The Managing Director/Chief Executive Officer, Coronation Merchant Bank, Mr. Abubakar Jimoh, in this interview with Obinna Chima, expresses optimism that the Nigerian economy will perform better this year. Excerpts:
Now that the elections are over, what are your expectations for the Nigerian economy?
The economy is growing steadily and there are some indications that growth is accelerating going into 2019. Inevitably the elections raised questions over stability, but those questions have been answered. The key sectors of the economy, namely agriculture, trade, telecoms and manufacturing were all growing in the second half of 2018. The encouraging thing is that non-oil Gross Domestic Product (GDP) was up 2.9 per cent year-on-year in fourth quarter (Q4) 2018, compared with total GDP which was up 2.38 per cent year-on-year. This non-oil growth, at 2.7 per cent year-on-year in Q4, was stronger than in Q3 2018, when it was up 2.32 per cent year-on-year, and in Q2 when it was up 2.05 per cent year-on-year. These are very small differences but they suggest a degree of robustness in the non-oil economy. By contrast, oil production and prices are inherently volatile and the oil and gas sector of GDP fell by 1.62 per cent year-on-year in Q4 2018. Going into different sectors, the biggest stand-out has been telecoms which accounted for just 10 per cent of GDP and which grew by 16.67 per cent year-on-year in Q4 2018. This came after double-digit growth rates in Q2 and Q3 2018. The growth comes from internet banking and mobile banking and we see this reflected in the growing fee & commission lines of the banks. Agriculture, which is about a quarter of GDP, continues to grow, and it grew at 2.46 per cent year-on-year in Q4 2018. Manufacturing is growing slowly, with Q4 2018 growth quite typical for this sector at 2.35 per cent year-on-year. The big question is over trade, about 15 per cent of the economy, which only grew at 1.02 per cent year-on-year in Q4 2018. The two key ingredients for trade are currency stability and domestic demand. The good news is that currency stability is a realistic prospect for 2019. Our research suggests that domestic demand is growing very slowly, but at least it is not declining.
So, what are your expectations from the capital market?
If you look at the Nigerian fixed-income market and the Nigerian equity market, they behaved differently during the elections. There was a significant inflow of foreign portfolio investment into Nigeria before and during the elections. This followed on from the decision by the US Federal Reserve, right at the end of January, not to pursue US dollar interest rises during 2019. This made naira-denominated treasury bills attractive to foreign investors and money flowed in. The equity market, after the first week of January, staged a rally up until the elections and then sold off. It was a rather short election rally. Going forward, we expect treasury bills market rates to hold steady for a while now, and then reduce during 2019, for reasons we outlined in our report titled: “Year Ahead 2019: A Year of Two Halves (published 15th January). Basically, if oil prices hold up around or above $60 per barrel, and if Nigerian inflation trends slowly down, then the underlying conditions will be ripe for lower T-bill rates later in the year. In the equity market the fundamentals of the banks are slowly improving and we believe this will be reflected in rising stock prices during the year. This may not be spectacular stock price growth but the banks are at very low valuations relative to their history and we expect investors to capitalize on this situation.
The financial results released so far by the bank showed that some of the banks have adopted cautious lending strategy, is that the trend we should expect going forward?
It is true that aggregate loan growth for the banks has been slow. In some ways that is not surprisingly in a low-growth economic environment. On the other hand, a number of factors were at work during 2018. The first was that banks were saddled with a high level of non-performing loans, a large proportion of which came from the upstream oil & gas sector. They had either made provisions for these or, in many cases, restructured the loans while recognising that there was a danger they could deteriorate in future. Next, oil prices were high during 2018 and the Brent price traded at an average $79 per barrel. These were the ideal conditions for banks to call in some of their oil & gas loans, which is what many of them did. So there was downward pressure on loan books overall and, in many cases, a drop in non-performing loans. However, some banks reported growth in non-oil & gas lending and we expect this to continue this year. For instance, specialised players like Coronation Merchant Bank grew their loan portfolio significantly. However, because they represent a small section of the banking system, the impact is not very high on the aggregate figure. Although we do not expect strong lending growth among the banks in 2019, we expect some because key sectors of the economy are growing. If we look at the overall loan books of the listed banks in 2019 we expect moderate growth, which means up to ten per cent year-on-year growth in aggregate.
