The Group Managing Director/CEO of FBN Holdings, Mr. UK Eke, in this interview speaks on the performance of the holding company, its contribution to the fight against the COVID-19 pandemic as well as towards Nigeria’s push for economic diversification. Goddy Egene brings the excerpts:
How will you assess the performance of the institution in the first quarter of 2020?
FBN Holdings had an excellent Q1 2020. Notwithstanding the difficult environment that has characterised the 2020 financial year and the likelihood of global economic slowdown, FBN Holdings has demonstrated, with the results, its capacity to reinvent itself and deliver on its promises to the market. The financial results for Q1 2020 have further demonstrated the resilience of the Group and its ability to generate income as evidenced by the 14.5 per cent growth in gross income over the prior period. Across all key financial metrics, we have seen significant growth and consistent upward trends, building on the 2019 performance. The Group posted a profit before tax (PBT) of N28.7 billion, an impressive 61.5 per cent growth over the prior period. From an efficiency standpoint, return on average equity has grown from 12.4 per cent at year-end to close the period at 15.5 per cent.
Similarly, the cost-to-income ratio has trended downward at 65.1 per cent, buttressing our commitment to the market to rein-in cost and leverage technology as a key lever to our cost containment strategy. Quite frankly, the performance is a carry-forward of the momentum we picked in Q3 and Q4 2019. Over the last five years, we have embarked on the journey to reposition the Group and reclaim our market leadership by strengthening the process, retooling our workforce, and leveraging technology to drive efficiency. We have to take the learnings from the challenges the Group faced with its legacy loan book and have put in place a robust framework to forestall these performance challenges in the future.
Secondly, the non-interest income, particularly, e-business contribution was very impressive, justifying our increasing investment in digital innovation.
Specifically, the e-business contribution to non-interest income is about 30.2 per cent. Clearly, our flagship, the commercial bank remains the dominant player in e-banking. We are delighted that the tools provided have fired up the workforce, leading to motivation to challenge for an increased share of customers’ wallets. Having said that, I hasten to add that there are significant headwinds from the macroeconomic standpoint and disruptions in global trade occasioned by COVID-19 and commodity prices, particularly crude oil prices. Consequently, we expect these macroeconomic challenges to reflect in the full-year performance of companies in nearly all markets.
Having tackled your legacy issues, how are you ensuring that they do not reoccur going forward?
I am glad you are paying attention to the numbers. At the start of the 3-year planning cycle which ended in 2019, we committed to the market to reduce our non-performing loan(NPL) ratio from a level north of 25 per cent to a single digit by the end of the cycle. I am glad to report that we achieved this at the end of the 2019 financial year when the Group posted an NPL ratio of 9.9 per cent. This single-digit NPL ratio for 2019 tells half of the story. The more commendable achievement and by far more important to the Group is the fact that the NPL ratio of our vintage loan book, new loans created in the last three years, is below one per cent. This is a leading indicator and a testament to the extent of work done by the Group to overhaul our risk management architecture. We strengthened the three pillars of risk management – people, process, and technology.
Accountability has improved, the processes for risk management are a lot more robust and technology including analytics underpins the process end-to-end. Now that we have decisively addressed the legacy NPL issues, we are focused on cautiously expanding our loan book and ensuring that all lending entities are able to grow their top-line without compromising risk management. Going forward, we are now a lot more deliberate on the choice of borrowing clients, meaning quality at origin and also even more selective in sectors of preference.
We are currently faced with the COVID-19 pandemic with its expected debilitating impact on businesses and the economy at large, how is FBN Holdings handling this situation?
COVID-19 pandemic is a global phenomenon. Even though these are early days, we have begun to see the devastating impact of the pandemic across the entire globe. There is a growing consensus that we may have entered a global recession and this position is reinforced by recent economic data including labor data in the US as well as other economies. In Nigeria, we expect data for Q2, 2020 to show what we already know given that the price of crude oil has suffered a significant drop since the turn of the year. This has already informed a reduction of the 2020 budget by N1.5 trillion and a revision of the crude oil benchmark price from $56 to $30. This development poses a significant challenge to the finances of government and by extension, the entire economy considering the importance of crude oil prices to the finances of the government.
