So, last week I started a “thread” to figure out the evolution of Nigeria’s transportation technology ecosystem. I touched on the ride hailing business, how and why some of them failed, some barely surviving, with others being somewhat successful. I also looked at new entrants into the space.
This week, we’ll take it a step further, starting with bikes and how they are returning to Lagos roads.
I remember a few years ago, it appeared that entrepreneurs in Nigeria were only thinking about e-commerce (just like lending apps are in vogue today, e-commerce was the beautiful bride then… I will write about this sometime later). Entrepreneurs were quick (maybe not so quick) to find out that it was not all rosy. It was not all about building a website. It was not all about writing lines of code, nor all about UI/UX. Building an e-commerce business involved (still involves) lots more.
Entrepreneurs had to solve infrastructure related problems including payment, warehousing, merchant management, customer service and of course reliable logistics. That is where I believe bikes began to return to our roads.
Tunde Kehinde and Ercin Eksin, both former Co-CEOs of Jumia Nigeria, faced this logistics problem first-hand while running Jumia. I am sure they learnt that their business then (Jumia) would not survive without an effective logistics platform. I believe they saw the problem and the opportunity, hence they left Jumia to co-found Africa Courier Express (ACE).
If the CEOs of Jumia could have left to start another business to support Jumia and other e-commerce businesses, it could be because they think that the logistics opportunity is larger than the e-commerce opportunity. Irrespective of what their thinking was, the most important thing is that they found that the opportunity was worth pursuing.
ACE had a value proposition to e-commerce businesses – to handle all their customers’ orders so that the founders of these platforms could focus on the core of their business – selling. For ACE to achieve this, it would require bikes to run these errands for the e-commerce platforms. I remember thinking about this problem then, and how the value flow within the industry would shape up. For ACE, it won’t have to bother too much about revenue collection, since the e-commerce platform guarantees that. However, the e-commerce platform would still have to figure out a way to collect her money from her own customers.
Needless to say that there are tens of these logistics play right now. In addition, the founders of ACE have moved on (again) from that business to co-found another – Lidya (a platform for small & medium business lending in emerging markets).
For a business like ACE, few things to track will be the efficiency of their delivery infrastructure. They have to invest in route optimization and manage downtime. They also have to grow their merchant pipeline. This is true for most B2B businesses. You can’t afford to have dependency risk. If one business contributes 50% of your total revenue, then you can as well be the subsidiary of that business. So your job as the founder will be to widen that partner pool in case you lose one of them.
If I were a founder of a business like ACE, I would run the customer experience bit of the business myself. Guys think about it, another business entrusts its own customers to me! That is a huge responsibility! I can’t afford to mess that up. As far as it depends on me, the customers will have a solid experience with our own dispatch riders and delivery agents. I might not be able to guarantee the quality of products being shipped, but the customer would love our own service.
Another company fueling the return of bikes is MaxGo. MaxGo started as a similar platform just like ACE, with a different twist. Max focused on individuals or businesses sending letters, documents or other packages from one location to another. Businesses typically send packages through their own in-house dispatch riders or drivers. Some also had partnerships with legacy courier companies to pick up letters at a certain time daily or weekly. Max created an on-demand platform where businesses could just order a dispatch rider from their app. I believe the market taught them something different, now they are focused on moving people around using these bikes.
The need is clear. Back in the days, before the ban on okadas, I could board a bike from my house at Ojodu Berger (then) to Victoria Island via Third Mainland Bridge without incident. Even if there was an accident, I would board again the following day. That was the best way we knew to beat Lagos traffic. Through its app, customers can request a bike ride to any location within the city.
Max had not settled in before competition hit. Gokada emerged with exactly the same offer – an on demand bike hailing app. From global trends, Uber and Taxify might be preparing their own entries into that space, like they are doing in other countries. In fact, Uber and Taxify had launched this bike hailing business in Kenya and Uganda. Nigeria will not be too far away. Go Jek (the Indonesian bike power) might also be looking at Nigeria as well.
This bike business is about to evolve into a street fight. We’ll wait and see.
Like we saw with ride hailing, distribution and pricing are major ingredients for success in this space. By distribution, I mean the ratio of bikes to customers. If I had to wait 30 minutes for the driver to get to me, then there is no point. To solve this distribution problem requires HEAVY capital investment to buy these bikes. Both Max and Gokada will have to figure out the best way to acquire their bikes.
