The National Bureau of Statistics last week reported that Nigeria’s household consumption real GDP growth rate for the 1st and 2nd quarter of 2016 was -1.06 and -6% respectively and -1.3% for the first half of 2016. They also reported that compensation for employees in Nigeria generated a real GDP growth rate of -10.68% and -17.58% respectively and -14.27% in the second half of 2016. These set of data confirms that ordinary Nigerians are neck deep in a recession.
The Bureau arrived at this conclusion using the GDP by Expenditure and Income approach. Unlike the production approach, the income and expenditure approach basically estimated Nigeria’s GDP from the point of view of the income and expenditure of Household, Government, Investments and Net Exports. You still arrive at the same GDP numbers and growth rate as the production approach.
In contrast to household’s still in recession, the data shows that the government avoided recession by returning to growth of 6.2% in the second quarter of 2016 compared to a contraction of -22.6% in the first quarter. This is probably due to the reported implementation of the 2016 budget in the second half of 2016.
According to the Bureau, in the first two quarters of 2016, household consumption fell year on year in real terms, by 1.05% in the first quarter, and by 6.00% in the second. This according to the bureau, reflects the difficulties that consumers have faced in recent quarters, with rising unemployment, and high inflation eroding purchasing power. In 2016, unemployment rose to 12.1% and 13.3% in the first and second quarter of 2016 compared to 7.5% and 8.2% in the first and second quarters of 2015. However, the higher prices resulted in year on year growth in nominal consumption remaining positive. Household Consumption also accounted for 58.11% of real GDP in the first quarter of 2016, and 58.55% in the second.
Employee compensation which measures compensation of formal sector employees has recorded negative year on year growth since the beginning of 2015. Things however got worse in 2016 as employee compensation contracted by -10.68% in the first quarter and –17.58% in the second quarter in 2016. This according to the Bureau were the lowest on record. Job creation in the formal sector was also the lowest recorded in the first quarter of 2016, and was less than a quarter of the average over 2013-2015.
In contrast, the informal sector, which according to the Bureau is made up of business profits and remuneration of those who are self-employed, recorded a GDP growth in real of 3.10% in the first, and 3.77% in the second quarter of 2016. According to the Bureau, the informal sector now makes up 77.24% of domestic income, in the second quarter of 2016, from 72.95% in the same quarter of 2015.
Why are things this bad?
The revelation by the NBS highlights how bad things are for ordinary Nigerians and also puts into perspective the challenges facing consumer goods companies in the country. This of course all started with the drop in the price of crude oil which triggered a massive depreciation of the Naira. With the exchange rate going South, inflation rate ticked Northwards rising to as high as 18.3% as at October 2016. Galloping inflation rate economist opine impact on cost of goods and services as they are also expected to rise in tandem, a common feature with supply push inflation. The immediate effect of this is that Nigerians have continued to see their purchasing power dwindle. Lower purchasing power means you every one naira earned is worth probably around 80 kobo when spent.
With household consumption down by as much as 6%, industries face a drop in sales, massive inventory pile ups and rack up operating expenses. This in turn ensures that companies can’t raise salaries or wages as they struggle to remain solvent by either cutting expenses or freezing growth in operating expenses. Cutting expenses, sadly also includes laying of millions of Nigerians which further reduces household expenditure and disposable income.
What does this mean to me?
This latest report confirms things are still likely to get worse before it gets better. With inflation rate stubbornly high at above 17% in the three months following the second quarter of 2016, we expect household consumption to continue its decline in the third and fourth quarter of the year. Nigeria’s third quarter GDP real growth rate contracted by a wider margin (-2.2%) in the third quarter of 2016 implying that employee compensation will likely contract further perhaps getting closer to -20%.
Companies relying on consumption expenditure to survive are looking at these numbers are probably sensing no economic respite at least in the near term. Jobs will continue to be lost and fewer jobs will be created. Employee compensation (salary and wages) will remain frozen or even reduced just as companies align their expenses with their income.
What is the government doing?
The Nigerian Government is expected to release its economic blueprint sometime in December and many hope to see a plan that could take Nigeria out of a stubborn recession. Evidence shows a flurry of poor monetary polices and non existent fiscal polices that may have at least cushioned the economic hardship Nigerians are facing. Rather what most critics point to are policies that actually negate private sector led economic growth.
