Did you know that the first indigenous bank in Nigeria, Industrial and Commercial Bank only survived for fifteen months before it went into liquidation? ICB was established in 1929, at a period when financial inclusion wasn’t extended to Nigerians and Nigerian business owners lacked equal access to credit as the colonial rulers.
But thanks to mismanagement, accounting incompetence, and embezzlement, ICB went into liquidation one year and four months after it began operation. Its exit from the financial market at the time opened the door for another Nigerian-owned bank in 1931, Mercantile Bank.
Mercantile Bank replaced ICB, serving as an offshoot of the latter, as most of its directors were reportedly from ICB. And just like ICB, Mercantile Bank went into liquidation, though voluntarily. However, it lasted for six years with branches in Lagos and Aba.
Prior to Industrial Commercial Bank
Before ICB, the Nigerian banking industry was saturated with foreign-owned lenders. It was the period of colonial rule, pre-independence.
The first bank that was set up in Nigeria was the African Banking Corporation, which later handed its operations in Lagos to British Bank of West Africa (now known as First Bank of Nigeria). All these happened within two years—1892 to 1894. The purpose of the bank was to achieve the financial aims of the colonial government at the time.
Asides the aforementioned colonial banks, the colonial era also ushered in the likes of Barclays Bank (Union Bank) which was formed by Anglo-Egyptian Bank and National Bank of South Africa in 1925, and British and French Bank for Commerce and Industry (United Bank for Africa) in 1949.
Demand for Nigerian-owned banks
The colonial banks, as stated earlier, were established to meet the financial objectives of the colonial government— objectives with adverse effects on Nigerians and indigenous businesses.
Nigerian business owners were restricted from obtaining credit facilities, as access was limited to foreigners only. This financial exclusion fuelled the need for a Nigerian bank that catered to the financial needs of Nigerians. So, despite ICB not surviving beyond fifteen months, the drive to establish a financial institution with Nigerians as its business focus continued. Within three years, two banks were established again, Nigerian Farmers and Commercial Bank in 1947 and the Nnamdi Azikwe-owned African Continental Bank.
The quick succession of these indigenous banks raised concerns, resulting in the creation of the G.D. Paton commission to research on the banking business in Nigeria. This led to the establishment of the Banking Ordinance Act in 1952 which required that all prospective lenders must obtain licenses before establishment.
The Banking Ordinance Act began the era of regulation in the Nigerian Banking Industry. It was this step that also led to the establishment of the Central Bank of Nigeria (CBN) in 1959, one year before Nigeria’s independence.
Influx of indigenous banks
Rather than limit the number of banks that entered the Nigerian banking industry, the regulated period ushered in more banks than the pre-regulated era.
Numerous banks sprouted after the Independence. The banking sector proved that the excess of something isn’t always progressive and too many competitors can drag the growth of the market.
A saturated banking industry became unbearable as the number of merchant bank branches significantly grew from 26 in 1985 to 144 in 1994, while commercial bank branches increased from 1,297 to 2,541 during the same period.
This led to financial distress among the Nigerian banks between 1992 and 1994, as the hundreds and thousands of lenders had only a handful of customers to serve. Besides the market size problem, the banking industry was also struggling with mismanagement.
According to Hyattractions, the following contributed to the bank distress:
- Many banks created risk assets at incredibly low interest rates with or without collateral or adequate cover.
- Some banks generated liabilities (deposits) at incredibly high interest rates.
- Insider abuse manifested in several dimensions (granting of credit to dummy individuals and organisations, high rate of loan repayment default, especially by government parastatals.
- Managerial incompetence, unbridled rate of bank fraud and forgeries, coupled with the general economic down-turn and adverse macro-economic conditions.
- Inadequate regulatory and supervisory capacity, all of which led to the distress of many banks during this period.
Banking Reform to the rescue
To prevent the collapse of the Nigerian banking industry and position the banking sector to be competitive globally, the CBN under the leadership of then CBN Governor, Charles Soludo, introduced a reform exercise.
The reform was carried out in 2004 with a one-year deadline. The reform exercise basically sieved the dying banks from the functional ones. It also enabled the banks to shelve their competition to consolidate, in order to meet the stringent requirements of the CBN.
