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Nigeria’s auto-policy in tatters as Cars and Motorbike importation hit N1 trillion

Recent data obtained from the NBS show that between the first quarter of 2018 and the second quarter of 2019, Nigeria had spent the total sum of N1.03 trillion to import used vehicles and Motorcycles in less than 2 years

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Used Cars and Motorcycle importation

Recent data obtained from the National Bureau of Statistics (NBS) show that between the first quarter of 2018 and the second quarter of 2019, Nigeria had spent the total sum of N1.03 trillion to import used vehicles (popularly called Tokunbo) and Motorcycles (Okada) into the country.

According to the various NBS reports gathered, while importation has surged between the periods, used cars and motorcycle importation into Nigeria grew by 325%.

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The Trends: According to the Bureau’s report, Nigeria’s import bill has been on the rise and this is largely reducing the country’s net trade balance (the balance of total export minus the import). For instance, in the foreign trade report released for Q2 2019, NBS stated that the performance of Nigeria’s trade was largely as a result of stronger growth in the value of imports far outpacing the value of exports which rose only marginally.

  • Specifically, in the first quarter of 2018, used car importation gulped N29billion, while motorcycles importation was estimated at N38 billion.
  • Meanwhile, fast forward to Q2 2019, used cars imported into Nigeria stood at a whooping N177.3 billion, while motorcycles importation grew to N111.9 billion.
  • A closer look into the reports showed that Nigeria’s trade balance dropped from N831.6 billion in Q1 to N588.7 billion in Q2 2019. This implies the net trade balance reduced by N242.9 billion in just three months.
  • Considering Nigeria’s import of N4 trillion in Q2 2019, it suggests used cars and motorcycle importation accounted for about 7% of the country’s total import. This also made used cars’ importation to rank the second most imported goods into Nigeria.
  • It should be noted for motorcycles, as illustrated by NBS, Nigeria largely imported Completely Knocked Down (CKD) parts.
  • Basically, CKD is fully disassembled item parts that are required to be assembled by the end-user or the reseller. Goods are shipped in CKD form to reduce freight charged on the basis of the space occupied by (volume of) the item.
  • So, this means that for motorcycles, while assemblages are done in Nigeria, all the parts are imported from India and China.

Industry in tatters: Ride and Motorcycles or Bike hailing platforms are one of the two fastest-growing businesses in Nigeria. Globally, the popular ride-hailing platform, Uber, introduced its operation in 2009. Five years later (July 2014), it launched operations in Lagos State, Nigeria to make it the 4th City in Africa.

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  • As technology keeps evolving, so is the ride-hailing industry. Today, spread all over the country are Uber, Bolt, OgaTaxi, GidiCab and many others all competing in the ride-hailing industry. On the other hand, the Bike hailing platforms are equally worth the mention, with GoKada, Opay, Max.NG and so on.
  • It is noteworthy to state that the industry expansion is indeed a welcome development as this creates thousands of jobs for Nigeria’s teeming population, however, this comes at another cost to the country.
  • Nigeria’s automobile industry is still largely docile, while the industry expansion should indirectly grow the automobile manufacturing industry, the trillions being spent by the ride-hailing platforms are obviously flying overseas, specifically to U.S, India and China.
  • One would wonder why Nigeria’s automobile industry has been at a standstill for many years.
  • Further check shows that local production (cars assemblage) stood at 200,000 vehicles in 2018, while Nigeria imported 862,220 vehicles in the same period. This means Nigeria imported over 300% of what was locally produced.
  • From the U.S only, Nigeria imported 627,055 vehicles in 2018, projected to hit 800,000 vehicles by the end of 2019.

Recall, in 2014 the Federal Government increased import tariffs and duties on imported new and used vehicles to as high as 70%, while reducing tariffs on semi-knocked down and complete knocked down vehicles and assembly machinery to a range of 0 to 10%.

  • Five years later, the rigmarole still lingers as used car and motorcycle importation gulp trillions of naira. Although, President Muhammed Buhari just made moves to lure Toyota car manufacturer to set up manufacturing plant in Nigeria during his recent event trip to Japan.

