Q: What are the benefits of Nigeria hosting the World Economic Forum for Africa this year?
A: In spite of our various challenges, I think it is important for the country to continue to play a leading role in Africa. As the largest economy in the continent, we have the critical responsibility in lifting the prosperity of the continent. A lot of the investor interest in the country – both portfolio and foreign direct investment – will have a good opportunity at the World Economic Forum to see Nigeria, interact with Nigeria and Nigerians, especially the key decision makers. WEF will also provide us the platform to welcome some of the key players from other parts of the world to the country. We should also use this opportunity to strengthen our relationships and links with decision makers in the global economy.
Q: With over $500 billion in GDP, Nigeria has recently become the largest economy in Africa due to the recalibration of the GDP. How did you receive this?
A: The whole idea of rebasing the GDP is to give us a more accurate account of the size of our economy. This means that before now we were underestimating the size of the economy. We have also been able to determine the make-up of the economy, and we can see that it is a lot more diversified than we knew. Previously agriculture was said to be over 40% of our GDP, it now seems to be less than that; on the other hand, the service sector is now a lot more prominent component of the economy than we previously thought. A more accurate account of the make up of the economy means that we should have a better idea of how best we can allocate resources. As bankers, we can now see clearly where we should choose to lend because the larger a contributor to the GDP a sector is, the more support it should get ideally. I think also that as our economy has become larger, it should also be more integrated into the global economy; and so we should now receive a lot more attention from the global players. And the more integrated we are into the world economy, the more prone we are to volatility. So global shocks will affect us now more than it would when we were perceived to be a smaller economy. As the largest economy in the fastest-growing continent of the world, a lot of foreign investors’ interests are coming towards Nigeria. Every global investor should be asking themselves: Do we have a Nigeria strategy? And as I said, the implication of that should be more integration into the global economy.
Q: In that case, which in your assessment are the most attractive investment sectors in the Nigerian economy today? If, as people are saying, electricity is the next big thing, what are the others?
Certainly power is big investment opportunity for the astute investor. We also have oil and gas which also remain very attractive despite the challenges in that area. The divestment of the oil majors from the marginal fields and onshore fields now offers new opportunities for Nigerian and foreign investors. Our huge population is a good market for areas like building materials like cement, retail services (such as supermarkets and e-commerce) and consumer goods. We are also seeing agriculture gaining momentum with the support it is receiving from government policies. So for me, the top five areas to invest in are: consumer products, agriculture retail services, oil and gas and power.
Q: Where is the banking industry now especially in terms of contribution to the GDP?
A: Banking still remains a very important contributor to the GDP either directly or indirectly through lending to other productive sectors of the economy. Nigerian banks’ credit to GDP ratio is improving at a rapid pace with loans growing faster than GDP. Our banking sector is also more and more inclusive. The micro finance banks are gradually getting their act together and extending credit to more and more people. The commercial banks are also lending to the SMEs. As a bank, FCMB is very active in retail lending – we give out like 250,000 personal loans every year. Of course, the corporate players – telecoms, oil and gas, manufacturing, etc - are constantly getting the lion’s share of credit. So the contributions of the banking sector to the GDP are largely through its lending activities. The banks are also helping to make payment systems much more efficient as we move into the cashless economy. In the investment banking side, the broader financial service industry also has been active in helping to bring capital to support investment – whether it is mobilizing pension funds into long term debt, raising equity, etc. This long-term capital-raising is beginning to come back strongly. Last year, for example, Oando raised a significant amount of money through rights issue to fund the acquisition of Conoco Philips. We were involved as the lead issuing house. This year, again, Seplat in the same sector is listed on the London Stock Exchange after raising about $500m. Again we were involved as one of the lead brokers. So the banking industry oils the wheels of the economy from large corporates to households and so it will continue to be a key contributor to the GDP.
