Aja: Expect more mergers and acquisitions among banks

Chartered investment and financial analyst, Mr. Idika Aja, is a regular contributor to several publications. In this chat with Tony Chukwunyem, he speaks on banks’ full year 2019 results, the coronavirus impact and other topical issues


Despite the tough economy, full year 2019 results of banks show that they continue to be profitable. What is their strength and can the trend be sustained?


The Nigerian economy performed better in 2019 compared to the 2018, especially in the final quarter of last year.  In the first half of 2019, GDP growth rate levelled at two per cent against 1.8 per cent in 2018. Even in 2018, the Nigerian banking sector was adjudged the second largest fastest growing banking industry in the world. Its Return On Equity (ROE) more than doubles the six per cent achieved by banks in developed markets.  Revenue of the top five lending banks; UBA, GTB, Access Bank, FBN Holdings and Zenith Bank for full year 2018 stood at N1.920 trillion while their profits after tax improved to N640.2 billion and this continued in 2019.


So far, we have seen commercial bank-favoured CBN policies, which have led to the high growth in most banks’ net interest income, fees and commission. For instance, Access bank’s net interest income after impairment nine-month 2019 stood at N166.36 billion compared to N83.7 billion in 2018, which is about 99 per cent.  Also Sterling Bank recorded a growth of 19.3 per cent.  This was driven by growth in the banks’ retail and consumer loans, greatly buoyed by CBN’s policies such as the increase of banks’ Loan to Deposit Ratio (LDR) to 60 per cent and 65 per cent; restriction of banks and other financial institutions from selling treasury bills to individuals and small firms with effect from November 29th 2019 – this somehow reduced investment outlets and thus led to increase in demand for fixed deposits accounts pushing down the interest rates the banks offered.  The banks then turned around and invested the cumulative fixed deposit balances into the same treasury bills, thereby making gains from the spread.  Also growth was buoyed from big volume foreign exchange with big companies and growth in banks’ e-businesses due to CBN’s innovative policies, especially with regards to financial inclusion, which contributed more to non-interest income. On a sour note, the growth in profit was driven by excessive charges and high margins on interest bearing products. Baring the cyclical nature of an economy, Nigeria in particular and the world in general, the trend can be sustained if the banks enlarge and extend its risk asset portfolio to small and retail markets, rather than concentrating on large and high ticket transactions.


After Access and Diamond Bank merger last year, are we likely to see more M&A in the industry soon?



Yes.  When the Access and Diamond banks’ merger negotiation started, which was announced sometimes in 2018 and scheduled to end on March 2019, stakeholders believed it was likely to trigger more mergers and acquisitions.  The M & A went seamlessly and was adjudged successful and a good development. No wonder, other banks are trying to follow suit. Now, it is being speculated that FBN Holdings is holding merger and acquisition talks in order to acquire Heritage Bank and Polaris Bank.


Nigeria’s economy was already struggling with slow growth before the outbreak of the coronavirus. Do you agree with suggestions in some quarters that the economy is now headed for recession?



First, what is recession?  Recession or economic contraction refers to a situation where there is decline in aggregate output for two consecutive quarters.  Coronavirus is a very big threat to the global economy and financial market.  Definitely, Nigeria being part of the global market and operating an open economy, cannot be isolated.



The Chinese manufacturing sector has been hard hit by the outbreak, with a lockdown, which has plunged their stock prices and bond yields. Factory activity contracted in February 2020. Bond prices are rising resulting in low yield in most economies.  Even US treasury bills considered as safe haven in periods of high volatility contracted and fell below one per cent in the past week. Service sector contracted and has weakened.  Country’s projections and growth are being downgraded.  China has downgraded their growth rate to 4.9 per cent from earlier forecast of 5.7 per cent.  The global economy that was projected to grow at 2.7 per cent has been downgraded to 2.4 per cent. 


Due to reduction in global activity and China being the world’s largest importer of crude oil, demand for oil has dropped,   taking oil prices to multi-year low.  If oil prices continue to fall without OPEC intervention in the form of production cut, tightening supply, definitely Nigeria will be impacted.


So the issue is not whether we are heading for recession or that we will be affected.  What we should be concerned about is how to re-tool, re-plan, re-forecast in order to remain buoyant in the midst of all these.   However, it is too early to conclude that the country is headed for recession.


How would you assess the mix of measures that the CBN has used to encourage lending to the private sector while at the same time trying to attract foreign portfolio investors?



CBN measures have been frequent, spontaneous and have posed great risk to banks’ credit profile.  In fact, CBN regulatory risks for Nigerian bank have been adjudged among the highest in Europe, the Middle East and Africa (EMEA).  After increasing the LDR of banks to 60 per cent and later to 65 per cent, which was aimed at forcing banks to lend to the real sector, in 2020, the apex bank came out again and increased the CRR to 27.5 per cent from 22.5 per cent.


The increase in LDR was to change the trend of commercial banks not extending credits to businesses especially those operating in the real sector. Defaulting banks were to pay a levy of additional cash reserve requirement equal to five per cent of the lending shortfall of the target LDR.  Despite that, some of the top banks failed to meet up, and 12 of them were debited to the tune N499 billion, but later pardoned.



