Chioke: Banks Must Specialise in Areas of Competence

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The Managing Director, Afrinvest West Africa Limited, Mr. Ike Chioke speaks on the state of Nigerian banks, just as he urged the federal government to change its anti-corruption strategy. Obinna Chima presents the excerpts:

What were some of the findings about the banks in your 2017 Banking report?

Clearly, the depreciation in the currency affected all the banks. Obviously, some of the key sectors that had trouble when you have a devalued currency, it kind of magnifies that problem.
So, if you had extended some foreign currency loans to the power sector, for instance, the oil and gas sector as well, then devaluation magnifies the problem. So, we saw some of the banks having to see that their capital adequacy ratio (CAR) was looking quite compressed and they had to look for ways to beef up their capital. But on the flipside, some of the bigger banks, particularly the tier 1 banks, who had more foreign currency deposits and risk assets, have benefitted from the devaluation and you see them booking foreign exchange gains.

The likes of GTBank, Zenith Bank, Access Bank, United Bank for Africa Plc, belong to that group. So, what we saw was a kind of continued widening of the gulf between the tier 1 banks and the tier 2 banks. Once upon a time, tier 1 banks accounted for about 60-65 per cent of market share in the banking sector. But in the 14 banks we covered in this report, we have seen that percentage rise to above 70 per cent. So, the tier 1 banks continued to grow, often at the expense of the tier 2 banks.

You also might have noted some of the reports that came out from the Monetary Policy Committee (MPC), where some observers said a few of the tier 2 banks might be challenged. While one would say that the system is sound, if you have multiple tier 2 banks that are challenged and all of them going down at the same time, it might be the impact of a Systemically Important Bank. But, be that as it may, we feel that the fact that we had forex illiquidity in 2015, which was quite massive in 2016, constrained growth across all industries, particularly manufacturing. But it supported and spurred growth in agriculture. For the first time in recent years, we had pricing parity such that the cost of production in Nigeria did not make our goods too expensive.

So, you had a lot of people investing in agriculture. But there was problem in the power sector, because a lot of people had borrowed money to build, maybe gas pipelines, gas processing assets, to deliver power to the power stations, and now the power stations are not able to pay back. They have massive loans that are not performing. Of course, I have mentioned the problem in the oil and gas sector. But luckily, some of these bottlenecks in the economy have been resolved and we see that the positive profit momentum which most of the banks registered, has given them some buffer to get away with some of the problems that they saw.

But we are not totally out of the woods yet. We just feel that with diligent management, and the fact that the Central Bank of Nigeria has also been constructive and supportive, we could also see ourselves trading out of the situation.
But the key thing is how do we bring back growth? Paradoxically, while last year we had illiquidity in the forex market, this year we are having an illiquidity position in the naira market whereby there are now dollars in the market, the exchange rate has stabilised, but people are looking for naira with which to purchase dollars.

Some of the central bank’s measures like making sure you put your cash down before you can buy the dollars, were designed to prevent speculators from coming into the forex market to drive the exchange rate to high heavens. It also frustrates normal businesses where for instance, if this building was a hotel and you feel like expanding to the next compound. Traditionally you will take a bank loan to finance the imported equipment to build that extension. But now, the banks would not give you the loan until you bring your naira cash. So, it frustrates your capacity to grow and that is what we are seeing across many parts of the economy.

We are beginning to see that politicians are preparing for another election. How do you think the process would fashion out for investor confidence?

Typically, with an election cycle coming in 2019, we estimate that by mid-2018, all efforts of government would be tied towards that election. But with any election, there is massive increase in government’s spending. Already you can see the signs, but the government is trying to demonstrate that it has done something, since 2015 when it came in. Even if they were a little bit late in starting, they would try to achieve some noticeable infrastructure projects between now and next year. Even if they are not finished by middle of next year, they can be commissioned late in 2018, ahead of the actual election. So, we expect to see investments in government spending. Of course, investors having been once bitten would insist a better contractual arrangement and agreements documented.

So, we would see it as the glass half full. If you say the glass is half empty, due to the election, a new set of persons would come in and distort the arrangement, you may miss the opportunities in Nigeria. I would take it on the other side, that because the government is heading towards elections, they would have to do a lot of spending, particularly in terms of capital spending and on infrastructure. They are focused on agriculture, power and of course oil and gas reform. If we can get it right, that would be positive for the economy. So, people who focus on those areas with the right project could be winners. Of course, underlying these is the country’s large population. So, if you can get the right products out, you will get the expected returns.

What were your findings around corruption and transparency?

We touched on anti-corruption, the government’s new whistle-blowing policy. The government came up with a lot of fanfare. But sadly, it hasn’t translated to the massive expectations we had when the government took over. So, far the government has informed us that they have recovered over N17 billion. Now, N17 billion relative to the number of announcements, of people they feel are corrupt is small and they have not been any arrest. We do feel that corruption has not been well tackled. We would like to just say there have been some positive ‘noise.’ I do recall one of the legislatures in Abuja saying that when it comes to fighting corruption, the government might be using deodorant against its officials, but if the person is on the opposition camp, they bring out their insecticide. So, there are still lots of work to do. If you look at some of the governance issues that arose from the Minister of State for Petroleum’s letter, it tells you that fighting corruption is about building the framework that prevents it from happening and most of it come from transparency and having people following due process.

With the widening gap in terms of market share, what is the implication for the industry?

There will be specialisation for everybody in the industry. The banking industry is growing. But what is happening is that tier 1 banks are growing faster. You could be a tier 2 banks and you see your business double. But maybe if you are a GTBank, you would have seen your business triple. So, all the banks are growing. What would happen in the industry is that there would be areas of specialisation. Even in Afrinvest, there are certain transactions we would rather want a tier-2 bank to execute, because we know they are small and specialised in that area, and you can get decision faster. But there are other transactions which may have wider implication for the country, or global linkages that works better for a tier 1 bank. So, you find space for each of the bank in their area of specialisation. But, a bank fundamentally needs to manage its balance sheet and if a bank is careless in terms of risk assets creation, this would have serious consequences.