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Critical times for Nigeria’s oil money as US-China trade war escalates

Global trade is currently at a standstill, as the Chinese president Xi Jinping and his U.S counterpart President Donald Trump prepare to meet at the G-20 summit in Japan this week.

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U.S-China Trade War
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Global trade is currently at a standstill, as the Chinese president Xi Jinping and his U.S counterpart President Donald Trump prepare to meet at the G-20 summit in Japan this week. The two leaders will, once again, hold key talks that may possibly end the bruising on-going trade war between the world’s two largest economies. 

The meeting, which will hold during the G-20 summit in Osaka Japan, has become one of the most globally-anticipated events in recent times. Many analysts and pundits expect that the meeting will help forestall moves by Washington to clamp tariffs on the remaining $300 billion worth of exports from China. 

Some Recent Developments 

Basically, the US-China trade war began in March 2018, when the United State’s President, Donald Trump, announced general tariffs of 25% on imported steel and 10% on imported aluminum. China hit back on US goods with tariffs worth $160 billion.

After the episodes of retaliation and counter-retaliation, recent developments may have forced both parties into another round of negotiation. Last week, President Trump threatened to “immediately” jack up tariffs on the remaining $300 billion Chinese exports to the U.Sshould President Xi fail to show up at the meeting. Ahead of the planned meeting, Trump and Xi reportedly held a phone conversation on June 18th to prepare grounds for the expected truce. 

After the supposed gesture from President Trump, the Chinese President also issued an official statement in agreement to the meeting. 

“I am ready to meet with President (Trump) during the G-20 Osaka Summit to exchange views on fundamental issues concerning the development of China-U’S relations. 

Trade-War Escalates into India 

The U.S-China trade war has largely dominated headlines over time, with little or no emphasis on the escalating issues between the U.S and India, which can be described as an off-shoot of the former. See below;

  • President Trump recently terminated a trade concession which allowed India to export almost 2,000 products to the U.S. duty-free. 
  • Trump’s move ended trade concessions for $5.7 billion worth of goods that India shipped to the U.S.as of 2017. These include imitation jewelry, leather goods, pharmaceuticals, chemicals, plastics, and some farm items. 
  • Following Trump’s move, India announced on June 15 that it would raise tariffs on 28 categories of imports from the United States. The increased tariffs, on goods worth $1.4 billion, cover almonds, walnuts, apples and finished metal items, among other products. 
  • There is also the issue of the U.S sanction on Iran, which prevents India from buying Iranian oil. This means that India will have to fill the gaps left by Iranian oil with imports from other major oil-producing nations such as Saudi Arabia, Mexico, Nigeria, and the USA. 

[READ THIS: Key takeaways from Dangote’s comments at the FT Africa Summit]

SSKOHN

China and India are Nigeria’s biggest markets  

The recent foreign trade data released by the National Bureau of Statistics (NBS) revealed that the world’s second most populated country, India, remains Nigeria’s biggest export market as of the first quarter (Q1) 2019. 

Further analysis shows that two of Asia’s biggest economies (China and India) control a significant part of Nigeria’s foreign trade. Unlike export, Nigeria’s biggest imports come from China. 

According to the recent statistics, Nigeria’s highest import in Q1 2019 came from China and it was estimated at N979 billion. Further insight shows that China maintains a distant top of 26% of Nigeria’s import, followed by Swaziland (N528.8 billion) and the U.S (N325.2 billion). 

Nigeria's top 10 import countries

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Nigeria’s top ten biggest export markets 

The top ten rankings of Nigeria’s export market released by the NBS shows that a total of N3.13 trillion worth of goods were exported in the first quarter of 2019. 

  • For the first quarter, India imported N744.9 billion worth of goods from Nigeria to rank first, and this is dominated by crude oil (N684 billion). A further breakdown shows that India now import16.43% of Nigeria’s total exportas against 15.53% recorded in the previous quarter (Q4 2018). 
  • Meanwhile, it should be noted that the U.S has completely fallen out of Nigeria’s top 10 export market. 
  • In recent times, the U.S has continued to cut down oil importation in the country and it appears that it may have already cut ties with Nigerian crude. 