It remains to be seen if the $30 per barrel will stand given current glut in the market. This is a double whammy that calls for a decisive response by all stakeholders. The financial services sector is not ring-fenced from this challenge and by implication, we will see significant implications of this pandemic reflect in our end of the year results. However, it is important to highlight the fact that we have triggered our robust business continuity plans to ensure the impact is minimised. It is also noteworthy to highlight that our investment in technology has strengthened our business to take advantage of the social distancing and remote working model.
Today, a huge chunk of our revenue comes from non-interest income which is largely transactions done via alternative channels. We have successfully enhanced our transaction mix to an 85:15 ratio in favor of alternative channels. Interpreted differently, 85 per cent of all customer-initiated transactions are consummated through alternative channels. In a nutshell, even though expectations for 2020 full year numbers have been dampened across sectors, regions, and markets, we are fully committed to ensuring this impact is minimized.
Recently it was disclosed that FBN Holdings is in the process of divesting its 65 percent in its insurance subsidiary, what informed this decision, and what are the implications for the Group?
First, let me emphasise that this is an ongoing process. We are in discussion with the Sanlam Group, a South African part-owner of the business, for the potential acquisition of our 65 per cent equity interest in FBN Insurance Limited. Consistent with a merger and acquisition (M&A) process, there are a few more hurdles to scale before a deal of this nature is concluded including regulatory approvals. For FBH Holdings Plc, this is a business decision and in line with our periodic portfolio review. The Group runs a 3-year planning cycle and the new cycle kicked-off at the beginning of 2020 financial year.
This planning process allows us to carry out a comprehensive review of our portfolio for optimising capital and ensuring that businesses within our investment portfolio are consistent with our long-term aspirations. The proposed divestment of our stake in the insurance business is in the normal business of the holding company which operates as a corporate center and responsible for ensuring capital is effectively deployed to ensure optimal return to our shareholders.
Despite the fact that FBN Holdings is a leading financial services group, its share price on the Nigerian Stock Exchange (NSE) is still very low, why do you think this is so and what are you doing to make investors see the value in the stock?
Our engagement with the market is robust and our philosophy is to speak to the market through our performance. As business managers, our remit is to deliver top-notch performance and where we have challenges, resolve them, and put in place processes to forestall future challenges just like we did with resolving the NPL issues. In the long-run, the market has been proven, time and again, to have the power to fairly value assets. We believe that our share price has not fully priced-in the robust fundamentals of our business and we are convinced that there exists a significant upside to buying our stock. Post the release of the FY2019 financial results, all research houses had our stock on the ‘buy’ rating, indicating a significant difference between the intrinsic value of the business and the share price.
Our Q1 2020 numbers are indicative of a Group that has completed a turn-around, ready to regain market leadership in the near term.
There have been complaints in some quarters, especially, among the SMEs, that the financial institutions are not doing enough to grow the economy, do you agree with these complaints?
This reinforces the fact that there are gaps in the system concerning credit penetration. The Central Bank of Nigeria (CBN) has done an incredible job of ensuring credit is directed to the deficit units in the system and increase the SME space. Regulation such as LDR and various SME intervention funds are tailored-solutions to addressing credit flow to the SMEs. The numbers show that this is improving and I fully understand the need to do more. Make no mistake, across the aisle, there is a broad consensus that credit to the SMEs is crucial to growing the economy as SME is the engine of any economy.
We also have an agreement that there are structural challenges to providing credit to the SME segment of the markets, but these are being dealt with by the regulators with the introduction of BVN and the passing of the Nigerian Collateral Registry Act among other steps. With the spread in 772 local government areas (LGAs) and over 53,000 agents, we have the touch-points to support MSMEs. Indeed, over the years, we have enhanced our lending into this sector and you will see more of this during the current planning cycle.
How is FBN Holding contributing to the deepening of the financial inclusion policy of the federal government?