Below were the thirteen requirements of the CBN to banks willing to remain operational after the 2004 reform exercise:
- Increase in the minimum paid-up capital of banks (unimpaired by loan losses) from #2 billion to #25 billion with a full compliance deadline of 31st December, 2005;
- Phased withdrawal of public sector funds from banks, starting in July 2004;
- Consolidation of banking institutions through mergers and acquisition;
- Adoption of a risk-focus and rule-based regulatory framework;
- Adoption of zero-tolerance for non-compliance, especially in the area of data/information rendition and reporting;
- Automating the process for the rendition of returns by banks and other financial institutions through the enhanced electronic Financial Analysis and Surveillance System (e-FASS);
- Establishment of a hotline, confidential internet address (Governorcenbank.org) for all those wishing to share any confidential information with the Governor of Central Bank on the operations of banks or the financial system;
- Strict enforcement on the contingency planning framework for systemic bank distress;
- Establishment of Assets Management Company as an important element of distress resolution;
- Promotion of the enforcement of dormant laws, especially those relating to the issuance of dud cheques and the laws relating to the vicarious liability of the Boards of Directors of banks in cases of bank failure;
- Revision and updating of relevant laws, and drafting of new ones relating to effective operations of the banking system;
- Closer collaboration with the Economic and Financial Crimes Commission(EFCC) in the establishment of Financial Intelligence Unit (FIU) and the enforcement of the anti-money laundering and other economic crime measures;
- Rehabilitation and effective management of the Nigerian Security Printing and Minting Company (NSPMC) PLC, to meet the security printing needs of Nigeria, including the banking system which constitutes over 90 percent of the NSPMC’s business (Ofanson, Aigbokhaevbolo and Enabulu 2010, Akpan in Mbat 2011, Abdullahi 2007, and Ebong 2006).
What 2004 reform achieved?
The reform saw the number of banks drop rapidly from 89 banks to 25 banks as at December 31, 2005. Some of the banks that survived did that through mergers and acquisition. Today, there are 27 banks in Nigeria.
The reform also resulted in the enhancement of the quality of banks in Nigeria, improved its financial stability and contribution to the economy. Also, the reform increased financial inclusion in Nigeria.
Disruption of the banking industry
Technology advancement has expanded the banking industry globally, and the banking sector in Nigeria hasn’t been left out of the disruption.
The advancement in technology has come in handy for the CBN, which has a mandate of 80% financial inclusion to beat by 2020. The impact of technology has changed the operating model of every bank in Nigeria.
The future of banking is in the hands of technology, and the CBN is willing to milk it for all of it’s worth. While the banks have adopted technology to cater to the underserved population through USSD codes, website and apps, the CBN’s aim to achieve the 80% financial inclusion has opened new opportunities in the banking sector.
The future of banking is now outside of the banking hall. This is because the financial market has been so divided to different parts, that even telecommunications companies now operate in the banking industry.
The need to visit a bank has now been reduced by Fintechs and the network providers which now offer similar service to banks – and it’s all because of CBNI’s goal to reduce the underbanked population; the same mission that led to the creation of Nigeria’s first bank, Industrial and Commercial Bank.
How does a bank make N19 billion a month?
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers.
How does a Financial Services Group make N19b a month, post a Profit After Tax figure of N230b in an environment where global commerce virtually ground to a halt in 2020?
The Zenith Bank Plc (Zenith) Year-end 2020 final results are a blockbuster, not just in the quantitative, but the qualitative as well. In all major headline numbers, Zenith posted growth on a Year-on-Year basis, specifically, Gross Earnings are up 5.2%, Net Interest Income up 12%, Customer deposits up 15.3%.
Somehow Zenith grew her loan book by 18% in a recession and reduced the volume of Non-Performing Loans in the same period. Zenith was also able to post a higher revenue number from non-interest income even as yields on fixed-income fell across Nigeria. I must stress, Zenith has posted these results by servicing her target segment of the high-end corporates in Nigeria.
So how did Zenith achieve this? I want to do a deep dive into how to make profits in a recession. However, it is important to start with a background on how banks make money which is basically in two ways;
- Interest income: which is income generated from the bank gathering deposits from customers and investors and “renting” out these funds to individuals and corporates for a fee called interest. Interest Income is seen as the main business of banks. It is a measure of how well the bank has fine-tuned its people, process, and systems to generate returns from a commodity called cash.
- Non-Interest Income: This is the income the bank generates from deploying its brands and people to juice revenues from activities that do not necessitate a transfer of cash. For Example, a bank asset management business leverages the bank’s skillsets to earn fees by providing investment advice to clients. Does a business want to expand? The bank can advise on the process to make that happen.
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers. This allows the bank generate a spread between cost and revenue. The bank’s interest spread can be magnified by the number of quality loans it creates as Interest Income rests also on the quality of the loan book. Positive spread drives the funding of other banking services and is supported by the banks internal competencies to manage risk
So a bank makes profits by
- Attracting cheap deposits
- Earning positive spread
- Providing value addition for a fee
- Effective Risk Management
All these have to happen simultaneously. A bank that sources expensive deposits by paying higher rates generates a lower spread. Lower spread exposes the bank to cost overruns and will prove fatal to long-term growth.