Q: Now that you’ve mentioned a few of your big ticket transactions, tell us about the success and challenges of FCMB in the last 31 years of its existence
A: We started from a very humble beginning as a merchant bank. Our key strength over the decades has been our resilience. The industry has witnessed a lot of turbulence but we have continued to weather the storm. With our dynamism, we have been able to evolve from a merchant bank to universal bank, then a commercial bank, and in recent times we have become very active in the retail banking. One of the things we take very seriously is that not only do we want to be pioneers; we also want to evolve with the economy. We are quick to make the best of the opportunities in the market. We’ve been able to display that and that’s part of our resilience in the economy. If we were very rigid and stuck in our ways, we would probably not be around today. In terms of growth, clearly in the 20 years or so that we have operated as a merchant bank, we remained the most profitable investment bank until when we converted to a universal bank in 2001. I believe that, in the long run, although it would be much harder, we can replicate that in commercial banking by being the most profitable commercial bank in Nigeria. We’ve risen steadily to occupy the 8th position today.
Q: What of ROE (return on equity)?
A: In terms of ROE, we are not where we would like to be. The bank’s ROE is about 14.9%. The Group is may be 1% lower than that, but we are inching steadily and next year we should cross 20% which is a critical threshold for an institution like ours. In terms of absolute profit, we are moving steadily up. In 2001 when we became a universal bank, our PBT then was may be less than $10 million (about N1 billion) at that time. Today, we are at above N18 billion, and with our Q1 results out, we are on course to significantly surpass that this financial year. So that is a very significant increase over the years. We are quite happy with the steady growth we have recorded over the years, but clearly there is a lot of work to be done.
Q: Is a lot of this growth from capital market businesses?
A: No. Not all. If you look at the composition of the income of the bank today, about 35% of our profit comes from retail business. Another 60% comes from commercial banking business (corporate, public sector and SME) and about 5% from investment banking.
Q: You should owe a lot of your successes to your heritage
Certainly yes. The foundation that we have is a very solid one. The continuing guidance that we get from the founders of the business is very invaluable. We are still privileged to have one of our early Deputy Managing Directors of the bank, who later became Managing Director, as our chairman today. He is Dr. Jonathan Long. And of course our founder, Otunba Balogun, continues to advise and guide us. So the solid foundation we have had and the continuity of leadership we have enjoyed have helped to add value for our various stakeholders.
Q: The industry also has evolved. Ten years ago, one of the critical challenges in the industry was dearth of expertise in certain areas of the business. What are the challenges now?
A: I think the operating environment continues to be challenging, the cost of operating the business is quite high. We are trying to manage that with technology and of course the cashless initiative is beginning to gain momentum. We are still seeing a concentration in lending going to the high-end corporates. I think we should do a lot more in two critical sectors – the SMEs and the mortgages. Right now, our mortgages are stunted by high interest rates. With the promotion of the mortgage refinancing company, I think we will see that sector gradually picking up. So if the mortgages pick up, I believe that the concentration in the corporate would be diluted. In matured economies where mortgages are well developed, the sector account for between 20%-30% of total lending. But here in Nigeria, it is less than 5%. SMEs should account for about 25% of total lending. But I’m not sure we have that in country now. Retail lending should also be a priority lending area. We are one of the few banks that support this critical sector very well. Our retail portfolio accounts for over 20% of our total loan book. By retail here I mean individual customers who borrow for personal and household consumption, and not the SMEs. Most banks do anywhere between five to 15%. We will continue to grow our retail portfolio until we get up to about a third of our total entire book.
Q: What’s the attraction in the retail end of the market? Certainly, the risk is not low.
A: The risk is high, but we have over the years we have learnt how to manage the risk well. So for us the attraction is not low risk, but our desire to be an inclusive lender. We do not want to lend to just a few people. We want to support as many people as we can. In an annual basis, we support as many as a quarter of a million people, and usually 80% of those people are first time borrowers. So in every four or five years, we will be supporting a million Nigerians in terms of financial support. It gives me a lot of joy to realize that we are helping households across the nation to meet very critical needs.
Q: But what’s the performance of the credits to that segment? What proportion is NPL (non-performing loan)?
A: The NPL in that segment is around 3%. This is quite low compared to other segments of the market.
Q: Our economy is beset with huge unemployment problems. What should government and businesses do to create jobs?