[READ: Toyota snubs Nigeria as it moves to establish assembly plants in Ghana, Ivory Coast 

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More Problems: Importation appears to be one of the major banes of the Nigerian economy. This partly explains why car importation has also surged over the years. The figure provided by the bureau, to say the least, omitted smuggled cars, while brand new cars are reported separately. Smuggled items and the importation of sub-standard goods have led to the death of several companies.

  • Recently, the CBN announced that it has concluded plans to close the bank accounts of smugglers. While this is a step in the right direction, it may not curb the importation of used cars.
  • To further drive home its stance, the CBN and the federal government agreed to partially shut the borders.
  • Another development on the sideline is that the controversy that trailed the Nigerian 9th National assembly plan to import Sports Utility Vehicles (SUV) amounting to N5.5bn for the senators took another twist. On Wednesday, the Senate Majority Leader, Abdullahi Yahaya, condemned the public outcry over the purchase of the SUV to 109 senators. The Majority Leader reportedly disclosed:

“What is the problem there. It is an insult to say that a senator of the Federal Republic cannot ride a jeep in Nigeria. It is an insult.

“The N5.5bn is from the national Assembly fund and it is budgeted for every Assembly which they will pay back at the end of the tenure. I was a permanent secretary, I know what ministers get, we cannot even compare ourselves with ministers because we are higher than the minister.

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 “For you to say that a senator of the Federal Republic cannot drive a jeep today, come on, that is an insult. Go and tell the people that the work that we do, is more than the work of ministers. The weight that is on me today there is no minister of the Federal Republic that has it,” The Senate leader stated.

There is no gainsaying that, the Nigerian economy is largely import-dependent, and for now, even the lawmakers and the government show no signs of contributing to solving import menace. Recently, Nigerians have raised concerns about why political office holders cannot be mandated to use locally assembled vehicles.

One thing is clear, the continued rise in importation of used vehicles will continue to affect innovation in the automobile industry, and this also further leads to more pressure on the country’s foreign reserves which has depleted in recent months.

 

 

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Patricia

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

1 Comment

1 Comment

  1. Folabi Awojobi

    September 20, 2019 at 3:18 pm

    This is where Buhari needs to step in and compel the law makers to buy locally made Jeeps so that the money can help grow the car industry locally.
    We have all been made to ‘hate local’ hence the crazy appetite for everything foreign makes us not love our own.
    I really hope this will change someday but sadly it doesn’t look like it anytime soon

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Blurb

Why Insurance firms are selling off their PFAs

It has not been uncommon over the years to have insurance companies with pension subsidiaries.

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Why Insurance firms are selling off their PFAs

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.

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 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.

READ MORE: AIICO seeks NSE’s approval for conducting Rights Issue

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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.

 

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Patricia
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Nigerian Banks expected to write off 12% of its loans in 2020 

The Nigerian banking system has been through two major asset quality crisis.

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Nigerian Banks expected to write off 12% of its loans in 2020 

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 disbursedRising 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 2022the highest of all the previous NPL crisis faced by financial institutions within the nation.  

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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.  

READ MORE: What banks might do to avoid getting crushed by Oil & Gas Loans

Background  

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Over the past twelve years, the Nigerian banking system has been through two major asset quality crisisThe 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.  

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 READ MORE: Ratings firm explains why bank non-performing loans could be worse than expected

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. 

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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 2022a 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 occurrencethe 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 2024It 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 quicklythe 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 2024Average 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.   

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Patricia
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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. 

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Even with a 939% jump in H1 profit, Neimeth still needs to build consistency 

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. 

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READ MORE: Covid-19: List of pharmaceutical firms that will receive grants from the CBN

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. 

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READ MORE: Nigeria records debt service to revenue ratio of 99% in first quarter of 2020.

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.  

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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. 

READ MORE: Airtel to acquire additional spectrum for $70 million 

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.  

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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.  

Patricia
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