An integral component of the long-term strategy of any company is corporate governance, epitomised by transparency and accountability. By extension, it is also the single most important means of sustaining the vibrancy and relevance of any capital market in the world. Furthermore, it has been observed that regulated markets with that adhere to best corporate governance practices have attracted and retained the confidence of investors, local and foreign alike.
As the CEO of VFD Group Limited, a company implementing a long-term investment strategy in the financial services industry, I basically assess companies on three cardinal points. First, the presence of a visionary and selfless leader as espoused by Jim Collins in his book, “Good to Great”. I also look for companies that have strategically positioned themselves within the context of their operating economy. These are companies that have developed a niche, either by way of technology, regulations, efficiency, etc., and established a moat around their business, as a barrier against competitors. The last cardinal point I consider is the company’s adherence to best practice in corporate governance, regardless of the local governance standards or regulatory requirements.
In the course of our operations, we have invested in a few listed companies – despite being mainly focused on private investments – and we intend to increase our capital allocation to this class of investments. One of our early investment picks was NEM Insurance Plc. The company had been a diamond in the rough for years with its market price then below N1. However, our valuation of the company, on a futuristic earning basis, was conservatively about N4 per share. This valuation has subsequently been validated by market trends; as at 21st June 2018, the market price of the stock was N3.04. We invested in the company based on our confidence in the long-term prospects of the company and its high score on our three-assessment parameters (i.e. strong leadership, strategic positioning and best practice in corporate governance) particularly the first two parameters.
NEM Insurance has a visionary leader, Tope Smart. He stands out as an extraordinary leader and is remarkably humble at it. He took on a struggling company in 2007 and bootstrapped it into one of the top five insurance companies in the industry. The company has doubled shareholders’ funds in the last five years and consistently paid dividends over the stated period. He has also built a team of remarkable lieutenants who rank as the best in the industry on a cost basis consideration.
As a result of their strategic positioning within their operating economy, the company not only enjoys the insurance regulatory environment, but has further enhanced its economic moat via efficient performance in a sector that is spectacularly known for inefficiency and poor regulatory compliance.
Unfortunately, it appears that the company is not nearly as strong on governance practices, relative to its stellar performance on the other two counts as stated above. I will elucidate with the organization of the company’s purported 2018 Annual General Meeting (AGM).
As a background, the Directors of the company collectively own less than 23.73% of the company’s issued shares. 22.98% of the 23.73% of the shares attributed to all Directors are held by four Directors (the “ruling 4”) out of ten Directors (source: NEM 2017 Annual Report & Accounts). On closer examination, the situation gets even more interesting. The same audited financial statements reveal that only 16 shareholders, inclusive of the “ruling 4” Directors, have up to 50m shares each and this group of 16 shareholders collectively controls 52.11% of the company’s issued shares. The implication is that there are 12 shareholders who collectively control 29.13% of the company’s issued shares that are not included in the management of the company. VFD Group is one of the 12 shareholders, with a 2.11% stake. In recent times, we have made efforts to identify the other 11 shareholders and observed a trend of exclusion of these shareholders from the activities of the company. For instance, as a run up to the 2018 AGM of the company, most of these shareholders did not receive notice of the meeting, the proposed special resolutions, proxy forms and audited financial statements as required by CAMA. This is extremely suspicious, particularly if one considers the special resolutions proposed for consideration and approval at the purported AGM.
First, special resolutions are usually passed by 75% of the votes of shareholders present and voting in an AGM. In the case of NEM, none of these resolutions can be passed if the 12 excluded shareholders were present and voted against the resolutions. It will be mathematically impossible because if all shareholders are in attendance, the 12 shareholders would represent 29.13% of the possible votes. This will preclude the possibility of achieving the 75% approval that is required for the resolution. This is further compounded by the fact that 100% attendance of its shareholders in NEM’s AGM is impossible. Thus, the only way to assure the passing of such resolutions (if management is not sure of the position of the 12 shareholders) is to tactically exclude them so as to ensure victory if a poll is conducted.
I am certain the question running through your head is, why go through all of these, at the risk of regulatory sanctions? Why risk the company’s reputation and particularly jeopardize the otherwise stellar achievements and track record of the Group Managing Director? The answer is simple: the company is run by a minority group of shareholders, “the ruling 4” Directors, who want to secure their hold on the company, at all costs.
The Directors, at the purported AGM, sought a resolution to issue 1.056bn shares of the company by way of private placement, at a price of N2.50. Looking closely at the proposal reveals why, in the words of former President Olusegun Obasanjo, “it is a do or die” affair for this ruling group of Directors. By maintaining the status quo and buying up shares on the floor of the stock exchange, it is currently impossible for anyone with minority holding to gain majority shareholding, and neither is it possible through fair and equitable rights’ offers. Nevertheless, the proposed special/private placement makes it possible for “the ruling 4” Directors plus the “special interest” beneficiary of the special/private placement to achieve a super majority.
Putting this in clearer context, post the proposed private placement, the collective stake of the “ruling 4” Directors plus the special interest to whom the placement shares are issued will increase to 35.82% from 22.98%. Kindly note that the provisions of the special placement gives “the ruling 4” Directors the right to pick who these shares can be allotted to. They can even allot the said shares to themselves or any one of them in the absence of any sensible checks and balances.
