Nairametrics| It was 11pm, 9 hours before my flight to London, and 6 hours before I dragged myself away from the bed to get ready to go to the airport. I got back home less than an hour before as I tidied up in the office for my two-week absence. And then it hit me. I have not booked a hotel room for my stay in London.
I don’t know anyone I could stay with in London. It is an expensive city, and no one goes about staying in houses with extra rooms. It will even be rude to call them up late in the middle of the night that I was coming to bunk with them the following day. Not in this time and age where everyone stayed on their lanes.
Not a problem. I hooked up my laptop and went to Expedia.com, where I normally booked hotel rooms whenever I wanted to travel outside the country. I got a hotel room, which was just 7 minutes drive and 20 minutes walk from my school, and it was time to pay. I used my normal Diamond Bank credit card to pay, and bam! Error in payment! Okay. This is Nigeria where people go around with more than one phone and at least two debit/credit cards. I tried GTB, same thing. I was sweating already. I tried Standard Chartered Bank. Same thing.
It was already 11.30pm.
No! This cannot happen to me. Which account officer will I call in the middle of the night? I called GT Connect, and they told me the amount I wanted to pay was above my daily limit. I called Diamond bank, and they said they were not doing US dollars transaction. See the problem CBN has put me into now! I asked my wife to lend me some money. She uses Access Bank. Same thing. I was stuck.
This is the problem the average Nigerian passes through whenever they want to do international transactions. Does that mean I have to look for mallam early in the morning when I am rushing to the airport and buy dollars at 6am? I had just enough foreign currency in cash to tide me over for two weeks in London, but not enough to book a hotel room for five days.
As I stared at the payment portal, I noticed the Bitcoin sign. I can pay with Bitcoin. Okay, I have another option. I brought out my phone, and fired up Whatsapp. I buzzed Peter, a close friend who knew everything about Bitcoin. It was already some minutes past midnight.
Peter walked me through the process of using the Bitcoin Blockchain wallet on iPhone. He transferred $1.00 to me and then hooked me up with someone who traded Bitcoin. I buzzed the person, also on Whatsapp. Within a few minutes we sealed the deal for the exact amount of money I needed to pay the hotel room. In Bitcoin. I transferred Naira to him and he transferred bitcoins to me and I paid Expedia and sealed the hotel room.
It took less than 30 minutes between the time I buzzed Peter and the time I paid for the hotel. By 12.45am, I was in bed. The CBN and Nigerian banks had locked down foreign currency transactions because of poor availability of dollars, but Bitcoin came to the rescue.
This is the difference between a tightly regulated market and the one that is allowed to function according the laws of supply and demand. Over-regulation, as seen with currencies even down to the US dollar, always leads to unintended consequences. The more regulated a currency is, the more volatile it becomes. The more CBN clamps down on international transactions, the more volatile the Naira becomes.
Let me put this bitcoin thing in perspective. The Nigerian foreign reserve is around $25 billion. As at the time of writing this, the total bitcoin available in the world was just about $9.6 billion. That means Nigeria can just vex one day and buy up all available bitcoin. Theoretically. Meanwhile, bitcoin is available whenever and wherever you need it in the world, but dollar is not easily available in Nigeria for international trades and transactions.
Bitcoin is not regulated. It is a currency developed by some tech-savvy people. I was initially under the notion that I needed to understand what Bitcoin was all about before I started using it. But after my first experience of conducting a transaction with Bitcoin, I understood that I actually didn’t have to understand where US dollars were printed or how they were shipped to Nigeria before purchasing and spending it. The same thing applies to Bitcoin. I have no idea how it is created, other than it is mined by people who have heavy data processors and that the higher the price, the more profitable it is to mine and the lower the price the less profitable it is to mine.
All you need to use bitcoin is to download a bitcoin wallet on your phone or computer and then buy from people or from bitcoin exchanges. Bitcoin exchanges are places where people buy and sell bitcoin in exchange for fiat currencies. An example is www.bitstamp.com.
I am not going to go into the intricacies of bitcoin as an asset class, but only as a mode of transaction. There is no economic theory or pricing methodology to determine the true value of bitcoin. In simple terms, this means bitcoin is an extremely volatile asset whose value is dependent on the whims and caprices of the people who buy and sell the currency. There is nothing stopping the currency from gaining 500% overnight or losing its entire value in less than 5 minutes.
