Back in February 2017, the Central Bank of Nigeria opened a window that allowed retail buyers access forex for invisible transactions, at N366. To ensure that sufficient amounts of forex got to the end users outside the banking system, the CBN also boosted its supply to the BDC segment.
Just recently, it was revealed that the CBN Investors and Exporters window recorded a whopping turnover of $3.8 billion since it was opened in April. The CBN opened this window specifically for investors and exporters, enabling them to transact at a price determined solely by market forces. Prior to the introduction of this window, forex transactions were based on prices set by the CBN. This limited the amount of forex inflows into the financial system.
If there is any silver lining in the somewhat haphazard handling of Nigeria’s FX market since the onset of the drop in oil prices in 2014, it is the fact that the CBN has somehow found a way to stabilize the forex market. This event may indeed soon become case study material for students of economics to learn from.
The following are some vital lessons that we believe could be learnt from developments in the FX market.
Free market is king – Call it what you like – full float or semi float, but allowing the market to determine the price of the currency is still the best policy. However, in Nigeria’s case, giving consideration to its peculiarities, it is perhaps wiser to do so with a lot of caution. Unlike Egypt – which introduced an unconditional full float of the Egyptian Pound and reaped record levels of inflation as a result, the CBN took a controlled and measured approach to the Naira float, beginning with the investor window, which although is smaller in terms of participants but now snowballing in terms of transaction volume and value. When this window launched initially, it relied on the black-market price as a benchmark for setting its prices, since that was the closest to market price. As the market developed, the market relied on demand and supply to determine its prices, forcing the exchange rate to strengthen below the black-market price. For free markets to function properly, Nigeria needs to get its supply model free from regulatory meddling focusing only on policies that encourage foreign investments into the country.
Black market is not the problem – For years, Nigerian authorities have come to loathe the black market, blaming them for enabling “illegal” sale of forex across the country at prices other than the official exchange rate. The CBN at some point toyed with the idea of getting operators arrested for selling FX on the streets. Black marketers still coexist today with all the official channels.
Fixed currency does not fix the problem – The FX price convergence event has also told us that for a country’s exchange rate to be properly priced, fixing the price only goes so far, before prevailing macro-economic events begin to take their toll. The CBN fixed the exchange rate at N197 between December 2014 and June 2016 as it maintained for months that the black market was not a measure of the true value of the naira. The lack of adaptability of the CBN to the developing macro-conditions was one of the many triggers for the country’s economic recession. Even though the CBN still fixes the retail purchasers window at N368, the reason for the exchange rate convergence between this window and the parallel market has more to do with improved supply rather than the fixing of the exchange rate.
Supply was the big elephant – We have also learnt that for Nigeria to have a stable FX market, we will need to have a steady and sufficient flow of FX to the retail end of the market. A review of forex sale at the BDC segment in 2016 showed that only $58 million was sold in the whole of 2016 compared to $3.9 billion in the first two quarters of 2017 alone. The scarcity of dollars more than anything else was responsible for the depreciation of the naira, widening the disparity between the official and exchange rate to as much as N200 at some point. It is important to also note that one of the key reasons why supply diminished last year was due to the negative effects of pipeline vandalization by Niger Delta militants. As vandalizations seized and production resumed, Nigeria’s exchange rate earnings improved considerably.
Speculators were not the problem, CBN was – Another punching bag of the CBN last year, was a set of people referred to as speculators. These are players who profit from market volatility, buying low and selling high. They have patient capital and can take significant risks for short term gains, and do not care if it affects the local market. While market speculators are not typically seen in good light, they are only carrying out legitimate actions propelled by the profit opportunity brought about by a rigged system. By holding a fixed rate for too long, the CBN created a huge chasm between the official and parallel market, allowing speculators to profit from and worsen the situation.
CBN prioritized higher interest rates – One other thing the CBN has been doing lately is mopping up excess liquidity (cash) by selling treasury bills and other securities at rates that are very attractive to investors. The idea behind this move is that exchange rate pressures would reduce if there was fewer naira chasing the available dollars. While this has so far worked out as planned, it does not particularly work for small businesses looking to borrow money from banks at moderate interest rates.
