Wigwe: Banks Looking for More Ingenious Ways to Make Money

Group Managing Director and Chief Executive Officer of Access Bank Plc, Mr. Herbert Wigwe, in this interview on ARISE TV, the sister broadcast station of THISDAY, spoke on a wide range of issues in the banking industry as well as the economy. Obinna Chima presents the excerpt:

To what extent did the 9mobile loan contribute to your impairments? 

We had to take a collective impairment as far as EMTS is concerned. This was because, obviously, given all the issues that were happening in the market, we had to basically downgrade the asset quality and what that meant was that there was an increased collective impairment. Now if you look at our exposure to Etisalat, the direct exposure may not appear to be that significant. But we do have exposures to other companies that do business with EMTS that are still going concerns with different level of securities and all of that. But on EMTS specifically, there was an increase in the collective impairment and we also took additional impairments with respect to those other exposures. So, that is where we are on it. So, it led to an increase on impairment on a collective basis, between last quarter and this quarter, by 100 per cent.

 

So, how much exactly did you provide in terms of the Etisalat (9mobile) loan?

Let me put up it this way, on a straight Etisalat exposure which is about N11 billion, we took about 30 per cent. However, remember like I said, there are other interconnected exposures and the level of collective exposures on those ones was a bit less.

 

What is the current status with Etisalat loan and what is the consortium of banks doing in terms of ensuring that they get new investors for the company and get the telco pay for its loan, especially its former shareholder, Etisalat of the United Arab Emirates?

 First of all, what we have done was to prepare the company for sale and so we have a management team that is working on it. The second is that we have appointed sale-side advisers who are now taking bids from people who are interested and we have a live room for people to virtually start doing due diligence so that we can conclude the sale very quickly. With respect to their parents, I think as a starting point, nobody walks into a system and takes so much loans and wakes up to say “oh I have gone.” It doesn’t add up. So, we still have recourse to them. That is the secondary level issue. But the most important thing is for us to sell the company and see how much we can get to defray our exposures.

  

While a lot of banks’ earnings, such as yours improved as a result of foreign currency trading income, there are still concerns about volatility in foreign currency trading and how it can affect your profit. What is your bank doing to safeguard such volatility?

 We occupy a very prime position as far as trading in derivatives and all of that is concerned. We have made money from it in the past 15 years, year in, year out. You just need to understand how it works and you need to understand the risk management processes you need to put in place to make sure that you are protected. I think all of that trading is geared towards a couple of things. Firstly, it increases the level of deepening and liquidity in the market. In the past you didn’t have futures, but now you have futures. We are trading forwards and forwards are necessary to support customers. So, it is not out of a bubble, it is out of customers’ demand and enhanced liquidity in the market. Now, there are different things you can do with your… You can either trade currencies, you can lend your dollars. Whichever one, it would throw out whatever returns, depending on how you choose to optimise your balance sheet. Having said that of course, when the market is less volatile, obviously what you tend to see is that there are fewer returns to be made from it. The risks are higher in a more volatile market, but again, remember that you have open position limits; you have dealers’ limit and all sorts of limits that were put in place to basically ensure that you remain within the limit of the risk appetite which you chose to play.

 

 The managers of the economy are optimistic that the country would exit recession at the end of the year. But a lot of analysts are saying even if the economy does grow at the end of the year, it might be muted. To what extent will this impact on households and even businesses? 

I think it is still a big issue. I think we really need to address the fundamentals of our economy. I think we need to pay a lot of attention to agric, we need to pay a lot of attention to SMEs and most importantly, we need to pay a lot of attention to the power sector which drives all of these things. Today, the critical engine for growth is between agric and largely oil prices. Now, we can achieve double-digit growth in Gross Domestic Product without any change in oil prices once we address power. So, I think exiting recession as quickly as we expected, for me is not eureka yet because you are still susceptible or vulnerable to too many influences. However, I guess, given the current emphasis of the government and the central bank on agric, if we pursue some of those action steps, what you are likely to see is that we would create a much more robust and resilient economy, even though it takes a bit more time.

 

 But there are also concerns that there is still so much emphasis on primary commodities, shouldn’t there be emphasis on industrialisation?

