A recent report by Coronation Research has rated insurance penetration in Nigeria at 0.31%, which is extremely low, even compared with countries with similar Gross Domestic Product per capita like India, with insurance penetration at 3.69%.
Experience in other countries shows that, in the right conditions, insurance in Nigeria can be rolled out to India’s level in eight to 10 years. So Nigeria could go from 0.31% penetration to 3.69% penetration in 10 years.
The Lagoon story
Nigeria’s insurance industry has not shared in the growth experienced by other Nigerian financial services, notably banks, pension funds and mutual funds. In fact, it has hardly grown in real terms over 10 years. Without scale, the industry suffers from poor returns on equity.
The analysts believe that its smallness is also its opportunity. If it were to grow to the level reached by countries with similar GDP per capita, it might grow by a factor of 10 times in real terms in eight-to-10 years. The technological infrastructure and data necessary for expansion are largely available.
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The new capital requirements race
The banking reforms of 2004 imposed new steep capital requirements and reduced the number of banks from 89 to 25. Insurance reforms in 2019, due for implementation by June 2020, also impose steep new capital requirements.
According to Coronation Research, the industry players are likely to reduce from 59 to about 25. Higher capitalisation increases underwriting capacity and the potential exists to roll out a much bigger industry than currently exists.
Now, the Blue Ocean route
Lessons learned in Asian markets, and also in West Africa, show how insurance can be rolled out to tens of millions of customers. Cooperation between regulators is critical, as are distribution partnerships with banks and telecom companies. Fresh capital is necessary for development, but a fresh strategic approach is required to reach the industry’s potential.
So far, Nigeria’s insurance industry has lagged behind other financial services. Conditions have not been helpful for growth. Experience from other markets, particularly in Asia, suggest three remedies.
First, government and regulators (not only insurance regulators but bank and telecom regulators, too) need to cooperate – there are gains for all. Second, the roll-out of micro-insurance, with the development aim of financial inclusion, is key to familiarising and educating the market. Third, technology plays a key role in partnerships and distribution.
But is the technology available?
The distribution channels for rolling out insurance in Nigeria are available in Nigeria already but have not been deployed yet. In recent years the issuing of bank verification numbers (BVN) and SIM card registration have created significant levels of personal data.
Already, in Lagos, traffic police use number-plate recognition to check motor insurance cover. Whereas some Nigerian insurance companies are set up to process tens of thousands of customers, the technological platforms and the customer data exist to service tens of millions.
NAICOM’s reforms address an industry that today is small, fragmented and not very profitable. In inflation-adjusted terms, and in US dollar terms, it has barely grown over the past ten years. Of course, it could continue to stagnate in the years to come but that would:
- be a waste of the capital being raised to meet the current regulatory initiative;
- frustrate the experience of strategic investors (domestic and foreign);
- leave existing technology unused; and
- allow Nigeria to fall further behind its peers. On the other hand, given fresh capital and renewed regulatory cooperation, the industry can leave the stagnant lagoon and make waves in the blue ocean.
Recent pockets of growth
While it is correct to say that the development of the industry has been essentially flat over the past 10 years, this view needs to be refined.
First, it is clear that the Life Insurance business was growing in real terms 2008-15 (see the beginning of this section). This reflected the take-up of group life policies by companies in the formal sector.
Second, the recent period 2016-18 has seen some growth in real terms, though it came after a significant contraction in business in 2016.
Third, the part of the industry which is expanding in real terms likely reflects gains in market share by the leading companies from the less successful companies, some of which have serious issues. In other words, a process of competitive selection during and after the recession of 2016-17 may be underway already.
Recovery, rather than growth, among Non-Life insurers
While the Composite Insurers have shown a degree of recent growth, the leading group of 10 Non-Life Insurers has not done so well. Collectively these companies experienced a significant fall in business at the onset of the 2016-17 recession and have only begun to slowly climb out of it.
In inflation-adjusted terms, Gross Premium Income fell by 18.7% in 2016, then rose by 3.3% in 2017 and by 4.4 % in 2018.
Asian countries and Ghana demonstrate how to grow
Where can the Nigerian insurance industry look to for examples of successful growth? In any survey of the global insurance industry, Asia stands out for its recent gains in insurance take-up. To a large extent, this has happened because Asian governments have prioritised the development of micro-insurance and demanded cooperation from regulators and insurance companies to achieve their objectives.
In Asian countries, where micro-insurance has been rolled out, the insurance industry as a whole has benefitted from the familiarisation process that micro-insurance brings. As a result, insurance penetration and density have risen quickly, as we shall see in this section. Levels of insurance take-up are now many times what they are in Nigeria.
Key case studies come from Malaysia, Philippines and India. We have garnered data from India and present it here.
An answer closer to home than Asia
One need not go as far as Asia. Ghana is an example of a country where micro-insurance take-up has risen from almost nothing to 28% of the population over a period of eight years. If Ghana’s experience could be replicated in Nigeria the effect would be revolutionary.