41 banned items still an elephant – The CBN had been adamant about lifting its ban on the 41 import items prohibited from accessing the official forex market. Critics have blamed this stance as one of the factors that worsened the FX situation and the economy to a larger extent. The CBN eventually caved in sometime in May, lifting a ban on select items from that list after pressure from the Manufacturers Association of Nigeria. The rest of the items still banned from accessing the forex window remains a determining factor in Nigeria’s FX supply and demand dynamics. For now, the CBN may be winning due to lower consumer demand which has made imported goods highly unattractive. One day, the chicken will come home to roost.
Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
Explore the Nairametrics Research Website for Economic and Financial Data
Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.
Finding Balance: GTB’s impeccable gains versus its notable losses
Bank’s strategy of increasing gains while seeking out ways to decrease its losses is on a true course to growth.
Guarantee Trust Bank Plc (GTBank), over the past few years, has taken the Nigerian banking industry by storm, particularly through the foresight and strategic actions of its management.
The bank has, over time, tactically built its operations and expanded its market share, earning its spot as one of the credible names in the Nigerian banking space.
Faced with challenges like increase in the loan-to-deposits ratio (LDR) instituted by the CBN, and the COVID-19 pandemic that got companies in the financial sector thinking of new ways to survive, GTB may have found its way out.
Overview of its half-year results
Net interest income increased by 9.7% to N127.6 billion in H1 2020, compared with N116.4 billion in H1 2019. Its Profit before income tax stood at N109.7 billion in H1 2020, compared with the N115.8billion in the corresponding period in 2019 – a decrease of 5.2%.
Somewhere in-between the good and the not-so-good, the bank has been able to round off its earnings to a balanced output for H1 2020.
The good: Foreign Exchange gains
One of the best happenings to investors this year, is the extreme volatility of the forex market – among other currency and commodity plays. In H1 2020 period, the company’s financial assets at fair value through profit or loss, was up by 91.6% to N140.8 billion, when compared with N73.5 billion in H2 2019.
Interestingly, this was due to 129.2% increase in treasury bills from N56.9 billion in H1 2019 to N130.5 billion in H1 2020. Through forward foreign exchange contracts and currency swaps, they were able to increase derivative assets by 49% from N188.6 billion (notional contract amount) in H1 2019 to N280.9 billion in H1 2020.
Explore the Nairametrics Research Website for Economic and Financial Data
Foreign exchange revaluation gain in the half-year period was significantly boosted, from N2.6 billion in H1 2019, it attained 723% growth to N21.9 billion H1 2020, and it was a major reason for the 28% increase in other income within the period under review. Deposits from customers were also higher by 18.5% to N3 trillion. While loans and advances to customers increased in line with the apex’s bank directive. This could be both a bad thing and a good thing, depending on the level of credit risk.
The not-so-good: Impairment losses, CBN’s penalties
Following CBN’s issuance mandating commercial banks to increase the percentage of customer deposits that were loaned to 65%, so as to effectively stimulate the economy, stringent penalties had been imposed on non-compliant banks by the apex bank.
Consequently, the company’s restricted deposits had increased to N1.054 trillion, owing to its limitations in full compliance. While its increased cash balance of 27.8% in the period under review, could signify that the worst of the challenge is over (particularly following the comparative reduction in cash in Q1 2020), a cursory look at the reason for the strengthened cash position, is the 75.7% increase in money market placements to N333.5 billion – another positive for the bank.
Loan impairment charges in the half-year period, increased by 209.7% from N2.1 billion to N6.8 billion, and this was as a result of increased provisions for expected credit losses on financial assets extended to its customers, no doubt as a result of the economic uncertainties, synonymous with the period under review.
Commenting on the half-year results, the CEO, Segun Agbaje, noted that; “Going forward, our focus is not just to survive this pandemic, but to thrive beyond it. That is why we are going ahead with our plans to re-imagine how we create value for all our stakeholders.
“We know that making financial services work for customers goes beyond banking, and in line with our long-term strategy, we will seek to create and drive innovative financial solutions that go beyond banking.”
The bank’s Return on Equity (ROE) of 26.8% is currently one of the best in the industry, and a testament to this promise. Its strategy of increasing gains by focusing on its strengths, while also seeking out ways to decrease its losses, is one that will set any organization on a true course for growth. GTBank is certainly on that path.