In truth, if the intention of the “ruling 4” Directors is to increase their interest or influence in the company, I have no fundamental objection to this goal. After all, we believe that the interest of shareholders is best served when management is significantly invested in the subject company. But the offer should nevertheless be appropriately priced. If I were to negotiate on behalf of fellow shareholders, I would place a price tag of N4 per share as I initially stated in this article and every kobo of that valuation can be justified. However, do not take my valuation as it is, let’s look to the market for the appropriate valuation of the company’s shares. The special placement is priced at N2.50 while the market price is currently N3.34 as at 27/06/18, representing a discount of 25.15%. This is clearly unusual and indicative of management’s destruction of other shareholders’ value and is designed to grant inordinate gain to an unidentified “special interest”. The question is: who will these shares be allotted to?
As an investor and specifically a shareholder of this company, VFD Group will like to participate in this offer. In fact, we will like to take up the entire offer. Why is such a compelling offer restricted to the exclusion of other shareholders who are willing and able to participate? How do you offer a significant stake of a company via a special/private placement priced at a significant discount to market?
My basic understanding of special/private placement posits the following considerations:
- That the public company cannot raise capital via rights offer.
- That the public company cannot raise capital via a public offer.
- That the company is not doing well and as such, investors are reluctant to be exposed to such company and therefore placing the company under immense capitalisation pressure.
- That the company is subject to all three above considerations and it is in dire need of funds.
If any of the above stated is the situation with NEM Insurance Plc, then the offer as proposed will be in the best interest of the company and shareholders alike. Unfortunately, this is not the case. Shareholders are willing to participate in a public or rights offer because the company is doing very well. As mentioned earlier, the Management of the company have done remarkably well based on the operations of the company and this is indicative in the current market price, profitability and industry ranking of the company. The company is also not cash-strapped; in fact, the Board proposed and obtained approval for the payment of 10k/share dividend at the purported AGM and has consistently paid dividend in the prior years. It is also not under pressure by regulators to recapitalise, as it is one of the few insurance companies that has maintained a clean bill of health. By the way, to date, no one has explained to shareholders what the funds to be raised will be utilised for.
So, what is the justification for the proposed special/private placement? What are the proceeds of the proposed offer for? If we must raise funds, why not do it via rights issue or public offer? A private placement appropriates the value in the company for the benefit of a few and savvy shareholders will have none of this.
On a general note, I will like to address the role of institutions in the pursuance of best practices in corporate governance. Their roles are integral to its attainment or otherwise. I have reviewed the activities of our corporate regulators e.g. SEC, NSE, CAC, NAICOM and others and I am extremely confident in their capacity and moral commitment to upholding global best practice standards in governance in our market. They have demonstrated this time and time again and we have no doubt that it will sustain through the foreseeable future. It is important to ensure that this governance standards are not only upheld but are seen to be upheld by all relevant parties, including NEM Insurance Plc and all auxiliary and related parties or officers of the company, such as the directors and the company secretary, as well as the Company’s Registrar, APEL Capital & Trust Limited. These parties all owe a fiduciary responsibility to all shareholders and are expected to always act in the best interests of the shareholders.
Before I conclude this piece, I will like to state a few things about VFD Group as a background to this matter, and with specific reference to our investment in NEM Insurance Plc.
- We are a Group of companies with interest/aspiration in all sectors of the financial services industry e.g. Asset Management, Bureau de Change, Banking, Microfinance, Insurance, International Remittance, Real Estate etc.
- Our operations are funded by our equity and debt investors as well as retained profit and we have been in existence for nine years. We currently have about 48 shareholders from all walks of life, including leaders of public listed companies.
- We are not particularly interested in running these companies or retaining Board positions, but we are firmly interested in the proper governance of our investee companies, a strong trend of profitability and consistent payment of dividends. Once that is in place, we are delighted to support the management of these companies.
- We also stand against interference with the operations of the company because we do not consider ourselves experts in our investee companies’ areas of business. We believe once our set objectives are in place, we have no business interfering in their business operation.
- This article is not written with malice and as much as possible, I have ensured that it is not personal but focused purely on the facts at hand. I also owe a fiduciary responsibility to our shareholders and it behoves me to speak on their behalf and protect their interest. I also think it is in the interest of the Nigerian investing public to speak out and advocate better corporate governance. Our economy will be better off by this and similar efforts.
- We think that our interests are aligned with those of NEM Insurance Plc and that there is absolutely no need for protective schemes with the negative implication on the company.
In conclusion, I call on the Board and Management of NEM Insurance Plc to set aside the purported 48th AGM of the Company and the resolutions passed thereat. This should not be done with the mind-set of a victor or vanquished but should be done in the interest of all shareholders, majority or minority alike. I am certain that if we do the right thing by the company, all shareholders will be better for it in the long run instead of a slow and deliberate process of destruction of value that is inevitable, if we continue down this path. In the meantime, VFD Group will take all necessary lawful steps to protect its investments in NEM while supporting the company to continue its growth trajectory.
Group Managing Director/CEO of VFD Group Limited
Email: [email protected]
Instagram Handle: @nonsomokpala
Twitter Handle: @nonsomokpala
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.