Agbaje: Why I am Excited about Our Upcoming HoldCo Structure

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The Group Managing Director, Guaranty Trust Bank Plc, Mr. Segun Agbaje, in a recent investor conference call on the bank’s half year 2020 financial performance fielded questions from analysts and investment bankers, where he spoke extensively on the plan by the financial institution to adopt a holding company structure by the first quarter of 2021. Obinna Chima provides the excerpts:

What is the update on the bank’s plan to adopt a Holding Company (HoldCo) structure and what should the market be expecting on that; also I noticed that you maintained your guidance, what is your view on your net-interest margin and your asset quality?

The arrangement for HoldCo is going very well. As you know, it is a financial holding company which means you need regulatory approvals. That means you need the Central Bank of Nigeria (SEC), the Securities and Exchange Commission (SEC) and other places that we currently do business. In terms of the work we are doing on it, the operational model for the HoldCo is set. You will have the centre, which is the controlling or holding company and you have a couple of business units.

Operationally, what you would see is that in terms of HoldCo, we are going to do a one for one exchange, which means that the shares of GTBank would move up to the HoldCo. In terms of the bank, operationally we are going to split it into three: You will have Guaranty Trust Bank Nigeria; Guaranty Trust Bank East Africa, almost operating as a region and you will have Guaranty Trust Bank West Africa operating as a region. We would then have other business units. The business unit we are looking at commencing with would be Asset Management, a Pension Fund Administrator (PFA) and a payment company. Hopefully this week, we would put in our application for final approval for the payment company. For the asset management and the PFA, we are going through a due diligence on an entity as we speak and if we close, they would be together.

I believe that we would be ready to go live with the HoldCo, hopefully by the first quarter of next year. Things are going well; we have all the advisers working and we are working on the operating model and we hope to go live first quarter 2021. In terms of guidance, we never change our guidance as we go through the year. As you would see, some of them, we have actually exceeded as at half year, but we are not going to change them. In terms of loan growth, we are eight per cent as at half year and our guidance is 13 per cent.

If you look at our net interest margin (NIM), half year it was 9.7 per cent. We gave out a guidance of eight per cent, which means we built in a possible drop in a third quarter. If you look at what is happening to interest rate and what is happening to your fixed income yield portfolio, you will see that half year we went down from about 15.6 per cent to 13.4 per cent. As our bill mature, we think we would face some NIM pressure in the fourth quarter, not necessarily in the third quarter. So, we might see some pressure, but we don’t think we would go below the eight per cent which we have as the guidance.

In terms of assets quality, our non-performing loans (NPLs) is about 6.8 per cent. We have restructured about 20 per cent of our loan book and five per cent of that was for public sector loans which we all had to do as a banking industry. So, we restructured our entire public sector loans, which was five per cent. The others that we restructured was about 15 per cent. We are very comfortable with the restructuring we have done.

The kind of restructuring we did were in accordance with what the Central Bank of Nigeria advised, which means we didn’t give anybody more than a moratorium of one-year. So, you would find out that most of our repayments would be due in April. So, when you look at our loan book, my believe is that what you are going to see on people’s loan books is that the decisions people made in the last three to five years is what you would see in their loan books. If you had a lot of off-shore trade loans, I think you have to strengthen because as those things mature, you would see some stress. I think we have been very conservative in terms of trade book. Our oil and gas book is okay and I am always willing to shed more light if people want to know. So, we haven’t done a restructuring outside of what the CBN wants and we are comfortable with the quality of our loan book.

If we take out the revaluation gains, non-interest income would have been very soft. What are you thinking about this going forward? Secondly, what is your dividend outlook and are you looking at shedding some expensive deposits before the end of the year?