  • Meanwhile, Angola is the only country that imported zero crude oil from Nigeria but imported the highest non-crude oil products from Nigeria, estimated at N202.6 billion in Q1 2019. 
  • Also, Sweden has just joined one of Nigeria’s biggest exporting nations, as it ranks ten with crude oil worth N151 billion. 

Top 10 exports market

[READ FURTHER: CBN is going after any company that imports banned items]

Cost and benefits – Nigeria needs to trudge smartly 

It is important to note that Nigeria generates over 70% of its total revenue and 91% of its foreign exchange revenue from Oil. Hence, the interplay of the trade war between U.S-China with escalation into India will greatly affect Nigeria’s oil money and the economy at large. 

  • President Trump may announce another tariff on Chinese goods, which will escalate the war. Sources have revealed that China may devalue its currency to sustain U.S sanctions and Nigeria may benefit from this through importation. 
  • Also, as stated earlier, India can no longer import oil from Iran which currently stands at 23.6 million tons. This portends a big opportunity for Nigeria to tap into the supply gap for more revenue. 
  • Meanwhile, a critical downside, irrespective of the U.S-China trade war outcomeis the escalation of trade war into India. 
  • U.S may employ its economic power to redirect a significant portion of India’s oil import to the U.S shale oil. What this suggests is that Nigeria’s biggest oil importer will be forced to reduce what it buys from Nigeria, which means that Nigeria revenue may lose billions, and this may critically affect the Nigerian economy. 

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Samuel is an Analyst with over 5 years experience. Connect with him via his twitter handle

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Ecobank: Pan African challenges weigh in on the company’s results

The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank.

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Ecobank, Ayo Adepoju's appointment, Ecobank Transnational Inc. records 24% increase in Profit After Tax for Q4 2020.
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ETI recently published its audited consolidated financial statements for the year ended 31 December, 2020.

Year-on-Year, revenues were up 4 percent to USD1,679.8 million while operating profits before impairment losses were also up 14 percent to USD625.7 million. Net interest income also increased by 21 percent on the back of a 27 percent decrease in interest expense, while customer deposits increased by 13 percent to USD18.3 billion.

However, apart from these, not so much else was great about the results. For example, profit before tax and goodwill impairment was down 17 percent to USD337.88 million, while profit for the year was down 68 percent year-on-year to USD88.32 million.

READ: Analysis: Sterling Bank, foreign exchange to the rescue

ETI faced several headwinds during the year that ultimately contributed to the performance. The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank. The effect on the profit after tax in 2020 was a USD163.56 million impairment charge in FY 2020.

In addition, a USD61million monetary loss was charged to the group’s profit resulting from the hyperinflationary economies of Zimbabwe and South Sudan where it operates. According to the Zimbabwe National Statistics Agency, Zimbabwe’s annual inflation eased to 348.59 percent in December 2020, compared with 401.66 percent in the previous month. To put this in perspective, South Sudan’s inflation rate on the other hand was estimated at approximately 58 percent at the end of 2020.

READ: UBA’s African footprint strengthens revenue and earnings

Perhaps further exacerbating the not-so-good results, the group effectively incurred a significant tax rate of 52.25 percent in 2020 compared to 33.3 percent for the same period by December 2019. A combination of these events caused a year-on-year decline in profit after tax by 57 percent, to USD174.32 million at the end of 2020 (2019: USD405.8 million).

Hotflex

The tough operating environment brought about by the global pandemic also impacted the results. While loan and advances and impairment charges were relatively flat in 2020, a significant portion of its loan book received regulatory forbearance, which meant that customer repayments of loan principals were deferred by up to 12 months.