Some have also argued that the low loan growth is a reflection of the impact of the fintech on banks, do you think that is true?
It is a logical argument that fintech creates disintermediation, in other words it should be possible to match depositors and borrowers in peer-to-peer online structures. However, there are a lot practical problems with this which include creditworthiness, security, legal enforcement, and liquidity to name but a few. Blockchain provides solutions to issues in peer-to-peer situations but requires a data series to function, which is a problem given a low level of transactions to begin with. Blockchain is also something used by banks and credit card companies to verify transactions. In other words, fintech is as likely to be used by banks as by peer-to-peer lenders which compete with banks.
What is the future of banking and how do you think the fintechs are impacting on the activities of the banks?
If you take an extreme view of the situation you could say that everything that a bank does is digitisable, therefore fintech represents a fundamental threat to banks. However, this overstates the role of digital financial solutions outside of banks and also does not allow for the way in which fintech brings money and transactions to banks. For example, look at the way that internet and mobile banking increases the fees and commission of banks. Fintech is this case is increasing the size of the pie in terms of fees and commissions and banks find that very helpful. We are at the early stage of involving telecom companies in money transfers which involves them taking customer deposits. Given that there are roughly twice as many ringing lines in Nigeria as there are bank accounts, this would be a welcome development. Extending financial inclusion this way increases the pool of money, some of which banks are going to handle. On the other hand, banks will need to promote their value-added services better than they have before, because the default mode of deposit taking and transferring funds could be challenged by Telecom and other tech companies.
Coronation Merchant Bank recently released its full year 2018 results, can you take us through some of the key drivers of its performance?
The Group continued on its path of sustainable growth within its overall risk appetite. The earning assets grew significantly by 70 per cent year-on-year to cushion the headwinds occasioned by compression of margins. Increase in foreign exchange and fixed income trading volumes saw the bank’s non-interest income grow by 46 per cent year-on-year to achieve N4.1 billion (2017: N2.8 billion). As a Group, we have continued to expand our sector reach to meet our customers’ financing needs by offering products tailor made to their various needs. The increase in customer deposit of 63 per cent year-on-year, helped to provide funding stability to grow risk assets. Risk Assets grew by 70 per cent to N54.8 billion as at December 2018.
How did the improved foreign exchange liquidity in the system impact on your performance?
Foreign exchange liquidity improved significantly at the end of 2017 and on into 2018. It is the life-blood of foreign direct investment, foreign portfolio investment and trade-related lending, and therefore is critical to the functioning of the bank. Foreign exchange liquidity was very high during the first two months of 2019 and this is a good thing for the banking sector in general and for us in particular.
In terms of lending, to what extent were you able to support your customers?
We will continue to support our customers and clients in the sectors we have chosen to play. As the numbers show, the growth recorded in risk assets are all in our strategic sectors of choice, such as agriculture, manufacturing especially in the FMCGs to obligors that fall within our risk acceptance criteria. We are poised to continue to deliver bespoke world class solutions to our customers’ needs. In 2018, our dollar asset base grew by over 100 per cent, we have also continued to increase our foreign correspondent banking relationships.
10) Going forward, what should customers expect from your bank this year?
It is clear to us that the underlying market conditions are improving this year and this is good for our customers. Economic activity is continuing to pick up, foreign currency liquidity is strong, and Nigerian T-bills rates have already fallen and may continue to fall at the year goes on. Fixed income markets are both liquid and trading well, and the equity market has a degree of upside potential.