In terms of non-interest income, of course we are down by two per cent. If you look at the banking sector, a lot of the non-interest income that we make money from is activity-based. So, in terms of fees we are down about 48 per cent because we really didn’t book a lot of loans; in terms of e-business income, we were down 32 per cent; in terms of corporate finance fees, we were down by about 68 per cent. So, it is all activity-based and I don’t think it is unique to us. But from what we have seen in the third quarter is pick up in activities. You will also see that account maintenance actually went down. So, account maintenance which is an indication of the amount of velocity going through your system was up; we would see if we can make up some of the others. Even in terms of e-business income, volumes are up – USSD is up by 34 per cent; mobile banking is up for about 58 per cent. So, what we are battling to do is just to make sure that the increase in volume more than outweighs, where really, for transfers under N5, 000, you are only allowed to charge N10, which is about 50 per cent of your USSD fee. Yes, we would try to close up the other lines as activities have picked up in the second half of the year.

In terms of dividend policy, there would be no change. We have paid 30 kobo, which is what we do at half year and by the time we get to the end of the year, we hope to pay our full year dividend. As I mentioned earlier, in terms of guidance, we don’t change its mid-way, not even when we are up or when we are down. We continue to drive the business. Just because we are above the guidance on deposits, we are not going to come back and change. We have a policy of trying not to change, because that is the easiest thing to do. So, we try to deliver what we promised.

Your restricted deposit with the CBN doubled, can you tell us what your effective CRR is at this time and can you give us an indication of the devaluation impact on your loan book in percentage terms?

As you know, the cash reserve requirement (CRR) is not up to us. Our CRR rate to deposit as at half year was 47 per cent and that was N99 billion.

What is the magnitude of interest rate reduction you granted to those you gave forbearance?

Essentially what we did was that when we give you a forbearance, we were not necessarily looking at an interest rate reduction, we were looking at the moratorium on the interest and the principal. So, we didn’t deliberately go out to reduce interest rate. We think where our interest rates were even before the pandemic was pretty low, so we didn’t feel the need to bring it down.

How did your customer cash flow fare in the second quarter and are you not seeing any signs of improvement and if so, which areas do you think are recovering faster and what is the risk that we see when some of these loans that had been restructured are due?

In terms of cash flow, what we have started to see which is very helpful was that in the second quarter, especially during the lockdown, lots of the retail loans, customers stopped paying because a lot of companies cut salaries by as much as 80 per cent. So, we have started to see the cash flow obviously improve for retail loans. Also, in the second quarter, for oil and gas, as you heard, people sold crude oil for as low as $9. So, I would say the three areas where cash flow has looked good is telecoms, general retail, SMEs are coming back as a lot of them, such as the restaurants have started to open, the fashion houses and hairdressers are all gradually coming back to business. Also, oil and gas is coming back up. I won’t say we have seen any significant increase in cash flows as far as manufacturing sector. If I am to pick the sectors, I would say oil and gas, telecoms and retail. Let me also spend some time on the stage two loans. Our total amount of stage two loan is actually N283 billion and four customers account for 91 per cent of the loan.

They are Aiteo, Wemco, Kunoch and Stallion. For Stallion, we have actually resolved that through a court settlement. But, even before we did that, they had for seven months met their loan restructuring agreement. So, for anything, Stallion is going to stage one and not to stage three, which is about N14 billion. Then you have Wemco, which is a syndication. It seems to be working and it is about N60 billion. That restructuring continues to work and we are looking at selling some assets which would de-leverage the loans. There are about two assets we are looking to sell: one is a hotel and the other is an office block in Hong Kong. If you sell that, you actually de-leverage the loan. So, I don’t expect Wemco to move towards stage three. If anything, we would be staying at stage three. Kunoch is stage two and I don’t expect it to move to stage three because right now apart from its other cash flows, you have the dividends from MTN and Access Bank to continue to service that loan and you have the core securities. For Aiteo, we are working on doing a restructuring which I hope we would finish. Once we finish the restructuring, I don’t expect it to move to stage three; I expect it to stay at stage two, but maybe 180 days to one year. So, when I look at the fact that 91 per cent of it is four loans and one has actually moved already to stage one, then I don’t expect to see further deterioration from stage two to stage three.

For the Holdco, what is the plan for leadership for the Nigerian business?

