Nigerians are hardworking people who also create time to unwind; this they do by hanging out with friends and families at joints after work, and family parties, popularly called Owambe every other weekend.
Despite the diversity of cultures in Nigeria, it doesn’t take long to note the common element of flamboyance interwoven in every culture, unmistakable anywhere in the world and in nowhere is this trait more obvious than in a special act reserved for Nigerian ceremonies and functions.
There is a certain set of people who attend these Owambes most times without invitations from the hosts/hostesses; however, the services rendered by these men and women are as important as the parties themselves. They are always noticeable at gates of parties, and event centres, gaily dressed and most times with small black bags clutched against their waists, while trying to gain the attention of their potential customers. These people are neither photographers nor party crashers.
Currencies of countries across the globe are symbols of national unity and are, as such, treated with respect. Sadly, the Nigerian culture has over the years promoted the poor handling of our Naira notes. More worrisome is the fact that this act has now left the shores of the country with Nigerians in diaspora doing same with currencies of other countries.
Welcome to the business of money hawking — an illegal but thriving business at Nigerian parties.
A thriving business that dates back years
Meet Baba Kazeem, a tall, dark middle-aged man with three kids. He has been in this business for the past 20 years. He is also a popular face at an event centre visited by Nairametrics on a sunny Saturday afternoon in Ikeja. After posing as a customer, Baba Kazeem reluctantly shed some light on the lucrative weekend hustle.
According to him, the spraying of money is as old as throwing parties and no government law or decree can stop it.
“I have been in this business for 20 years now and it is the only business that I do.”
Considering the amount of money spent weekly at parties, one would come to appreciate that these men and women hawking mint Naira notes form an integral part of making parties glamorous. Party-loving Nigerians patronise them gladly because they have filled the void caused by lack of access to mint Naira notes used for showing off at parties.
No doubt, there is more than meets the eye when it comes to how these hawkers come across mint Naira notes despite their increasing scarcity. The situation is further worsened by these cartels of currency hawkers who sell new notes to willing buyers ready to buy them at varying rates based on denomination.
According to Baba Kazeem, the demand for lower denominations like 50, 100 and 200 Naira notes is always very high, especially for 100 Naira notes, considering its scarcity in the market. When asked to change N1,000 notes of N10,000 into N100 denomination, after some haggling, he agreed to a cut of N300 for each one thousand Naira and later gave me pieces of freshly minted, serially numbered N100 notes.
Altogether, he made a profit of 3,000 changing my N10,000 (N1,000 notes) to lower denomination of N100, though he agreed to charge less for other denominations. After striking a deal with him, he pleaded with me to pay him via his POS which he brought out of his black sling bag. According to him, the use of POS was a new strategy which some of them had just adopted to ease the stress of carrying cash around.
“We carry lots of cash and because the notes are new, you cannot know the huge amount of cash we carry. The use of POS not only makes the transaction easy for us, it also shields us from incessant arrests by policemen. Soon, you will not see any of us displaying new notes again at event centres or at bus stops, as we would have perfected how to deliver the money to customers.”
The amount charged on each Naira note depends on the volume of demand and the scarcity of such denomination in the market. He, however, refused to disclose how he and his fellow hawkers got the supply.
“We have an association even though we are not registered. We know ourselves and you have to join us before you can even meet our agent. I cannot just give you his number like that. He doesn’t know you and only those of us who get goods (new notes) from him call him on the phone for any business deal.”
Efforts by Government to stop this act
The Central Bank of Nigeria, CBN, recently established mobile courts in partnership with law enforcement agencies and the judiciary, with the intention of combating the rising incidents of Naira hawking and other forms of crimes against Nigeria’s legal tender.
Section 21 of the CBN Act 2007 prescribes a jail term of not less than six months or a fine of not less than N50,000 or both for a person found guilty of tampering with the currencies (note and coins) issued by the apex bank. However, it is not known how many have been brought to book.
A senior bank worker in one of the commercial banks, who spoke with Nairametrics, said that Naira hawking was a big business. The bank staff said that his experience in the banking sector showed that there are cartels in some of the banks reaping bountifully from illegal alliances with these Naira merchants. He also revealed that some customers usually approach their account officers or those known to them in the banks to request new notes whenever the need arose.
On his part, a Financial Expert, Mr. Benjamin Uduak said that the first thing to note was that people would be willing to pay for anything that was of use to them. He further noted that people would also be ready to pay for any scarce item with a price tag.