This question ties into my last response and on this front, we have led the market. Today, we have grown our agency network from zero to over 53,000 agents in the last three years, covering 772 LGAs out of the 774 local governments in Nigeria. Similarly, we also maintain the most extensive branch network in Nigeria. In nearly all alternative networks and switching platforms, we continue to lead the market and provide access to financial services for Nigerians in remote locations through our *894# and other platforms. The commercial bank currently has 2,970 ATMs and controls 33 per cent of the transaction volume carried out on the domestic dominant switch and 22 per cent share of Nigerian Inter-Bank Settlement System (NIBSS) traffic.
The bank crossed the 10 million, active card in issue in 2019, leading the West African market in this regard. We have received several commendations and awards in this regard including the Emerging Markets and Middle East (EMEA) award for the best mobile app in Nigeria banking industry.
The advent of FinTech companies is changing the face of the financial services sector, does this pose any challenge to FBN Holding given the fact FirstBank is a leading retail banking institution that has used its wide network to generate significant income over the years?
At FBN Holdings, what we see are limitless opportunities to collaborate to increase our market and driving efficiency. Our vision is to lead the market in innovation. Consequently, we opened the FBN Digital Lab in 2018 at the heart of Yaba, the epicenter of innovation in Nigeria, in pursuit of this aspiration. That lab today is the melting pot for young entrepreneurs and a center for incubation of novel ideas in the financial services sector.
Our extensive platforms, large customer base, name recognition, and scale of services make the Group a partner of choice for Fintechs who are naturally inclined to partner with institutions with the right network for growth.
Our role is to support the building of a robust and extensive yet efficient ecosystem that will give confidence to the users of financial services in the economy. We have begun to see the benefits given the increasing share of our revenue mix from fee and income from alternative channels.
FBN Holdings has commenced the implementation of a new strategic plan, how will this plan position the group in the coming years?
We currently run a three-year strategic planning cycle and the last cycle ended in 2019. We have commenced a new cycle that runs from 2020 – 2022. The strategic focus for the next three years is to reposition the Group to reclaim its leadership across key metrics and in all the markets we serve. This involves collaboration across the Group to enhance several enablers that are key to our business – risk management, people, processes, and capital.
Technology cuts across all of these key growth drivers and remains a major consideration for the Group. As you are aware, we have made a significant investment in technology, and in the next three years, we will be working to harness the benefits of this investment. Similarly, we will be harnessing the huge amount of data to drive our businesses to stay ahead of the curve. Collaboration and synergy are also key components of our medium to long-term strategy as we take steps to up the ante in our plan to increase the share of customer wallets through product bundling and analytics. M&A is one of those developments that will shape the industry in the short to medium term.
Our approach is to fully optimise investment in our African businesses and then evaluate opportunities to expand our regional footprints. We believe there will be opportunities for big bets and M&A activities and we will be looking to be part of the conversations. We have evolved into a transaction-led Bank against a credit-led institution and we continue to entrench our mantra of ‘putting the customer First’ in how we serve our various markets.
COVID-19 and falling oil prices have shown the need to refocus our economy, what do you think is the best way to ensure economic diversification?
This is a recurring topic in Nigeria and I believe the time has come to move the conversation beyond mere rhetorics and confront the issue to minimise our exposure to oil price shock. Our dependence on crude oil proceeds has continued to exacerbate our vulnerability as an economy and with the growing appeal of green energy projects, the long-term outlook for oil and gas remains bleak and has ominous ramifications for Nigeria.
As a country, we must invest in infrastructure and provide support for other sectors of the economy including agriculture which has significant capacity to help grow the economy in a diversified way. Efforts by the CBN must be complemented by the fiscal side of the aisle through policies and interventions to drive the priority sector and other emerging sectors of the economy such as entertainment and the creative industry. Greater focus must be accorded to the MSME and creating incentives for domestic manufacturers and import substitution given that sourcing of inputs from overseas will no longer be viable due to disruptions in logistics and exchange rate challenge.
Similarly, Nigeria needs to begin to create a framework that supports export markets, to take advantage of the African Continental Free Trade Agreement (AfCFTA), leveraging the energy and resourcefulness of Nigerians and our entrepreneurs.