Notwithstanding,  the CBN claimed that industry gross credit increased by N829.40 billion or 5.3 per cent from N15,567.66 billion at the end of May 2019 to N16,387.00 billion as at September 26, 2019.   But was this credit channelled to the real sector? It was reported that some of the banks gave out these loans to their customers to buy treasury bills instead of extending the facility to players in the real sector.  Do the banks really have genuine and qualified SMEs to take such facilities?  Some of these SMEs in most cases lack, or do not have the right and adequate structure to take these loans, so banks would prefer to keep their money with CBN rather than lending to riskier ventures that do not meet their lending criteria.


As a result of CBN’s measures, fixed income yields have dropped significantly in recent times. Is the development good for the economy?


At the head of fixed income assets is bond. Bond yield and price are influenced by interest rates, inflation, market dynamism, sentiments, expectation, etc, and monetary policy is at the root of determining interest rates.  Interest rates, in turn, define the risk free rate of return and the risk free rate has a large impact on the demand for all types of financial securities including bonds.  As bond prices increases, yield drops.  Bond prices fluctuate with changing market sentiments, supply and demand as with any free-market economy. Bond yield is affected by interest rates, inflation, the yield curve and economic growth.  Falling interest rates cause bond yields to fall, thereby increasing bond prices.


Whether the decline in bond yields is good for the economy, depends on the side you are looking at it from. Low bond yield is expected and believed to be a boost for the stock market. With low bond yield investors are expected to move to the stock market.   On the other hand, when bond yield is high, the stock market may not have any chance of success, because the market would be competing with bond high yield.  However, with high bond yield, foreign investors may be attracted to bring in hard currency, which stabilises the local currency, thus appreciation of the local currency. Apart from that, low bond yield means that issuers’ cost of fund will be very low.  Hence government will borrow at a very low rate, which invariably will reduce their debt burden.


What measures should the authorities introduce to effectively address the slide in the stock market?


The stock market all over the world fluctuates and is cyclical.  That is the reason it offers higher return than fixed income securities. However, there are certain causes that are peculiar to our market only and need to be addressed. Stakeholders should re-create that trust and restore investors’ confidence in the sector.  This can be done by creating more awareness, innovating, being creative and striving to train and retain talents.I nnovative Fintech should be used to drive retail activities and disrupt the system.  Investors should be able to, through Fintech, trade on stocks on their own. Other variant products should be created and introduced.  Products such as derivatives, crowd funding, crypto currency should be used as tonic or appetizer to help deepen the market. Already derivative trading has started and it will help deepen the market.


Some of the policies should be re-tooled. For instance the minimum free float of 20% is not encouraging.  It limits and shrinks the market.  The demualisation of the exchange is a right step in the right direction.


How do you assess the palliative measures recently announced by the CBN to deal with the impact of the coronavirus outbreak?


As I have pointed out, all the authorities need to do is to retool and refocus.  The CBN has announced that they are going to be allowing a one year moratorium on all the intervention funds especially for SMEs. Apart from that, they have also cut their interest rates from nine per cent to  five per cent for  one year, starting from March 1. The aim is that they are trying to curtail the impact of the coronavirus. That is ok. But the problem is whether the Deposit Money Banks (DMBs) would be able to implement it (you know that the intervention funds go through the banks) in real terms. It is one thing for the CBN to churn out policies; it is another for the banks to implement. We are already getting reports that some of the banks have started reforecasting(revising),  reducing their loan growth ratios  for 2020 lower than what they got in 2019. So the issue is why are the banks doing this? Does it mean that they were not actually lending to the real sector? I suspect that they are taking this action because they were giving the bulk of their loans to the oil and gas sector(big ticket transactions). Due to the drop in oil prices, most of them are reducing their forecasts. There is no way we can really move forward if we don’t give loans to the manufacturing sector. I believe the CBN should actually look at the components of the loans that the banks are giving out very well to know the percentage that is going to the real sector, which is the purpose for introducing the LDR policy. Without developing the real sector, I don’t think we would be able to make it economically as a nation.



What is your stance on the debate over Nigeria’s rising debt profile?


As at the 3rd quarter of 2019, the country’s debt profile had risen to N26.2 trillion from N12.6 trillion in 2015. In December 2019, debt to GDP stood at 28 per cent.  The planned (now suspended) $22.7 billion borrowing would bring the total debt stock to $108 billion, which is adjudged low, but our income to GDP still remains low, which to me is more important. According to data.worldbank.org, in 2018, our GDP per capita (income per person) was $2,028.2.  It moved upward to $2,22.01 in 2019 and projected to be $2,400.45 in 2020, while a country such as Gabon had $7,952.5 in 2018.  Germany’s GDP per capita in same period (2018) was $47,603.



People are worried because they feel the country may not be able to repay these loans.  For instance, the debt service provision in the 2019 budget was whopping N2 trillion whereas the total capital budget was N2.9 trillion, which means that the debt service commitment was 70 per cent of capital budget allocation.  Debt to revenue ratio was about 30 per cent, which is also on the high side.



To me, there is nothing wrong with borrowing provided it is within acceptable standard; the economy is growing and you can pay back.  What is paramount and important is the use of the fund borrowed.  If it is channelled into productive sectors, self-amortizing projects and prudently used in such a way that will help achieve significant impact on the economy, then it is good, otherwise it will expose the economy to financial vulnerabilities.

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