SSKOHN

Also, the group’s NPL ratio remained higher than the regulatory NPL limit while Ecobank Nigeria’s NPL was higher than the Group’s NPL ratio. The write-offs arising due to goodwill impairment in Ecobank Nigeria as well as hyperinflation in Ecobank operations in Zimbabwe and South Sudan affected the group’s regulatory capital ratios.

READ: FCMB Group records N188bn revenue, grows Profit to N20.1billion

Although the group remained compliant with the minimum regulatory capital adequacy ratio requirements, its Tier 1 Capital Adequacy Ratio declined from 8.8 percent FY2019 to 8.5 percent FY2020 while Total Capital Adequacy Ratio also declined from 11.6 percent FY2019 to 11.5 percent FY2020. The minimum capital requirements were 7.25 percent Tier 1 and 9.5 percent, Total Capital, respectively.

In January 2021, Ecobank Nigeria raised N50 billion in subordinated debt from Development Bank of Nigeria with a 10-year tenor at 6.5 percent. It also in February 2021 raised USD 300 million in form of a 5-year, fixed-rate, US dollar-denominated bond. These amounts will improve the Nigerian subsidiary’s capital adequacy ratio.

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READ: Banking sector NPLs down, loans up

ETI groups its African operations into four geographical regions. The reportable operating segments are Nigeria, Francophone West Africa (UEMOA), Anglophone West Africa (AWA), and Central, Eastern and Southern Africa (CESA). Unlike other Nigerian Deposit Money Banks with International presence that outperform their African and international subsidiaries, the reverse appears to be the case with Ecobank Nigeria within ETI. Among the four geographical regions, Ecobank Nigeria contributed the least to the operating income, operating profit, as well as profit before tax in FY2019 and FY2020. Reported RoE were also 26.9 percent, 18.6 percent, 16.1 percent and 4.2 percent in the AWA, UEMOA, CESA and Nigeria regions in 2020 (against 30.1 percent, 22.8 percent, 23.6 percent and 0.4 percent in 2019 respectively).

ETI’s overall performance depends on whether the results are reviewed from a Naira or Dollar perspective as some of the results were better in Naira than when reported in Dollars. The group lost about USD8.6 million as a result of exchange differences on foreign currency translation of foreign operations. ETI perhaps also seems to be affected by the poor performance of some of its acquisitions as well as its operations in some African countries where it has its presence.

Its earnings per share as of December 31, 2020 was 0.010 (cents) as against 0.778 (cents) for the same period in 2019.

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Analysis: Sterling Bank, foreign exchange to the rescue

The bank’s foreign exchange trading income includes gains and losses from spot and forward contracts and other currency derivatives.

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virtus, Sterling Bank announces an appointment
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Sterling Bank Plc recently published its audited Annual Report, and Financial Statements for the year ended 31 December 2020. While the results indicated an underperformance based on expectations and compared to the prior year, the outcome was not totally unexpected given that the bank faced severe headwinds from the effects of the COVID-19 pandemic. Indeed, while commenting on the results, the bank’s Chief Executive Officer (CEO), Abubakar Suleiman, had explained that 2020 was an extraordinary year, defined by the global pandemic, which disrupted the society and severely impacted economic activities.

Gross earnings fell by 7.5 percent to N138. 9 billion (compared to N150.2 billion in 2019). The bank’s Interest income also dropped by almost 12.5 percent from N127.29 billion in 2019 to N111.45 billion in 2020. This drop is mostly attributable to a drop in interest income from loans and advances to customers, which dropped to N82.88 billion in 2020 compared to N97.89 billion for the same period in 2019. The bank’s net fees, and commission also reduced to N13.1 billion in 2021 compared to N14.61 in 2020 as Other fees and commission (mostly advisory fees) fell to N2.9 billion in 2020 (2019: N5.9 billion) while the bank’s e-business commission and fees reduced to N4.98 billion (2019: N6.79).

