differently. Wema Bank lost almost N40billion to TSA. But some banks would lose a bit more. If you look at our 2015 annual report, we grew deposit in spite of the loss between 10 and 15 per cent, compared to 2014. TSA was implemented in September 2015, but we were still able to grow deposit. So, what that means is that we would have grown deposit higher than we did. Now, if I had that N40 billion or thereabout in the system, it would have helped my growth better than it was. But certainly, the impact was not such that we were not able to meet our debt obligation, neither were we short on the liquidity ratio required for banks. Certainly, we lost some money to TSA that otherwise would have helped the performance of the bank better than we recorded the previous year.

Did you bid for keystone bank as part of your growth strategy?


Yes we had the plan. We were one of the set of people that wanted Keystone. But we re-appraised our strategy somewhere along the line. Growth comes in two major stages – organic and inorganic. Organic by what we are doing today at Wema Bank and inorganic through mergers and acquisition (M&A) opportunities. So, we looked at the M&A opportunity and essentially what we looked at was the fit of the target. First, you define your strategy and what you want to do as a bank, and then you go look at the other opportunity, to see if it has a fit in what you are doing. We went some distance in the process and we decided we should get out of it because there were a whole lot of overlap between what we are and what the target is. Essentially, what you are looking at is the value addition. In M & A, if you add one plus one, in arithmetic, the answer is two, but in M& A, it is not. In M & A, if one plus one gives you two, it has added no value to you. In fact, if anything, you have taken on more trouble. So, if you take on a target, one plus one should give you multiples of two. It can be three or four. But if one plus one gives you just two in M& A, it is not value creating. Really what do you do in M&A? I have a platform and if I bring another institution on board, I can use a large part of my platform and scale down the other platform significantly to serve both of them. It is going to be one Managing Director and not two. But as the MD, they are not going to increase my salary because I am serving two institutions and my cost as against serving one institution is on serving two. But that does not mean the target is not good. But what i am saying is that it did not align with my growth aspiration. That was the consideration and at some point in time, we decided to opt out of the bid

A new regional bank was unveiled recently and we learnt that another would also be unveiled before the end of this year. With all these emerging financial institutions, how prepared is Wema Bank to face the stiff competition in the increasingly tough business environment?

Yes, some banks are joining. A bank was recently presented to the public and another one will be coming up soon. I strongly believe, like they always say, that the sky is big enough for all banks to fly without them bumping into each other. Taiwan has a population of about 23 million people, but the country has over 80 banks. Nigeria has a population estimated at 180 million. With the coming on board of a new bank recently, there are 22 deposit money banks. Are we under banked? Relative to the size of the economy, relative to the potential that we have, honestly this economy can do with more banks. Now, is it in the number of licences that we have or in the number of branches of banks? It is both. There are some places where we don’t have any trace of a financial institution, especially in the rural setting. So, I think the economy can accommodate more banks. What it does is that you also don’t want to create a monopoly. We have seen what happens to public institutions where there is monopoly. Now, you may not create a monopoly, but you create an oligopolistic economic environment. It is almost similar to monopoly because they can come together and fix prices and a whole lot of things if they are just a few of them participating in the industry. So, this industry can live with a dose of more competition. So, you need to define your own target market. If all of us are playing in the same area, then we bump into each other. There are some areas that are not well developed enough, so banks need to create their own niche market. If you define your own niche, you will play and play quite well and be successful. Some banks come in the future and say they want to focus only on agriculture, another could come to say they are only for solid minerals, some could say they are purely a digital bank without office(s). It is happening today. In some parts of the world, banks do not have branches and that is a niche. So, there are still several things that we need to do. Infrastructure is in short supply in this country. Who is going to fix them? They are not foreigners; they are Nigerians who would use the financial system to fix them. So, it is a competitive environment and I am sure the new banks are aware. For those of us they are joining, we are also bracing up for the competition. So, I think we can do with more banks and like I said we welcome them all.

