By refining capacity, Dangote Sugar Refinery Plc (DSR Plc) is acknowledged as the largest Sugar Refinery in sub-Saharan Africa and one of the largest in the world. With up to 60 percent market share, it is also clearly, the most dominant player in the Nigerian sugar market.
DSR Plc recently released its audited Financial Statements for the year ended December 31, 2020 and overall and year-on-year group performance results were very good.
Despite the impact of the Covid-19 induced lockdown which curtailed distribution across the country and resulted in decreased revenues from income generated from freights, gross revenues increased by over 33 percent year-on-year to ₦ 214.3 billion. The significant growth in gross revenue was driven largely by a rise in revenue from the sale of its 50kg sugar, with the two main customers being the Nigerian Bottling Company Limited and Seven-Up Bottling Company Limited who operate principally from Lagos.
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.
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.
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.
Central Banks Digital Currencies (CBDCs) – a Gift or a Curse?
Should we expect a CBN announcement on e-Naira soon?
China recently became the first MAJOR economy to create its Central Bank Digital Currency (CBDC).
Specifically, China’s CBDC has gone from the testing phase to actual implementation. Such that the digital yuan is now ready for use in regular transactions. The expectations are that by the time athletes gather for the upcoming Winter Olympics, visitors to the country can pay for a wide range of goods and services using the Digital Yuan. (Think about using government digital currency to settle Hotel and Restaurant bills, Taxi rides, etc.).
Across the world, Central Banks are racing to implement Central Bank Digital Currency (CBDC). The latest BIS 2021 survey identified that 86% of Central banks are engaged in developing a CBDC.
In this article, we ask the question: What exactly are Central Bank Digital Currencies (CBDCs), and why are so many central banks are working towards their implementation?
What is a Central Bank Digital Currency (CBDC)?
Specifically, CBDCs are legal tenders issued by a country’s central bank which will only ever be available in digital format AND will be acceptable from day one for payments of goods and services once implemented.
Fund settlement will be facilitated by the issuing Central bank who may / may not choose to partner with an approved list of institutional counterparties. The Bank of International Settlements (BIS) has a more technical definition here.
For the avoidance of doubt, CBDCs are neither the same as Electronic Funds Transfers (EFTs) nor are they Cryptocurrencies. Despite many similarities such as contactless settlement between counterparties, key differences are that Central Bank Digital currencies are legal tender AND represent a direct claim on a central bank by end-users.
- So, if you are one of those people who likes to “spray” very crispy notes at Owambe… better be prepared as with digital currency, you will never see any physical notes to “spray”.
Which countries have CBDCs on the horizon?
The latest BIS 2021 survey of 65 central banks identified that 86% of Central Banks are engaged in developing digital currencies. Out of which 60% of central banks have begun research work whilst 14% of central banks are already in the pilot and proof of concept phase.
- Bahamas (Sand Dollar), China (Digital Yuan), and Sweden (e-Krona) are the nations most advanced with implementation.
How will the CBDCs work?
For now, each Central Bank is determining its own scope and CBDC functionality as there is no standard global framework regarding infrastructure requirements and functionality scope (e.g. some central banks simply want to focus on domestic payments whilst others want both domestic and international payments focus).
However, having said that, the underlying workflow will likely be similar across the world, in the sense that workflow will include solutions on distribution and utilization.
- Distribution: Central Banks will create the digital currency and permit a list of commercial banks to access to the central payment network for onward distribution to end customers. Given that CBDCs are digital, the Central Banks will be able to track exactly who is holding how much of their currency and how exactly their currency is being spent.
- Utilization: End-users will have a tool (e.g. digital wallets) to help them be aware of their CBDCs balances. Further, these wallets can be presented (i.e. scanned) at participating locations for transaction settlements (think QR codes on a phone app).
In other words, as a CBDC end-user, you only need access to the internet and electricity for spending. Intermediaries such as SWIFT will be bypassed. (You can read more about how the digital yuan will work here).
Why are so many Central Banks rushing into CBDCs?
Firstly, faster cross-border trade settlements / International Trade ambitions:
The widely accepted use of CBDCs will facilitate faster cross-border settlements between participating counterparties. Regardless of your location, there will be less need to convert from local currencies into reserve currencies such as USD, GBP, EUR, and vice versa via financial intermediaries.
Additionally, for a country such as China which has long sought to expand its global reach in international trade, the digital yuan provides mouth-watering opportunities.
- As a simple example, for international trade facilitation, end-users of smartphones built by Chinese-owned phone companies can potentially be enabled to access the Digital-Yuan, and that digital yuan can be spent with Chinese-owned firms across the world. These payment transactions can take place on the People’s Bank of China (PBOC) controlled network and bypass any existing financial intermediary (you can read more about digital yuan opportunities here).
Secondly, from a domestic perspective, CBDCs will be a potential game-changing macro-economic tool.
For countries not interested in global trade dominance, digital currencies offer Central banks an exciting opportunity to transform monetary policies. Specifically with regards to financial relationships and money transmission mechanisms (too much grammar but we have all heard of stimulus and intervention funds!!)
Under the current state, when a Central Bank wants to increase or decrease money going into the hands of consumers, it does so via a range of tools (i.e. alter interest rates, set reserve ratios, buy/sell short-term instruments, etc.). Unfortunately, this current approach has some limitations which include:
- Transmission mechanisms: Despite all the tools available to Central Banks, they ultimately rely on financial intermediaries (i.e. banks). Existing monetary policy tools simply aim to influence commercial banks to increase or decrease the amount of money/funds available for onward lending to end consumers.