 I agree. But we have to start from somewhere. So, let us start growing rice. There are milling plants that had been set up already, so at least it would be processed and then we would be more competitive and there would be no need to import rice. So, you have to start from somewhere. And I think it is all coming together. The central bank governor recently insisted that banks contribute to a new fund which is being set up for agro-related types of businesses. The whole idea is not just to support the primary end, but to support the entire value chain. That way, you have an integrated structure that would ensure that we have less of imported products. But the real point at the end of the day, irrespective of what you do, industrialisation requires steady power. So, we need to actually fix that problem. And if you ask me, we are probably having issues with it right now, but it just requires a little tweak and we would get it right. That is because a lot of investments had been done and banks and entrepreneurs that had taken risk, ought not to suffer because the longer and protracted it is, the more painful it would be. And I think once government pays a bit more attention to that, we would solve that problem.

 

Your bank and other banks place so much emphasis on growing their retail base. But there seems to be a disconnect because a lot of your lending still goes to the high net worth and large corporates. With the new legislation on Movable Assets and Credit Registry, do we expect to see a shift in your lending pattern?

 I think seismic is too strong a word to use. A couple of steps have been taken that would ensure that you start to see those shifts. First of all, the Credit Registry Act and secondly the use of Bank Verification Numbers (BVN), which means that if somebody defaults on a loan, we can blacklist that person and he cannot have access to credit in the system. The fact that I can’t lend to somebody who had defaulted means that, that person has been excluded from borrowing in the system. Now, as banks are beginning to look for other ways to make money, look at even the EMTS exposure we are talking about, God knows how many millions of Nigerians you would have lent to, for you to have that amount of bad loan. But it is not even going to happen! So, people are looking for more ingenious ways to make money and it is happening. There is increased agency banking. One thing I can tell you for sure is certain, the proportion of loans that is going to be lent to retails and SMEs is going to be a lot more in 2017, than it was in 2016. And in 2018, it would be a lot more. If you take my bank for instance, our traditional arrangement was we were a wholesale bank, but we are now a large diversified bank and we have invested significantly this year as far as expanding our channels and retail network is concerned.

 

 Why was your loan book flat for last year? 

It was flat because you have to understand that when you have devaluation in the manner in which we saw, it does not matter how much you lend to retail, it is not going to be that significant. It was flat because we had to take some interesting steps to basically curtail growth because of the fluctuations which you saw in the foreign currency market. So there was significant play down in the foreign currency loans. We had to work on it. So, as far as local currency is concerned, it was not that significant. But we had to bring down the foreign currency loans because we were concerned about how the macro would span out over a period of time. If companies had significant currency risk, it is a problem; if people were taking significant loans for trade, it is also a problem. If you like, as a country, our reserve management required that we start curtailing imported raw materials. So, as a deliberate risk management process, what we did was to bring down a lot of the foreign currency exposures. So, that was why you saw it taper down.

 

 Financial inclusion in this country remains a major concern and banks keep talking about spreading their digital footprints. But what exactly is holding mobile banking back from being a major tool for financial inclusion? 

 It is happening in Nigeria. If I take my own customer base, in terms of those that use basically, mobile telephones, I have grown my customer base by more than four million customers that didn’t exist before. So, it is happening. Remember, Kenya and Nigeria are different economies. In Kenya, it was more telecoms-led. But Nigerian banks are far bigger in terms of size and the legislative issues are also slightly different. However, having said that, what you are beginning to see is increased partnerships between the banking industry and telecoms players to basically ensure that we reach out to the remote parts of the country. How do you think farmers are paid in the most remote parts of Kebbi or in Sokoto? It is through mobile banking. So, that is where it starts from. If you look at it, more people are coming into the virtual aspect of banking. So, financial inclusion is happening and again, I keep saying you would see a lot more happening in the second half of this year and next year. That is because as you now have these customers, the customer engagement mechanism requires that they continue to operate their accounts and of course the process for you to uplift them from basic Know-Your-Customer (KYC) levels into proper bank accounts would happen. Our industry is very dynamic and more sophisticated than most markets in the continent. Perhaps, the only exception may be South Africa. And when things like this happen, it happens like wild fire. So, I think we would see a big jump as far as the numbers are concerned. 

 

 Your bank has a very good relationship with Lagos state government and was involved in packaging the Lagos fourth mainland bridge which has been cancelled. What led to the cancellation and what is the next phase as regards that project?