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Will the multi-nationals bring their experience to Nigeria?
An important point about the Asian experience is that the same companies that cite Asia as a core geography for growth are the ones that have acquired insurance companies in Nigeria.
What it means: For example, Axa and Allianz. Axa bought Mansard Insurance in 2014 and Allianz bought Ensure in 2018. Other global insurers present in Nigeria are Prudential in its partnership with Zenith Life Insurance and Sanlam with FBN Insurance, as well as Saham of Morocco with Saham Unitrust.
Therefore, the experience of Asia’s roll-out of micro-insurance is familiar to the shareholders and management of several Nigerian insurance companies. There is no doubt that they could put their experience to use in Nigeria; the question is whether the legislative and regulatory environment will allow them to achieve this.
Micro-insurance roll-out and partnerships with other industries
In Asia, there are two conditions that spur the roll-out of insurance. The first is that governments sponsor the roll-out of micro-insurance and work to ensure that regulators work together.
What it means: This means bringing central banks, insurance regulators and telecom regulators together to pursue the common objective of developing the insurance industry.
The second is that the roll-out of micro-insurance provides education, mass-awareness and initial market penetration which the insurance industry requires.
What it means: The initial micro-insurance roll-out involves partnerships that can be with banks (bancassurance), or with telecom companies, or with government institutions. Even if insurance renewal data suggest that traditional insurance company outlets remain the main points of sale, it is partnerships that get the ball rolling by giving insurers access to the mass market in the first place.
Strong performance from Stanbic IBTC, despite weak retail banking position
Will Stanbic IBTC be able to generate profit from its personal banking division by full year?
Stanbic IBTC made a profit after tax of N45.2billion, growing its profit by 24.7% when compared with this period last year.
The feat is remarkable; given that a majority of financial institutions responded as expected to the economic downturn triggered by inflationary pressures, oil price instability, and lack of notable business activities, necessitated by the corona-virus pandemic that has characterised the 2020 business calendar year.
These other organizations reflected positions worse off than their escapades in 2019. In cases where improvements in bottom-line were seen, it was only marginal.
Stanbic IBTC was not exempted from these economic trials, their immensely diversified business portfolio boosted their numbers on multiple fronts. Robust presence in Asset Management paid off, as commissions and fees represented a massive 62% of general fees and commission income. It’s Corporate and Investment division continues to produce astoundingly, contributing the highest and growing profit after tax of 49.2%.
This focused and efficiently monitored diversification, is turning Stanbic IBTC into world-beaters, reflecting in the expansion of its gross earnings by 7.8%, from N117.4billion in HY’2019 to N126.6billion so far this year.
This position could have appeared even better; had STANBIC been able to demonstrate in its personal and business banking segment, the same excellence, noticeable in its other business segments (Wealth, Corporate and Investment).
It’s Personal banking (generally regarded as Retail banking), encompasses the provision of banking and financial services to individual customers and SME’s (Small and Medium scale enterprises), mortgage lending, leases, card products, transactional and lending activities such as telephone banking, ATM’s, etc. The segment suffered this year, closing with a loss of N3.2billion, despite being responsible for over 58.4% of general staff costs. This poor position was sponsored by a reduction in income levels, especially non-interest income from fees and commission.
Unsurprisingly, given CBN’s policy at the start of the year to implement a much-reduced transfer fee rate, an increase in Non-performing loans is another causal factor for its loss this half-year. STANBIC cannot afford to bask in the euphoria of the massive successes of its Wealth and Corporate segment, at the expense of Retail banking.
Retail banking is fundamental to any bank looking to be a force, or preserve its going-concern status in this critically competitive economic environment. It has been the subject of immense research in the last decade, with many banks devising strategies to acquire a large chunk of the market share in this business segment. The banking landscape is evolving amidst growing competition, such that a bank that generally does well in its retail banking segment, is perceived as strong by the public. This has an underrated capacity to effortlessly attract more customers. Banks need to revisit the drawing board and re-embrace their sacred purpose of serving the basic and pure needs of their individual customers.
Michael Lafferty, Chairman of the Lafferty Group, whilst describing Retail banking said, “Retail banking is the foundation on which global banks are built,” It is a vast retail and consumer banking market, pointing out that the world’s biggest banks built their financial empire from the mass market.
Stanbic IBTC must be conscious in its quest to provide universal banking and find a balance in product and service offerings across its business segment.
A summary of the performance parameters in its financial statement, shows growth in gross earnings, from N117.4billion to N126.6billion, and improvement in earnings per share from 342kobo to 419kobo.
Attention now shifts to the impact of the bank’s new super app, supposedly a one-stop-shop for its diverse offerings, including banking, investing, pensions, trading, and insurance, and how it affects the bottom line in subsequent quarters.
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Lastly, will Stanbic IBTC be able to generate profit from its personal banking division by full year? We await their H2’2020 results.
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.
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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.