A: We need a concerted effort where everybody has a role to play. The financial services industry must become a lot more inclusive. We have to ensure that our services get to more and more people, smaller and smaller customers because the jobs we need in the country would not be created by big industry. It is the micro- and small enterprises that would cumulatively create the jobs we need to make a dent on the huge unemployment in the country. If we can get credit down to that segment of the economy, they themselves would become employers. Second, we should also target certain sectors that we know are labour intensive. Agriculture, for example, is such an important area that if we support it and grow it well, we can spawn a lot of jobs there from. We are involved, working with various partners, on a scheme that will create three million new jobs in the agricultural sector. We are focusing on farming and not just the value chain in that area. So in the next 15 years, we will help create 3 million jobs. We have a blue print on this and our role will be essentially financial support. What’s more? This initiative is in northern Nigeria where people generally believe is not a place for job creation. As a country we must drive up export to create jobs for two reasons. One, export on itself creates jobs, two, if our export becomes bigger, our balance of payment improves and when this improves, our exchange rate stabilises and when our exchange rate stabilizes, interest rate will comes down. One of the reasons interest rate is high right now, is because we try to defend the naira. If we are to use tight monetary policy for a very long time, it will continue to stifle the economy because people’s ability to invest is constrained when the prevailing interest rate is very high. So the more we have export promotion or import substitution, the better the exchange rate becomes and the better the balance of payment becomes. This can then bring down interest rate which can stimulate investments and create more jobs. As a bank we are supporting export business and local manufacture of goods that would substitute imported ones. This to us will benefit the entire economy and enhance the sustainability of our own business thereby it is actually at the heart of our business strategy.
Q: Is FCMB also supporting the power sector?
A: Yes we are. We have supported four of the privatisation transactions and we are also actively supporting three other power projects – both in the generation and distribution - outside of the privatisation.
Q: We will soon have a new CBN governor. Where do you think the new governor should focus on?
A: I think the central bank has limited tools with which it influences events in the economy. So ever so often, they use these tools to the fullest. In that regards, we cannot expect the central bank alone to stimulate growth in the economy. That has to be done in concert with other government institutions. The core function of the central bank is to maintain price stability which is essentially inflation and exchange rate. I think we will continue to see tight monetary policy. I will also like the CBN to continue to support the critical sectors of the economy. What Mr Sanusi did for the power sector, agriculture, aviation and other intervention initiatives were absolutely critical. He got a number of entrepreneurs to take those sectors seriously because of improved funding that were injected there from the intervention funds. A company like Notore, for example, would not be where it is today if it had not been for the long-term funding from bank of Industry which came of course through the support of the CBN. I therefore think that the critical and priority sectors of the economy should continue to receive the support of the banking industry and the CBN.
Q: Do we expect another wave of reforms and consolidation in the industry? We have had two major consolidations in the last 10 years.
A: I think we must always expect change. And we should always expect that change could be dramatic sometimes. Certainly in the banking industry, and indeed in the economy as a whole, I have come to acknowledge that we don’t do things in small measure. I therefore think that the industry will continue to consolidate. There is actually a natural consolidation going on now with a large chunk of the market share of the industry in the hands of few players. Thus, those outside the few should continue to look for niches where they can continue to operate and deliver value to customers and shareholders. So to that extent there’s a natural consolidation going on, maybe quite imperceptibly to some people. But if you’re asking if there’s a need for official policy to push this, I think I do not see a need for that because we do not have any issue with the health of the institutions. The industry is very healthy at the moment. If you look at the shock absorbers that have been built into the banking industry today, we actually have a very well fortified industry in terms of liquidity ratio at 30%, outside this, banks have another 25% of their deposits in cash reserves. So 55% of all industry deposits are either in liquid assets or cash reserves. This means that it would take an almighty run on the industry for us to go down. Also capital adequacy ratio has been raised for the international banks, of which FCMB is one, to 15%. Internationally this is between 8 to 10%. So the Nigerian banks operate currently with 70% to 80% additional capital over and above what you will find in most institutions globally. The cushion we have in terms of capital is also very healthy and a number of governance issues have also been addressed. So I think the industry is a very healthy place today, and so consolidation by fiat and regulation does not seem necessary by my reckoning.