- These tools, as well as, associated end-user responses may not often work as fast as Central Banks would like. As an example, most bank customers will tell you that loan application processes can be extremely cumbersome and sometimes subjective.
- Also, think about folks in remote areas who truly need credit for their business expansion but are not financially included or are not able to complete the plethora of loan application forms or are missing IDs for authentication, etc.
- All these limitations create latency challenges for Central Banks looking to influence macroeconomic indicators quickly.
- Monitoring: Under the current approach, it is cumbersome for Central Banks to continually track existing money in circulation and utilization purposes. Think about CBN intervention funds and how difficult it is for the CBN to know exactly how its intervention funds are being spent once the funds are disbursed to applicants.
Fortunately, with digital currencies, given that they leave digital footprints, Economic Surveillance is facilitated (i.e. Central banks can monitor exactly who owns how much and what it is being used for); arguably giving Central Banks an opportunity to better direct funds to parts of the economy requiring support.
Thirdly, Technology advances driving the growth of the Digital Economy and lowering operating cost dynamics.
- The unrelenting growth of the Digital Economy: The use of physical cash continues to decline driven by the exponential growth of contactless services such as e-commerce (Amazon, Alibaba, eBay), contactless interaction (Zoom, Facebook-Portal, Google-Nest), etc.
- Global eCommerce is now projected to be over 25% of total retail sales across the world and the US estimates that Digital Economy accounted for 6.9% of 2017 GDP which made it the seventh (7th) largest component of GDP and still growing.
- Given that no one needs physical cash for transactions in the digital economy, Central banks are warming up to the need to implement CBDCs for transactions in this emerging digital economy.
- Changing unit cost dynamics: From a central bank perspective, there are significant costs incurred for maintaining oversight of existing payments and settlement systems. Furthermore, there are additional costs for creating cash, transporting, storing, and securing existing stock of physical cash. As existing systems become outdated and population growth continues apace, there will be an inflection point for when it will simply be cheaper to create digital currencies to drive financial inclusion. Especially as cloud computing processing capacity continues to expand at a cheaper unit cost.
Are there risks/issues to be concerned about with Digital Currencies?
The answer is yes, whilst there are benefits, there are also some risks and concerns such as the risk of excessive Economic Surveillance, Privacy concerns, ease of implementing, and Negative Interest (aka financial wealth tax).
Economic Surveillance can easily be a double-edged sword especially in the hands of an authoritarian regime, as an increased level of economic oversight can easily lead to financial repression or targeting opponents. However, just like with CCTVs, the risk of misuse cannot be a unilateral reason to discredit the opportunities available with CBDCs. (You can read more about concerns here)
So, what about Nigeria?
The Central Bank of Nigeria (CBN) was not included in the BIS 2021 survey, additionally, the CBN has not formally outlined its position on whether it plans to implement a Central Bank Digital Currency in the future (e-Naira).
However in February 2021, (as part of its explanation of its regulatory directive on Cryptocurrencies), the CBN acknowledged the emerging trend of Central Banks’ ability to issue legal tender digital currencies.
Nairametrics founder, Ugodre mentioned on his Twitter Spaces show “OnTheMoney” that a senior official at the CBN informed him that the Apex bank was seriously considering digital currency and had put together a team to explore its possibilities.
So, should Nigerians expect an e-Naira soon?
Firstly, with regards to innovation, the Nigerian payments landscape continues to evolve rapidly as the CBN drives innovation as part of its National Financial Inclusion Strategy (NFIS). Thus far, this strategy has resulted in the deployment of new products in the Nigerian payments space such as Money Market Operators (MMOs), Payment Solutions Service Providers (PSSPs), Agent/Super Agents, Payment Service Banks (PSBs), etc.
Consequently, having a digital Naira should not be ruled out as an additional tool to drive financial inclusion in Nigeria,
Secondly, based on industry statistics, Nigerians are quick to adopt technology that facilitates convenience at minimal cost to end-users.
- Specifically, CBN payments statistics reports show that the use of cash and ATMs in Nigeria continues to decline rapidly. The latest annual report shows Cash/ATM usage has declined from 18% of transactions in 2015 to 6% of transactions in 2019. In other words, 93% of activity was done electronically (across platforms NIP, REMITA, MMO, etc).
- Furthermore, NCC reports show high penetration rates for mobile technology with over 195 million active mobile phone subscribers (95% penetration) and 150 million internet subscribers (73% penetration rate).
These reports lend credence to the perception that Nigerians are quick adopters of new technology where the technology enhances convenience at minimal cost to end-users.
Consequently, a digital Naira will likely have high adoption rates to the extent that end-users do not expect to incur additional onerous charges.
Finally, from a CBN perspective, we already know that the APEX bank prefers direct interventions as part of its macroeconomic toolkit. Arguably having a digital Naira (e-Naira) allows the CBN to better facilitate direct transmission to target beneficiaries in key sectors, whilst monitoring the use of the funds disbursed, and expedite recovery when funds are due for repayment.
So, should we expect a CBN announcement on e-Naira soon? Your guess is as good as mine.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- Dangote Cement Plc to hold AGM on May 26th
- Linkage Assurance Plc proposes N500million as final dividend for 2020, and a bonus issue on its existing shares.
- VFD Group set to raise additional capital of N9.01 billion through rights issue and private placement.
- GT Bank records a 9% dip in profit to N45.55 billion in Q1 2021.
- Secure Electronic Technology Plc records a 121% surge in Profit after tax in Q1 2021.