Then they will need to track the payback and profitability on each bike. Imagine I bought a bike for 100k, payback period checks how long the 100k investment is returned by the bike itself. Profitability then checks how much each bike is able to make after deducting the cost of operating the bike. These are metrics that need to be tracked as they both scale.
They need to know how much each bike will need to make daily and the cost of operating the bike for that day. If that is not profitable, then they might need to check their pricing strategy.
Regarding pricing, Uber and Taxify are bad examples. Taxify entered into the market by undercutting Uber on price. Reducing the per kilometer cost of a trip for the customers, while increasing the drivers’ share of the revenue. Both companies are still loss making.
So, Max and Gokada will have to be deliberate about their pricing strategy. Pricing strategy is typically informed by the overall business strategy. What is the business trying to achieve at this point? Is it to drive customer usage or improve profitability.
Now I need a Part 3. I still need to talk about the heavy industries and market data gathering (Kobo 360, TruckIt, Trade Depot and Delivery Science). I need to write about Staffbus, GidiTraffic (if it has overstayed its welcome), and Lagos Traffic Radio. I need to discuss the response of the incumbents including NIPOST and the likes of God is Good Motors. I don’t think that the car dealership space has changed too much, except of course the used car market that is being redesigned by Cars45. I am not sure Elizade and Coscharis have gotten the memo yet. This car market will change. This is where Corporate Venture capital comes in. I think companies like Elizade and Coscharis should be investing “small change” into these startups. That “might be” (is) the future. Even the car manufacturers themselves are hedging their bets by investing in Uber, Lyft, Didi, Taxify, etc. Some are investing in electric cars, self-driving cars and technology amongst others. Let me not start another post here.
Covid-19: Companies raise N222 billion during lockdown
Corporate organizations successfully raised at least N222.6 billion from the 24th of March till date.
The COVID-19 pandemic is unarguably the greatest disruption of recent times. Not only has the world been faced with the existence of a real-life plague, but its impact has also been felt across industries, economies, markets, and more. Yet, corporate organizations successfully raised at least N222.6 billion from the 24th of March till date, covering the toughest periods of the economic impact of the pandemic itself as well as the pandemic-induced lockdown.
Across the world, businesses and companies alike have sought out ways to curb the menace that is the pandemic through the introduction of cost-cutting measures to withstand the storm. However, in the midst of this, an array of companies have also sought out ways to raise finance to ensure their sustainability while also leveraging the relatively cheap opportunity to raise capital.
Data from the Nigerian Stock Exchange (NSE) reveals corporate bodies and the government have raised capital and facilitated secondary market trading activities worth over N1.8 trillion. A number of securities have also been listed on FMDQ. Methods used cut across Rights Issues, private placements, bond listings, etc., and they have been supposedly geared towards supporting working capital needs of the organizations, facilitating business expansion and more.
Listings over the period include; LAPO Microfinance Bank’s bond worth N6.2 Billion, NewGold ETF valued at N7 Billion, UACN Property Development Plc’s N16 Billion Rights Issue, Dangote Cement Plc’s bond worth N100 Billion, FBNQuest Merchant Bank’s Series-1 N5Bn Bond, Flour Mills’ N30 Billion Series 13 & 14 Commercial Paper programme, Primero BRT Securitisation SPV Plc bond worth N16.1Bn Bond, and the Golden Guinea Breweries Plc’s private placement of N1.2 Billion. Also listed are MTN Nigeria Communications plc’s proposed series of N50 billion and Transcorp Hotel’s N10 billion Rights Issue.
In addition to this, several Government Bonds worth over N797 Billion have also been listed within the past few months. Other companies have also listed capital financial issues include Guinness Nigeria (N5 billion) and United Capital (N20 billion) through commercial papers, also offering low-interest rates to suit the overall trajectory of the economy.
The amounts raised
Of the various amounts listed over the same period, Flour Mills has raised N7 billion. FBNQuest Merchant Bank’s 5 billion issuance was 2.3 times oversubscribed but news reports are not clear as to how much was actually received; UACN Property Development raised N16 billion; Dangote Cement was 1.5 times oversubscribed, raising N155 billion; The Golden Guinea Breweries, Primero BRT Securitisation SPV, and NewGold ETF were all 100% subscribed at N1.2 billion, N16.1 billion, and N7 billion respectively. United Capital raised N5.3 billion in Commercial paper issuance and N10 billion in its Series 1 Bond issuance, and LAPO Microfinance is ongoing. This brings the total amount raised in the period to at least, N222.6 billion.