I am really excited about our plan for holdco. I think everything that happened in the pandemic has proven that are on are the right path. I think you would see that we are gearing up the business for another high growth phase. Not only are we taking the banking business and operationally splitting it into three, where we can look at Nigeria differently from East Africa and from West Africa. We think that if you look at what we are doing in the payment business, where we are number one in NIBSS Instant Payment (NIP), where we are number one in both inflows and outflows, which means we control over 18 per cent of outflows and almost 17 per cent of inflows, when we commence the payment company, we think the business is going to do well. With PFAs, we think we are strategic about that, especially right now that people are going to be able to move their pension accounts around. We think we can always gain market share from that. We also have the asset management business, which would basically complement our personal banking business for people who are looking for high yield. We would obviously focus on Nigeria, but none of these businesses would fully focus on Nigeria. For the payment company, we are going to be Africa-focused. So, the way I feel is like where we were at 2011, when we decided the retail and SMEs would be the base for us. I think we are well positioned to handle the next couple of years and this will put us in a position where we would diversify our earning base significantly and de-emphasise the reliance on the interest from the bank in Nigeria.

So, in terms of succession, what we are looking for now is a Managing Director for Guaranty Trust Bank Nigeria. The process has started and I have always told people that we have five Executive Directors and so all of them are going through a process at the moment. We are working with a consulting firm in the United Kingdom. We are looking at what we think the future would hold and what we think the Nigerian banking industry would look like. At the end of the process which would end at the beginning of the fourth quarter, we would have a Managing Director for GTBank Nigeria. So, we are on track. So, succession to GTBank Nigeria is well under control.

In terms of your fee and commission income, are you seeing any form of recovery back to the first quarter level and for the retail book, the NPLs have increased quite significantly, can you speak more about that?

In terms of non-interest revenue, we have started to see some pick-ups in volumes. Our volumes are going back to almost like the first quarter. So, live is becoming a bit more normal. Obviously, we are being a bit more careful about how we are growing our loan books.

Retail NPLs went up to about 12 per cent. But it has started to correct for two reasons.

Just like I said, salaries are being paid. I also believe that the fact that the global standing instruction (GSI) policy has been switched on, it has also made people a little bit more careful about diverting salaries or cash flows, when they know they have loans somewhere else. We have actually have some monies sent to us through the GSI for people who had moved their salaries to other banks. So, I think between the fact that live is coming back to normal again, people being paid salaries again and businesses are opening up and the GSI, the quality of the retail loans would keep getting much better.

Why is GTBank’s fee income lower than that of its peers and what steps are you taking to narrow the gap and in terms of your assets quality, you talked about the oil sector earlier, can you speak more about your midstream book?

I try not to compare myself to my peers. In terms of fee income, we are driving our volume. Like I said earlier, in terms of retail, we are pushing volume to be number one. Our corporate business is about 70 – 75 per cent of our business. Maybe that is why we can’t charge a lot of credit-related fees. That is because your corporates don’t really pay credit fees. They pay no account maintenance charges. So, maybe the reason is the mix of our business. In terms of our businesses, you will see that 75 per cent of the loan book is high-end. And that is where they pay the least fees and that is the only reason I can think of. But in terms of retail, I don’t think anybody would be doing better than us. We really don’t have a middle market business. So, when you look at the middle market business where you can charge a lot of fees, we are not big there. So have to look at the structure of business that we and our high-end business is not where you charge a lot of fees. In terms of oil and gas, our midstream is now 15.5 per cent of loan book. It is a pretty safe loan book quite honestly. In there we have a company that does pipeline and the payments are obviously tied to upstream evacuation. We don’t have a lot of vessel financing there, which is the part that is a bit tricky today, where a lot of upstream companies have actually de-commissioned vessels. So, we don’t have a lot of vessel financing. What we have is logistics based and pipeline, which are not really affected. The place I would be worried is if most our midstream loans were for vessel financing, which really isn’t. So, it is pretty okay.