What has been the experience for Wema Bank being a foreign exchange primary dealer (FXPD) of the CBN?


As an FXDP, we are a dealer to others who are not. We have the direct interface with the central bank. The CBN is still the major supplier of foreign exchange into the system. It is just like clearing. There are only four banks doing clearing system in this country today, but a lot of customers don’t know. When you go to your bank and drop your cheque, that bank is not the one going to the clearing house to go clear the instrument. So, we have four banks representing the rest of us who go to the clearing house to clear. So, what we are saying is that we don’t need as many as 22 banks all coming together to the clearing house to do clearing. So if you look at it, it is an average of five banks per clearing house. By limiting the number, it brings a whole lot of efficiency into the system. I think what the FXPD has done is to say rather than having everybody doing it, let’s have some primary dealers who would take the funds from the central bank, which is the biggest supplier of foreign exchange to the market today and other people can go to those banks. It is an open platform and we all bid on the FMDQ platform. So, whether you are a primary dealer or you are a secondary dealer, honestly I really don’t mean anything, as long as everybody has access to foreign exchange. So, it has been a pleasant experience and we are happy that we are able to be a primary dealer and also selling to others who are not. What does it do? It puts lots more responsibility on you and it is also a training ground for our dealers. We have one of the best dealing rooms in this country in terms of equipment, lay out, and our dealers are well equipped to do the business. So, we are up to the task and I think we have delivered to the best of our ability to the industry as a primary dealer.

We know you are optimist about the economy, but how is your bank coping with the challenges posed by the economic recession and what are the risk management process being put in place to mitigate likely shocks that might emerge in your institution?



Everyone is in this recession. Even as individuals, we need to look at the resources that are coming into our purses and we need to look at the needs that we have and do what we call structural adjustment. A lot of adjustments are being done at individual levels. I am doing it in my own family and I am sure everyone is doing it on their respective families. What are the things that are critical? You need to put food on the table, if you don’t own a house of your own, make sure you pay your rent so that the landlord doesn’t push you out, pay school fees of your children and cloth yourself. Then, for the other things, you start to see which one is priority. And I think that is the adjustment that a whole lot of us are doing. In a situation like this, you need to watch some things, especially your cost. Watch your cost like a hawk. What we are doing is to cut our cost. The initiatives that we are doing in the digital space are to ensure that the cost to serve comes down. In a situation whereby the margins are thinning, the levels of revenue accruing to you are coming down; you need to find a way to put a lid on your cost. Our half year results showed that cost grew by 2.9 per cent in the regime where average inflation rate today cannot be less than 12 per cent. So, I had to manage my cost do that in the first half of the year. We challenge ourselves to do more with less. We didn’t retrench staffs, but we are happy to use our staffs to take up more responsibilities. In the last 14 months we have opened about eight branches, but our head count has not increased. So, we are asking our people to do a lot more than they have been doing, but we are not a task master. However, we are using technology to drive what we have been doing. So, with technology, physical involvements are getting reduced such that you can process a lot more than you used to process. For instance, the industry took a decision to automate clearing system. We have less than 20 per cent of those that used to be in clearing in that department today. So, the hands that we saved, what did we do with them? We didn’t ask them to go home, but we used them in some other areas. So, recession is here, but the strategy for us is to stay alive and stay afloat. And how do you do that? We ensure that our cost does not overrun our revenue to the extent that we are using capital to run the bank. We want to use operational profit to run the bank.