Secret behind MTN’s blistering performance
Despite COVID-19 disruptions, MTN Nigeria’s 2020 financials showed marked improvements compared to its 2019-year-end.
MTN Nigeria Communications Plc (MTN Nigeria) released its audited financial results for the financial year ended December 31, 2020.
Despite a challenging 2020 to individuals and businesses caused by COVID-19 disruptions, MTN Nigeria’s financial and non-financial information showed marked improvements compared to its 2019-year-end as well as prior quarters of 2020 results that were impacted by the COVID-19 pandemic.
Indeed, the evolving pandemic which intensified lockdown, remote working, and work-from-home procedures, appeared to have led to increased adoption of MTN Nigeria data and digital services.
Specifically, year-on-year on non-financial information, mobile subscribers increased by 12.2 million to 76.5 million; active data users increased by 7.4 million to 32,6 million while the company’s mobile money business continued to accelerate with a 269.2 % increase in the number of registered agents to over 395,000 and 4.7 million active subscribers from approximately 553,000 in 2019.
Year-on-year on financial information, service revenue increased by 14.7 % to NGN1.3 trillion driven principally by voice (with revenue growth of 5.9 %) and data revenues (rising by 52.2 % led by increased data use and traffic); profit before tax (PBT) grew by 2.6 % to N298.9 billion; profit after tax (PAT) increased by 0.9 % to N205.21 billion; while Earnings per share (EPS) rose by 0.9 % to N10.1 (N9.93, 2019).
Nonetheless, significant increases were noted in its operating expenditure as well as capital expenditure. First, there was a 2.3 % increase in operating expenses arising from the rollout of new sites and the impact of naira currency depreciation affecting the costs of MTN Nigeria lease contracts. Secondly, EBITDA margin declined by 2.5 %age points to 50.9 % (from 53.4 % in 2019) There were also other significant cost rises including a 25.4 % increase in net finance cost, and 19.4 % increase in capital expenditure which had a 11.7 % knock-on increase in depreciation and amortization costs.
On the back of the year-end result, MTN Nigeria has proposed a final dividend per share (DPS) of N5.90 kobo per share to be paid out of distributable income and brings the total dividend for the year to N9.40 kobo per share, representing an increase of 18.7 %. MTN Nigeria paid N4.97 as final dividend for the year ended December 31, 2019. This was in addition to an interim dividend of N2.95, which brought its total 2019 dividend to N7.92 per share.
The proposed dividend implies a yield of 3.4%. Having paid an interim dividend of NGN3.50 in 2020, the proposed dividend, if approved, will bring the total dividend per share to NGN9.40 or c.19% higher compared with 2019. We expect a positive reaction from the market due to the marked improvement in earnings. However, the market’s reaction may be dampened by negative investor sentiments on equities arising from the uptick in yields on fixed-income securities.
We expect that the introduction of additional customer registration requirements requiring subscriber records are updated with respective National Identity Numbers (NIN), and the continued suspension of the sale and activation of new SIM cards will affect subscriber growth.
MTNN share price remains unchanged at the end of trading yesterday at N174 per share.
Tade Fadare PhD, is an economist, and a professionally qualified accountant, banker and stockbroker. He has significant experience working or consulting for financial institutions in Europe, North America, and Africa.
How does a bank make N19 billion a month?
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers.
How does a Financial Services Group make N19b a month, post a Profit After Tax figure of N230b in an environment where global commerce virtually ground to a halt in 2020?
The Zenith Bank Plc (Zenith) Year-end 2020 final results are a blockbuster, not just in the quantitative, but the qualitative as well. In all major headline numbers, Zenith posted growth on a Year-on-Year basis, specifically, Gross Earnings are up 5.2%, Net Interest Income up 12%, Customer deposits up 15.3%.
Somehow Zenith grew her loan book by 18% in a recession and reduced the volume of Non-Performing Loans in the same period. Zenith was also able to post a higher revenue number from non-interest income even as yields on fixed-income fell across Nigeria. I must stress, Zenith has posted these results by servicing her target segment of the high-end corporates in Nigeria.