 I don’t think it has been cancelled. I think the governor of Lagos state basically decided to reprioritise, given the recession. It is certainly not cancelled. I know it is still an anchor project as far as his administration is concerned. He is probably revisiting the structures, engineering, in a bid to scale it down, given the resources available. Obviously, sometimes you make plans and you may need to revisit it so that you don’t have a problem. So, I think that was basically what happened and I am certain that he would continue executing it during his stewardship.

 

To what extent is Access Bank lending directly to farmers?

We are doing that increasingly. Not just farmers, we are looking at the entire value chain. We are looking at agro-businesses. For example, Lake Rice, which is supposed to ensure that a significant proportion of rice in this country that is imported is significantly reduced, is something that we are supporting. It is a collaboration between Lagos and Kebbi. The rice is grown in Kebbi, and in Lagos, you have the larger market. So, we are doing things and supporting firms that are involved in agriculture under the Anchor Borrowers’ Scheme. We operate as an extremely responsible entity and sustainability is a critical part of our existence. And if we don’t start to think Nigeria, live Nigeria and eat Nigeria, we would have a problem. For us, the only way to do that is to live by example. So, we are investing more as far as agric is concerned. Also, more local banks are beginning to look at it and are taking it more seriously.

 

 The CBN governor has taken some significant measures to stabilise the foreign exchange market since February. What more needs to be done to ensure that there is convergence between rate on the I & E window and the spot market rate?

 In fairness, it is closing and it would close. You can see gradually that the gaps are closing. Look at the unofficial market that had such huge disparity before, what has happened? It’s like that market is almost wiped out because most of the people who had to go to that market now have access to the formal market. For SMEs, what the governor did was to establish a mechanism for them to come into the formal market and therefore, there is less pressure. Now, as more investors get into the I & E window, as more investors see that the market is real, what you then start to see is the gap closing up. When you talk about stabilising the system, you also have to ask questions about the local industry and what you need to do to make them sustainable in the short-run. One of the things you see and why people are still able to access forex at a different rate is that, those are for priority sectors for manufactuing concerns. So, let us support those people who are producing locally, using local raw materials and get them more competitive. It is also expected that as more investors bring in money through the I &E window, that market would firm up and the convergence would happen.

 

 What is your forecast for the sector in terms of non-performing loans? 

I think a couple of things would happen. You don’t just come out of a recession and nothing happens. You would see a spike in NPLs, particularly as loans mature. You know, some of those loans would just be maturing, so you would see a spike and it would get better. So, what you are likely to see, depending on the risk management philosophy of the bank, you would see a spike between now and December 2018. But I think the banks are certainly in much better positions to handle it than they did during the last exercise that happened in 2007-2008. So, it would cut across sectors, but more in sectors where you have people who require imported raw materials to support production. But I think banks are going to look at other ingenious ways of making money and by lending a lot more in the retail space where you have a wider margin and in a much more structured and secured manner, pushing cards and their channels, so that they can find replacement income for all of these. So, I think 2017 would still remain a year of muted growth for banks. But the stronger banks would continue to do well because they (the strong banks) still have strong capital adequacy ratio and strong capital to support them. Overall, I think the industry would play out better.

 

 There seems to be some collective silence in the industry about banks’ exposure to the power sector. Have there been provisions for those that acquired the power assets and cannot pay for them 

You can’t tell the banks to provide for those loans right now. It is a very important issue and it is a national issue. It is a national issue because it is critical for our economy. And the banks that were sufficiently patriotic to support investments in power, need to be given time to manage those exposures. Some of the problems that have come out of these exposures were actually not caused by the banks, but out of the fault in the implementation of the power policy. Now, having said that, there is also the issue of systemic importance, relevance and what you need to do about depositors’ funds.

 

But operators are partly to blame, especially the distribution companies because some generate income and they don’t service the loans. They don’t even pay for the power sold to them by the generation companies?

 These are pricing issues. There is a problem in that value chain and there is also a problem with pricing of their product which everybody needs to look at. There is a problem of access to gas. So, several little things need to be resolved. But this is not the first time it is happening. Remember in the 80s, the government had to step in and that was how the creation of prudential guidelines came up. I think the government needs to revisit that whole sector in terms of the people who are exposed to that sector and create some form of reprieve for them to work it out and for things to go right. That is because that sector is extremely important for the industrialisation of our country. But if you treat it otherwise, what you get is a collapse of that sector, which would be worse for all of us. So, I think it needs to be managed and I believe the government would do that.