The attraction with raising capital in a COVID-19 era
The pandemic has brought about the world’s worst statistics and Nigeria is no exception with rising inflation juxtaposed with lower-than-normal interest rates – and that appears to be the catch. A common phenomenon across these bond listings is that many have been oversubscribed despite COVID-19 headwinds. In other words, with very limited opportunities available across markets, investors have rushed at many of these bonds at their comparatively low coupon rates. Given that these investments are locked at fixed interest rates, companies now have the opportunity to piggyback growth strategies on affordable capital raising. With investors, on the other hand, grappling for opportunities to shield their funds from inflation, the situation appears to take the semblance of a win-win situation.
Why Insurance firms are selling off their PFAs
It has not been uncommon over the years to have insurance companies with pension subsidiaries.
The idea of mitigating risks and curtailing losses at the bare minimum begins from the insurance industry and only crosses into the pension space with the need for retirement planning. For this reason, it has not been uncommon over the years to have insurance companies with pension subsidiaries. However, controlling the wealth of people is no easy feat – and crossover companies are beginning to think it might not be worth it competing with the big guns; that is, the pension fund administrators (PFAs) that already cater to the majority of Nigerians.
A few months ago, AXA Mansard Insurance Plc announced that its shareholders have approved the company’s plan to sell its pension management subsidiary, AXA Mansard Pensions Ltd, as well as a few undisclosed real estate investments. It did not provide any reason for the divestment. More recently, AIICO Insurance Plc also let go of majority ownership in its pension arm, AIICO Pension Managers Ltd. FCMB Pensions Ltd announced its plans to acquire 70% stakes in the pension company, while also acquiring an additional 26% stake held by other shareholders, ultimately bringing the proposed acquisition to a 96% stake in AIICO Pension. The reason for the sell-off by AIICO does not also appear to be attributed to poor performance as the group’s profit in 2019 had soared by 88% driven by growth across all lines of business within the group.
So why are they selling them off?
Pension Fund Administration is, no doubt, a competitive landscape. Asides the wealth of the over N10 trillion industry, there is also the overarching advantage that pension contributors do not change PFAs regularly. Therefore, making it hard to compete against the big names and industry leaders that have been in the game for decades – the kinds of Stanbic IBTC, ARM, Premium Pension, Sigma, and FCMB. Of course, the fact that PFAs also make their money through fees means the bigger the size, the more money you make. With pressure to capitalize mounting, insurance firms will most likely spin off as they just don’t have the right focus, skills, and talents to compete.
The recent occurrence of PENCOM giving contributors the opportunity to switch from one PFA to another might have seemed like the perfect opportunity for the smaller pension companies to increase their market shares by offering better returns. More so, with the introduction of more aggrieved portfolios in the multi-fund structure comprising of RSA funds 1, 2, & 3, PFAs can invest in riskier securities and enhance their returns. However, the reality of things is that the smaller PFAs don’t have what it takes to effectively market to that effect. With the gains being made from the sector not particularly extraordinary, it is easier for them to employ their available resources into expanding their core business. There is also the fact that their focus now rests on meeting the new capital requirements laced by NAICOM. Like Monopoly, the next smart move is to sell underperforming assets just to keep their head above water.
Olasiji Omotayo, Head of Risk in a leading pension fund administrator, explained that “Most insurance businesses selling their pension subsidiaries may be doing so to raise funds. Recapitalization is a major challenge now for the insurance sector and the Nigerian Capital Market may not welcome any public offer at the moment. Consequently, selling their pension business may be their lifeline at the moment. Also, some may be selling for strategic reasons as it’s a business of scale. You have a lot of fixed costs due to regulatory requirements and you need a good size to be profitable. If you can’t scale up, you can also sell if you get a good offer.”
What the future holds
With the smaller PFAs spinning off, the Pension industry is about to witness the birth of an oligopoly like the Tier 1 players in the Banking sector. Interestingly, the same will also happen with Insurance. The only real issue is that we will now have limited choices. In truth, we don’t necessarily need many of them as long all firms remain competitive. But there is the risk that the companies just get comfortable with their population growth-induced expansion while simply focusing on low-yielding investments. The existence of the pandemic as well as the really low rates in the fixed-income market is, however, expected to propel companies to seek out creative ways to at least keep up with the constantly rising rate of inflation.
Nigerian Banks expected to write off 12% of its loans in 2020
The Nigerian banking system has been through two major asset quality crisis.
