The National Bureau of Statistics reported on Thursday that Nigeria posted a real GDP growth rate of 0.11% for the 4th quarter of 2020, which means the country just about slipped out of recession. This is Nigeria’s first positive GDP growth rate following two consecutive quarters of contraction.
Whilst this is a welcome development, this is historically the slimmest GDP Growth rate Nigeria has recorded since 2011 when the country’s GDP composition was rebased. However, the growth was just about enough to help Nigeria achieve a much sought-after V-shaped recovery. A slim GDP growth rate will always be more appreciated than any form of contraction.
A further breakdown of the GDP growth rate in terms of contribution to GDP reveals Agriculture grew by 3.4%, Industries contracted 7.3%, and Services grew by 1.31% respectively. In terms of contribution to GDP, Agriculture, Industries, and Services comprised 26.95%, 18.77%, and 54.28% respectively. From here we can deduce how Nigeria got out of recession.
Digging into the data
Digging into the data reveals the major drivers of Nigeria’s exit out of recession. The largest sub-sectors in the economy as of the 4th quarter of 2020 were Crop Production at 3.68%, Crude Petroleum and Natural Gas at 8.2%, Trade at 14.9%, Telecommunications & Information Services at 12.2%, and Real Estate at 5.7%.
All 5 sub-sectors recorded significant improvement in their Real GDP Growth numbers including those that are still in contraction.
- For example, Crop Production’s GDP grew in the 4th quarter by 3.42% compared to 1.39% in the previous quarter, nearly double quarter on quarter. Crop Production constitutes a significant portion of Nigeria’s GDP and most of all.
- Trade GDP, which constitutes 15.5% of the total GDP, contracted by 3.2% compared to a 12.12% contraction in the prior quarter. This is an example of a sector that improved hugely despite still being in a contraction.
- The Telecommunication sector grew by 17.64% in the 4th quarter of the year compared to 17.36% in the prior quarter. At 12.2%, the Telecommunication sector is now one of the largest in the economy. We believe this sector is a major reason why Nigeria got out of the recession.
- Finally, the Real Estate sector, which had been in contraction since the second quarter of 2019, finally snapped out of recession in the 4th quarter, when it grew by 2.81%.
- Thus, Trade, Telecommunications, Real Estate, and Crop Production GDP performances are the reasons why we are out of recession.
Are we out of the woods?
The result of the latest round of GDP figures does not in any way suggest the Nigerian economy is out of the woods. The economy is in a critical condition and most sectors are still in contraction, even those growing could easily fall back into a recession. However, we do know which sectors will drive economic growth in the country.
For Nigeria to record faster economic growth than the slim 0.1%, we will need the telecoms, Trade, and Real Estate sectors to grow rapidly. So much focus has been placed on oil and gas for years, but there is no better time to move away from oil than now. Logistics, transportation, and ease of doing business challenges inhibiting trade must be resolved if this sector is to drive growth.
A lot has been said about border closure and import substitution as being a zero-sum game for trade. However, a lot of intrastate trades still take place in Nigeria that involve strictly made in Nigeria goods. Yet, the issues listed above remain huge challenges.
Real Estate, being a major job-creating sector, is also pivotal to putting money in the pockets of unskilled workers who feed off the indirect jobs it creates. For the sector to thrive, the government will need to solve the high-interest rate regime which has been the bane of progress for this sector for decades.
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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