According to him:
“Nobody is comfortable with dirty notes, either for spending or holding. Also, the use of new notes at parties is a cultural thing. You will not eradicate that. We live in a society where we hold parties and celebrate people.”
He noted that the CBN would need to sustain the culture of withdrawing old notes in circulation and replacing them with new ones.
According to him, it is wrong to accuse Naira hawkers of being responsible for the scarcity of new notes since such notes are essentially in short supply.
He stated, “They don’t print new notes. That is why whenever you go to the bank for new notes, they will say they don’t have. If they do, of what importance will it be for them to keep them?”
If the fight against money hawkers is to be won anytime soon, the CBN must double down on withdrawing dirty Naira notes from circulation and also liaise with the National Orientation Agency on the need to handle the Naira notes with care and dignity.
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.
Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
Neimeth has been one of the better performers in the stock market in the last one year.
Neimeth’s profit after tax for H1 2020 might have jumped by 939% from H1 2019, but there’s still so much the company needs to do to remain in the game.
For the first time in years, Pharmaceutical companies across the globe are in the spotlight for a good reason. As the COVID-19 pandemic rages on, the world waits patiently for this industry to produce a vaccine that can once again lead us back to the lives we all missed. Nigeria is also not an exception, it seems. One of Nigeria’s oldest pharmaceutical companies, Neimeth, has been one of the better performers in the stock market in the last one year. However, there is still so much the company needs to do to earn profits consistently.
Neimeth’s recently released H1 2020 results show a jump of 19.4% in revenue from ₦976 million earned in H1 2019 to ₦1.165 billion in H1 2020. While this is impressive, its comparative Q2 results (Jan-March ‘ 20) show a drop in revenue of 25.4% from ₦748.8 million earned in Q2 2019, to the ₦568.7 million revenue in Q2 2020. In similar vein, while its profit-after-tax soared by 939% from ₦5.447 million in H1 2019 to ₦56.596 million in H1 2020, its quarter-by-quarter results show a drop of 118%. While there is a truth that some months are better performers than others, Neimeth’s extreme profit jump in the half-year results juxtaposed with the more-than-100% drop in the first quarter of this year, reveal wide-gap volatility in its earning potential. Its revenue breakdown attributes the quarter-by-quarter drop in revenue to a comparative drop in its ‘Animal Health’ product line by a whopping 897.42%. The ‘Pharmaceuticals’ line also only experienced a marginal jump of 2.57%.
Full report here.
Current & Post-Covid-19 Opportunities
A 2017 PWC report had revealed that by 2020 the pharmaceutical market is expected to “more than double to $1.3 trillion. Mckinsey had also predicted that come 2026, Nigeria’s pharma market could reach $4 billion. The positive outlook of the industry is even more so, following the disclosure by the CBN to support critical sectors of the economy with ₦1.1 trillion intervention fund.
The CBN governor, Godwin Emefiele, had stated that about ₦1trillion of the fund would be used to support the local manufacturing sector while also boosting import substitution while the balance of ₦100 billion would be used to support the health authorities towards ensuring that laboratories, researchers and innovators are provided with the resources required to patent and produce vaccines and test kits in Nigeria.
While manufacturing a vaccine for the Covid-19 pandemic might be nothing short of wishful, the pandemic presents a global challenge that businesses in the healthcare industry could leverage. Through strategic R&D, it could uncover a range of solutions, particularly those that involve the infusion of locally-sourced raw materials.
In order for the company to attain sustainable growth, it needs to come up with structures and systems that are dependable, while also tightening loose ends. One of such loose ends is its exposure to credit risk. It’s Q2 2020 reports reveal value for lost trade receivables of N693.6 million carried forward from 2019. To this end, it notes that while its operations expose it to a number of financial risks, it has put in place a risk management programme to protect the company against the potential adverse effects of these financial risks.
At the company’s last annual general meeting (AGM), the managing director, Matthew Azoji, had also spoken on the company’s efforts to gain a larger market share through its initiation of bold and gradual expansion strategies.
The total revenue growth and profitability of the half-year period undoubtedly signals a potential in the company. However, we might have to wait for the company’s strategies to crystalize and attain a level of consistency for an extended period before reassessing the long-term lucrativeness of its stock or otherwise. That said, it certainly should be on your watchlist.