With this in mind, let’s review Zenith FY 2020 Performance
- Attracting Cheap Deposits: In 2019, Zenith’s total interest expense, which represents how much it paid to get deposits was N148b, that figure dropped in 2020 to N121b. this means the bank was able to grow deposits by 25% but at a lower cost. How? Zenith changed her deposit mix, reducing borrowed funds/leases and time deposits by 41% and 38% respectfully and increasing the share of current accounts by 155%. By swapping the deposit mix, the bank’s cost of funds ratio fell by 18mn%.
- Earning Higher Spread: Zenith grew Net Interest Income by 12.2% in 2020. This figure represents income earned from the deposits and investments of the banking group. Again, this was achieved by asset mix reorganization. In the face of falling rates especially on shorter-dated FGN instruments, Zenith shifted allocation from Treasury bills to longer-dated FGN bonds which paid a higher yield. Zenith’s Non-interest Income also grew to N275b a 5% jump from 2019. This is driven largely by extraordinary items including foreign currency revaluation gain, which is the gain realized from the revaluation of foreign currency-denominated assets. I must highlight this. Zenith was able to post a gain of about N43b which is a 256% gain from FY 2019 based on the Naira being devalued to the US Dollar.
- Providing Value Addition: Value addition will include all non-core banking services Zenith Group provides to the public including subsidiaries like the Zenith Penson Custodians which has N4t in assets under custody. Commission on agency and collection was a big contributor to Zenith’s non-core banking revenue.
- Risk Management: Zenith was efficient in deploying its internal competencies to minimize and avoid risk and impairments from the ordinary and extraordinary course of business. Zenith like other financial institutions saw a pullback in commercial activities from her clients. Take the Commerce subsector, the Non-Performing Loan share in that sector grew from 9% to 24%. Zenith, booked an increase in the number of NPLs by volume to N125m in FY 2020 but the bank was able to keep the NPL ratio down to 4.29%. An extraordinary feat.
Overall, the bank was able to navigate a difficult year and post a good return and a handsome dividend of N3 to investors. Zenith was able to achieve all this while increasing the staff strength by 4.6% to 7555 employees.
However, there are red flags as well:
- Net Interest Margin was down in FY 2020 as yields declined. If yield continues to stay muted, can Zenith keep finding profitable avenues to invest that N5.34 deposit base?
- Interest income positive in FY 2020 at 420b but when compared to 2017, interest income is falling.
- If you ignore the revaluation gain, then Non-Interest income will be considerably muted, possibly negative in FY 2020
- Fees on electronic products fell 36% in an environment where online banking has been not just sound business practice, but life-saving as well.
Overall, in an environment with months of local and international shutdowns, Zenith has posted good numbers and demonstrated it is possible to eke out gains from a hard environment. When one looks at the dividend yield, P.E. Ratio of the bank, for me, this is a Buy.
Why there is a massive sell-off of US stocks
The United States 10-year Treasury yields rose to a new one-year high of 1.5% on Thursday sending the equities market on a bearish run. The US Dow Jones Industrial Average was down 1.5% as of 7.30 pm on Thursday falling by a whopping 500 points. The S&P 500 and NASDAQ were both down 2% and 2.75% respectively ad the sell-offs intensified.
Global bond prices also fell lower on Thursday and investors around the world sold off massively as they feared higher inflation could erode bond yields.
What is going on?
Investors are worried that massive injection of stimulus in the US and in most European countries could trigger higher inflation which will erode profits on bond yields assuming their fears materializes.
US inflation rate for the month of January 2021 was 1.4% the same as the month of December 2020. US inflation was as high as 2.3% a year ago yet investors remain worried. In response to this fear, bond yields have hit multiple one-year highs. This fear is has now spread to the US equities market.
US President Joe Biden is seeking a $1.9 trillion stimulus package which many had hoped will please the market. However, it appears investors are rather afraid that it could trigger a “reflation” eroding whatever positive jolt it could have had on the wider economy.
What this means for your stocks
A rise in interest rates is triggering a massive sell-off in US stocks ad investors fear a return to higher inflation could signal the market could be entering a bearish era. Stocks have hit multi-year highs since January as investors poured in billions of dollars into stocks. If this sell-off persists then investors in US stocks could see the value of their portfolio plummet.
Tech Stocks are particularly affected by the sell-offs with investors dumping heavyweights like Netflix, Tesla, Amazon, Microsoft, Facebook, Google all falling. Meme stocks, an acronym for stocks popular with Reddit and Twitter retail investors have also suffered losses.
Nairametrics SSN subscribers are advised to track their portfolios accordingly.
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