The bank reported that total non-performing loans (NPL) as a percentage of gross loans improved from 2.2 percent in 2019 to 1.9 percent in 2020. While this appears to be good, a closer look at the bank’s loan portfolio shows a somewhat different picture. First, loans and advances to corporate entities reduced in 2020 (corporate entities N570.88 billion and individuals N42.48 billion) compared to 2019 (corporate entities: N582.94 and individuals N48.76 billion), yet impairment allowance on loans to corporate entities and individuals increased in 2020 (N14.11 billion and N2.42 billion respectively) compared to 2019 (N11.12 billion and N1.85 billion respectively). Secondly, the bank’s credit loss expense (made up of impairment on loans and write-offs) also increased by 36 percent to N7.91 billion from N5.84 billion in 2019, thus raising the bank’s cost of risk by 10 basis points to 1 percent.

Also, during the year, the bank sold off N19.5 billion of its loans and advances portfolio to Cambridge Springs Investment Limited, hence further explaining the significant drop in its total loans and advances portfolio from N618 billion at the end of 2019 to N596 billion by the end of 2020. It is worth noting that as at the end of 2020, the bank was yet to receive consideration for the loans and advances sold to Cambridge Springs Investments Limited worth N19.5 billion as this amount appears as a receivable in the bank’s financial statement (other assets) and explains why its accounts receivable increased from N18.62 billion as at end of 2019 to N39.33 billion by the end of 2020.

Although well within regulatory limits of 30 percent, the bank’s liquidity ratio deteriorated from 39.2 percent at the end of 2019 to 33.87 percent by the end of 2020. The reduction in its total loans and advances portfolio while the total deposit liability improved explains the reduction in the loan-to-deposit ratio of 62.36 percent (2019: 65.29 percent).

It was not all bad news as the bank did very well in several areas. First, as already implied, total deposits increased by 7.5 percent to N972.12 billion at the end of 2020 compared to N892.66 billion at the end of 2019. You will also recall that the Central Bank of Nigeria directed in 2020 to all banks to reduce interest rate payable on savings deposits from a previous minimum of 30 percent of MPR to a new minimum of 10 percent of MPR, effectively reducing interest rates payable on savings account deposits from 3.75 percent to 1.25 percent per annum. During the year, it appeared that one of Sterling Bank’s strategy was to significantly reduce its interest expense, as its interest expense improved by 21.3 percent from N62.59 billion in 2019 to N49. 31 billion at the end of 2020 driven by a 39.5 percent year-on-year growth in low-cost customer deposits.

Note that the bank also increased its savings account portion of total deposit liability from 13.55 percent as at the end of 2019 to 20.5 percent by the end of 2020. The bank also significantly increased the ratio of Current and Savings Account to Total Deposit to 78.95 percent compared to 62 percent in 2019. Compared to term or fixed deposits, savings and current accounts offer the least interest to depositors. This positively and significantly impacted the bank’s cost of funds and ensured that the cost-to-income ratio declined year-on-year to 77.4 percent.

The bank did extremely well in its trading activities as its net trading income more than doubled to N11.72 billion (2019: N5.06 billion). This performance is attributable to a more than doubling of income from trading in bonds (2020: N5.07 billion; 2019: N2.53) and income foreign exchange trading (2020: N 3 billion; 2019: N415 million). Note that the bank’s foreign exchange trading income includes gains and losses from spot and forward contracts and other currency derivatives. Despite the pandemic and the other parameters earlier described, the bank was able to post N11.24 billion profit after income tax for financial year 2020 compared to N10.6 billion recorded in 2019 a 6 percent growth in profit after taxes.

Hotflex

There was also a significant increase in the bank’s effective tax rate or Income tax expense from less than 1 percent at the end of 2019 to over 9 percent by the end of 2020. This increase impacted its Profit after income tax which would have been much higher than the N11.24 billion reported if the same effective tax rate of 2019 had been maintained for 2020.

SSKOHN

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