For our loan exposure, in a period of recession, our loan portfolio gets a bit challenged. As businesses are challenged, loan obligations are not always met on time. So, first is to understand your customers and you know the customers’ businesses. A time like this is not when you run away, this is when you stay close to your customers and you work things out together. There are situations where we you need to extend more and there are situations where you need to accommodate restructuring and there are situations where you need to give your professional advice so that the customer doesn’t run into trouble. I remember we were having a meeting with a group of people and we told them that at a situation like this you watch your cost. And when we talk about cost, people just think you are talking about head count. It is not just about head count! For instance, we did a count to find out how many customers come to us in some jurisdictions after 4pm. Sometimes, you find two or three customers coming in after 4pm and you look at that number to know what they always come to do at that time. If it is cash business, they can do it on the ATM and if it is to deposit cash, you can find some other ways to service those customers. And we took a decision. We categorised our branches into three: category three which where volume is huge, they close at 6pm, by 6pm everybody is gone. So you won’t be burning diesels and running your generators for nothing. Category two closes at 4.30pm or thereabout and the first category are those in some semi-rural areas and they close around 3pm. Today, people have stopped traveling for meetings to the head office. We have meetings that involve branches and we set up a conference facility that is as good as the individuals coming for the meetings. They join the conference meetings and its quality is not in any way reduced. So, rather than somebody jumping into the plane for a two hour meeting and then go back to stay in the hotel, we use technology to drive the system. My bank had what we call a quarterly performance review where we ask all senior people everywhere in the country to assemble at a point and then we do a two-day quarterly performance review, with a lot of expenses in transportation and hotel. But today, we do conference call; just the same way we do investors’ conference call quarterly. This was an initiative we started in 2015. So, it calls for creativity in times of economic recession and we are doing that so that we can maintain our growth strategy even in the face of recession. In recession some people will die, but we have chosen to stay alive. But you know what, when we say there is recession, it also opens up opportunities. Now, if you focus extremely on the problems, then you may not see the opportunities. As much as we are managing our cost, we are also looking at the opportunities. Today, we have launched *945# as a product. First, it would respond to some challenges. I need to acquire more customers and the cost of customer acquisition, if you manage it well, it could be substantial. Since we launched *945#, the number of new accounts that we have acquired, apart from the traditional way of getting accounts, are growing in leaps and bounds every day. So, more importantly, we also need to look at the opportunities we can see.

Can you shed more light on your planned capital raising?

We are raising a tier-2 capital. It is a bond. It is a N50 billion bond issuance programme, but we are doing it in two tranches. The first tranche is N20 billion and the second tranche is N30 billion. So, we are taking N20 billion on board first and in the near future, as need arises, we take on the balance of N30 billion. We are good on tier-1.So, what we are doing is to bring in another form of capital, but this time a debt capital. In recapitalising an institution, what you need to watch out is your optimum capital. Sometimes, if you make it all tier-1, it may not just be the optimal that you need. So, sometimes you also need to have some dose of tier-2. So, what we are doing today is tier-2. If you look at the environment, the capital market is not as exciting as it used to be. Perhaps you may want to wait. Otherwise, if you decide to raise tier-1 capital, you might be throwing away value because all stocks are under-priced. The price-to-book value for most stocks is really down. So, it might not be a good time to issue tier-1. But we are encouraged by the response of would be investors. You must have read some of the things we have been doing in the bank. In 2009 when we took over, we had a distressed institution and all indices pointed to that direction. As at December 2009, the audited financial statement showed a negative capital of N45 million and the bank was totally on its knees. The share of market we had then was less 0.6 per cent. Equipment and processes and the platforms we were running were obsolete and the core banking application we had which is the platform we use to serve our customers, was old to the level that it couldn’t be supported by those who supported them. The non-performing loan ratio was 89 per cent and the performance of the bank was poor. So, we came in and said we need to have a containment strategy to stop the bleeding and stabilise the bank. So, between 2010 and 2014 was largely to give life back to the bank. A distressed bank needs to be turned around to a performing bank. Of course, you need capital for any business, more so for banking which is a regulated business. So, the first major assignment we did was to recapitalise the bank. Today we have been able to make our proposes better and have completely turned around the bank. We invested in a new core banking application and at the time we implemented Finacle 10.2 version, we were the first.