So how did Zenith achieve this? I want to do a deep dive into how to make profits in a recession. However, it is important to start with a background on how banks make money which is basically in two ways;
- Interest income: which is income generated from the bank gathering deposits from customers and investors and “renting” out these funds to individuals and corporates for a fee called interest. Interest Income is seen as the main business of banks. It is a measure of how well the bank has fine-tuned its people, process, and systems to generate returns from a commodity called cash.
- Non-Interest Income: This is the income the bank generates from deploying its brands and people to juice revenues from activities that do not necessitate a transfer of cash. For Example, a bank asset management business leverages the bank’s skillsets to earn fees by providing investment advice to clients. Does a business want to expand? The bank can advise on the process to make that happen.
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers. This allows the bank generate a spread between cost and revenue. The bank’s interest spread can be magnified by the number of quality loans it creates as Interest Income rests also on the quality of the loan book. Positive spread drives the funding of other banking services and is supported by the banks internal competencies to manage risk
So a bank makes profits by
- Attracting cheap deposits
- Earning positive spread
- Providing value addition for a fee
- Effective Risk Management
All these have to happen simultaneously. A bank that sources expensive deposits by paying higher rates generates a lower spread. Lower spread exposes the bank to cost overruns and will prove fatal to long-term growth.
With this in mind, let’s review Zenith FY 2020 Performance
- Attracting Cheap Deposits: In 2019, Zenith’s total interest expense, which represents how much it paid to get deposits was N148b, that figure dropped in 2020 to N121b. this means the bank was able to grow deposits by 25% but at a lower cost. How? Zenith changed her deposit mix, reducing borrowed funds/leases and time deposits by 41% and 38% respectfully and increasing the share of current accounts by 155%. By swapping the deposit mix, the bank’s cost of funds ratio fell by 18mn%.
- Earning Higher Spread: Zenith grew Net Interest Income by 12.2% in 2020. This figure represents income earned from the deposits and investments of the banking group. Again, this was achieved by asset mix reorganization. In the face of falling rates especially on shorter-dated FGN instruments, Zenith shifted allocation from Treasury bills to longer-dated FGN bonds which paid a higher yield. Zenith’s Non-interest Income also grew to N275b a 5% jump from 2019. This is driven largely by extraordinary items including foreign currency revaluation gain, which is the gain realized from the revaluation of foreign currency-denominated assets. I must highlight this. Zenith was able to post a gain of about N43b which is a 256% gain from FY 2019 based on the Naira being devalued to the US Dollar.
- Providing Value Addition: Value addition will include all non-core banking services Zenith Group provides to the public including subsidiaries like the Zenith Penson Custodians which has N4t in assets under custody. Commission on agency and collection was a big contributor to Zenith’s non-core banking revenue.
- Risk Management: Zenith was efficient in deploying its internal competencies to minimize and avoid risk and impairments from the ordinary and extraordinary course of business. Zenith like other financial institutions saw a pullback in commercial activities from her clients. Take the Commerce subsector, the Non-Performing Loan share in that sector grew from 9% to 24%. Zenith, booked an increase in the number of NPLs by volume to N125m in FY 2020 but the bank was able to keep the NPL ratio down to 4.29%. An extraordinary feat.
Overall, the bank was able to navigate a difficult year and post a good return and a handsome dividend of N3 to investors. Zenith was able to achieve all this while increasing the staff strength by 4.6% to 7555 employees.
However, there are red flags as well:
- Net Interest Margin was down in FY 2020 as yields declined. If yield continues to stay muted, can Zenith keep finding profitable avenues to invest that N5.34 deposit base?
- Interest income positive in FY 2020 at 420b but when compared to 2017, interest income is falling.
- If you ignore the revaluation gain, then Non-Interest income will be considerably muted, possibly negative in FY 2020
- Fees on electronic products fell 36% in an environment where online banking has been not just sound business practice, but life-saving as well.
Overall, in an environment with months of local and international shutdowns, Zenith has posted good numbers and demonstrated it is possible to eke out gains from a hard environment. When one looks at the dividend yield, P.E. Ratio of the bank, for me, this is a Buy.
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