The Nigerian Banking Sector has witnessed a number of asset management challenges owing largely to macroeconomic shocks and, sometimes, its operational inefficiencies in how loans are disbursed. Rising default rates over time have led to periodic spikes in the non-performing loans (NPLs) of these institutions and it is in an attempt to curtail these challenges that changes have been made in the acceptable Loan to Deposit (LDR) ratios, amongst others, by the apex regulatory body, CBN.
Projections by EFG Hermes in a recent research report reveal that as a result of the current economic challenges as well as what it calls “CBN’s erratic and unorthodox policies over the past five years,” banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Note that Access Bank, FBN Holdings, Guaranty Trust Bank, Stanbic IBTC, United Bank for Africa and Zenith Bank were used to form the universe of Nigerian banks by EFG Hermes.
Over the past twelve years, the Nigerian banking system has been through two major asset quality crisis. The first is the 2009 to 2012 margin loan crisis and the other is the 2014 to 2018 oil price crash crisis.
The 2008-2012 margin loan crisis was born out of the lending institutions giving out cheap and readily-available credit for investments, focusing on probable compensation incentives over prudent credit underwriting strategies and stern risk management systems. The result had been a spike in NPL ratio from 6.3% in 2008 to 27.6% in 2009. The same crash in NPL ratio was witnessed in 2014 as well as a result of the oil price crash of the period which had crashed the Naira and sent investors packing. The oil price crash had resulted in the NPL ratio spiking from 2.3% in 2014 to 14.0% in 2016.
Using its universe of banks, the NPL ratio spiked from an average of 6.1% in 2008 to 10.8% in 2009 and from 2.6% in 2014 to 9.1% in 2016. During both cycles, EFG Hermes estimated that the banks wrote-off between 10-12% of their loan book in constant currency terms.
The current situation
Given the potential macro-economic shock with real GDP expected to contract by 4%, the Naira-Dollar exchange rate expected to devalue to a range of 420-450, oil export revenue expected to drop by as much as 50% in 2020 and the weak balance sheet positions of the regulator and AMCON, the risk of another significant NPL cycle is high. In order to effectively assess the impact of these on financial institutions, EFG Hermes modelled three different asset-quality scenarios for the banks all of which have their different implications for banks’ capital adequacy, growth rates and profitability. These cases are the base case, lower case, and upper case.
Base Case: The company’s base case scenario, which they assigned a 55% probability, the average NPL ratio and cost of risk was projected to increase from an average of 6.4% and 1.0% in 2019 to 7.6% and 5.3% in 2020 and 6.4% and 4.7% in 20201, before declining to 4.9% and 1.0% in 2024, respectively. Based on its assumptions, they expect banks to write-off around 12.3% of their loan books in constant currency terms between 2020 and 2022, a rate that is marginally higher than the average of 11.3% written-off during the previous two NPL cycles. Under this scenario, estimated ROE is expected to plunge from an average of 21.8% in 2019 to 7.9% in 2020 and 7.7% in 2021 before recovering to 18.1% in 2024.
Lower or Pessimistic Case: In its pessimistic scenario which has a 40% chance of occurrence, the company projects that the average NPL ratio will rise from 6.4% in 2019 to 11.8% in 2020 and 10.0% in 2021 before moderating to 4.9% by 2024. It also estimates that the average cost of risk for its banks will peak at 10% in 2020 and 2021, fall to 5.0% in 2022, before moderating from 2023 onwards. Under this scenario, banks are expected to write off around as much as 26.6% of their loan books in constant currency terms over the next three years. Average ROE of the banks here is expected to drop to -8.8% in 2020, -21.4% in 2021 and -2.9% in 2022, before increasing to 19.7% in 2024.
Upper or optimistic case: In a situation where the pandemic ebbs away and macro-economic activity rebounds quickly, the optimistic or upper case will hold. This, however, has just a 5% chance of occurrence. In this scenario, the company assumes that the average NPL ratio of the banks would increase from 6.4% in 2019 to 6.8% in 2020 and moderate to 4.8% by 2024. Average cost of risk will also spike to 4.2% in 2020 before easing to 2.4% in 2021 and average 0.9% thereafter through the rest of our forecast period. Finally, average ROE will drop to 11.6% in 2020 before recovering to 14.4% in 2021 and 19.0% in 2024.
With the highest probabilities ascribed to both the base case and the pessimistic scenario, the company has gone ahead to downgrade the rating of the entire sector to ‘Neutral’ with a probability-weighted average ROE (market cap-weighted) of 13.7% 2020 and 2024. The implication of the reduced earnings and the new losses from written-off loans could impact the short to medium term growth or value of banking stocks. However, in the long term, the sector will revert to the norm as they always do.