That was why the value dropped from about $670, at the time I booked the hotel room in London, to around $540 a few days later (bitcoins are currently worth over $1k). This drop was as a result of a hack that was carried out on Bitfinex, one of the most popular bitcoin exchanges. Some coins were stolen and a lot of people lost a lot of money. This is one of the downsides of the currency. The best way to secure your coins, if you ever chose to venture into holding it, is to keep them away from exchanges. Store them on your phone, computer or devices, such as Trezor, that are designed to hold cryptocurrencies.
Bitcoin has recovered some its value and is currently selling at around $600. Yours truly bought some between $540 and $580. And I have no intention of selling them. It is my personal opinion that Naira is going to remain more volatile than bitcoin for a long while, and I have every intention of minimizing my exposure to the Naira to the barest minimum. I may be wrong, and I am sincerely hopeful that I am wrong. In any case, as at the time of writing this, anyone who bought bitcoin right after the hack would be up by 10% against the US dollar and up by 26% against the Nigerian Naira.
To avoid the volatile nature of holding bitcoin, you can use it as a mode of transaction. You can buy the currency and then use it to purchase goods and services like I did. If you like, you can also set up your business to receive payment in bitcoins and then sell them for fiat money as soon as possible. That way, you can minimize your exposure to its volatile nature.
In a new world where negative interest rates are the norm, and central bankers are doing unprecedented things in the search for economic growth, fiat currencies are going to be increasingly volatile. As the primordial instincts for self-protection kicks in and nations manipulate their currencies, cryptocurrencies are going to rise, led by the bitcoin, and we will be here as bitcoin take the center-stage in the much touted internet of things.
And for the avoidance of doubt, Bitstamp was given a license by Luxembourg’s Ministry of Finance a few months ago.
As the title suggests, this is just a word about Bitcoins. If you want to really get into the world of Bitcoins — you want to start saving, transacting in Bitcoins, you can check out my longer post about it.
Manasseh Egedegbe is a medical doctor at the cutting edge of Finance 5.0. You can contact him via twitter @knightofdelta if you want to know more about Bitcoins. You can also follow is Medium Page
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.
Why there is a massive sell-off of US stocks
The United States 10-year Treasury yields rose to a new one-year high of 1.5% on Thursday sending the equities market on a bearish run. The US Dow Jones Industrial Average was down 1.5% as of 7.30 pm on Thursday falling by a whopping 500 points. The S&P 500 and NASDAQ were both down 2% and 2.75% respectively ad the sell-offs intensified.
Global bond prices also fell lower on Thursday and investors around the world sold off massively as they feared higher inflation could erode bond yields.
What is going on?
Investors are worried that massive injection of stimulus in the US and in most European countries could trigger higher inflation which will erode profits on bond yields assuming their fears materializes.
US inflation rate for the month of January 2021 was 1.4% the same as the month of December 2020. US inflation was as high as 2.3% a year ago yet investors remain worried. In response to this fear, bond yields have hit multiple one-year highs. This fear is has now spread to the US equities market.
US President Joe Biden is seeking a $1.9 trillion stimulus package which many had hoped will please the market. However, it appears investors are rather afraid that it could trigger a “reflation” eroding whatever positive jolt it could have had on the wider economy.
What this means for your stocks
A rise in interest rates is triggering a massive sell-off in US stocks ad investors fear a return to higher inflation could signal the market could be entering a bearish era. Stocks have hit multi-year highs since January as investors poured in billions of dollars into stocks. If this sell-off persists then investors in US stocks could see the value of their portfolio plummet.
Tech Stocks are particularly affected by the sell-offs with investors dumping heavyweights like Netflix, Tesla, Amazon, Microsoft, Facebook, Google all falling. Meme stocks, an acronym for stocks popular with Reddit and Twitter retail investors have also suffered losses.
Nairametrics SSN subscribers are advised to track their portfolios accordingly.
Nairametrics | Company Earnings
- Custodian Investment Plc posts N12.69 billion profit in FY 2020.
- 2020 FY Results: Nestle posts N39.2 billion, as earnings per share prints N49.47
Nestle Nigeria Plc released its audited […]
- 2020 FY: WEMA Bank posts N5.06 billion profit after tax as earnings per share prints at N13.1.
Wema Bank Plc released […]
- 2020 FY: Zenith Bank post N230.6 billion profit after tax
Zenith Bank Plc released its […]
- Mutual Benefits Assurance Plc boosts post tax profits by 25.9%
Mutual Benefits Assurance Plc released […]