Guaranty Trust Bank (GTBank) recently released its audited group’s financial statement for the bank and the group for the financial year ended 31 December 2020.
As with prior years, the topline and bottom-line results were impressive. The group reported gross interest income of N300.74 billion in 2020, up by 1.5% from N296.21 billion reported in the corresponding period of 2019. More impressive was the reduction in GTBank’s total interest expense from N53.82 billion at the end of 2019 to circa N41 billion at the end of 2020, representing a reduction of N12.82 billion or 31.26% within a 12-month period.
This significant reduction is explained by policies of the Central Bank of Nigeria in 2020 to drive down market rates in the banking sector. Of particular relevance during the year was the CBN directive to all banks to reduce interest rate payable on savings deposits from a previous minimum of 30% of MPR to a new minimum of 10% of MPR, effectively reducing interest rates payable on savings account deposits from 3.75% to 1.25%per annum. For a bank like GTBank that had approximately 33% of its total customer deposit liabilities in savings accounts throughout 2020, this was a real game-changer in terms of its cost of funds and net interest income.
The increase in gross interest income and reduction in interest expense resulted in net interest income improving to N253.67 billion in 2020 compared to N231.36 billion in 2019, an increase of N22.31 billion or 9.6% year-on-year. The significant increase in net interest income is attributable to increase in interest income from an additional N162.16 billion in loans and advances made to customers in 2020 (mostly to non-individual customers).
Additionally, the Bank’s “Other Income” grew significantly in 2020 on the back of foreign exchange revaluation gains of N56.64 billion compared to the N17.07 billion gained in the preceding year. The implication is that the foreign exchange amount received by the bank during the period translated into significantly more Naira than was originally posted, as a result of Naira devaluation during the period.
Notwithstanding the impressive income numbers, it is surprising that the bank’s profit for the year grew by only 2.3% to N201.44 billion compared to the profit after tax of N196.85 reported in 2019. Given this marginal increase in YoY profit, perhaps the results are not so impressive after all.
To try and understand the reasons for the marginal increase in YoY profit, we first noticed that the bank’s loan impairment charges increased four-fold to N19.57 billion in 2020, compared to N4.91 billion in 2019. This is indicative of a deterioration in the quality of its loans and advances. It was noted that in response to the COVID-19 pandemic, the bank granted a 90-day grace period on all Small and Medium Enterprise loans. This was further extended to 6 months in June 2020 and may account for the deterioration in the quality of the bank’s loans and advances.
The effect of this huge increase in loan impairment charge was to reduce the net interest income (after loan impairment charges) to N234.1 billion (N253.67 billion before impairment charge) compared to N226.45 billion (after loan impairment charges) in 2019 (N231.36 billion before impairment charge in 2019).
The bank’s Capital Adequacy Ratio also slightly deteriorated during the period. As at December 31, 2020, the group’s capital adequacy ratio was 21.89% (December 31, 2019 – 22.51%). Note however that while the group’s CAR may have declined, it remained firmly more than the regulatory 16% minimum for Domestic Systemically Important Banks. The group’s Liquidity Ratio at the end of the year was 38.91%, a deterioration compared to the 49.33% liquidity ratio at the end of 2019. The regulatory minimum liquidly ratio is 30%, although at one point during 2020, the bank’s liquidity ratio was as low as 28.54%. So, the group remains well in compliance of the minimum limit.
Given the results of its international expansion, the strategy for aggressive international expansion is not very obvious. The group currently has ten subsidiaries (although two out of the ten subsidiaries are sub-subsidiaries) with nine located in West and East Africa, while one is located in Europe. Its Nigerian presence however dominates all ten subsidiaries as GTBank in Nigeria accounts for 79.78% of total group revenues: 84.54% of Group Profit before tax; 80.37% of Group Total Assets; 81.51%of total liabilities; and 85%of Group Net Assets.
In addition, total investments in the ten subsidiaries (or eight subsidiaries if we discount the two sub-subsidiaries) totalled N56.9 billion at the end of 2020 (N55.81 billion in 2019); however, two of the subsidiaries (GTBank Tanzania Limited and GTBank UK Limited) are loss-making, with GTBank Tanzania Limited making a loss of N415.46 million and GTBank UK Limited making a loss of N1.66 billion in 2020. GTBank UK Limited generated income of N3.55 billion in 2020 but incurred expenses of N5.17 billion in the same period. The performance of GTBank Ghana Limited is however an exception, generating 65.34% of the total N28.22 billion profit before tax generated by all eight subsidiaries.
Operations in GTB Finance B.V. Netherlands was discontinued during the period with a loss after tax of N16.39 million. It is arguable whether with minimal international presence or international presence in other locations, the bank would have generated better returns on investment on the N56.9 billion invested in subsidiaries as at the end of 2020.
During the 2020 financial year, an interim dividend of 30 Kobo per ordinary share on the issued capital of 29,431,179,224 ordinary shares of 50 Kobo each, for the half-year period ended June 30, 2020, was declared and paid. The bank’s directors have recommended payment of a final dividend of N2.70 kobo per ordinary share of 50 Kobo. If approved, this will bring the total dividend for the financial year ended December 31, 2020, to N3.00 kobo per ordinary share (2019: N2.80K per ordinary share).
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.
Why SEC should support democratization of sale of foreign securities
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.
The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”
These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.
This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.
In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.
This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.
The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.
After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.
It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.
At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.
By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.
The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.
Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?
The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.
Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- PZ Cussons Nigeria Plc appoints Ifueko Okauru as Independent Non-Executive Director.
- Chams Plc announces the appointment of Patricia Duru as new CFO
- NPF Microfinance Bank reports a profit after tax of N614.42 million in FY 2020.
- UACN Property Development Company Plc appoints Ojo Odunayo as new CEO.
- Unilever Nigeria Plc reports a loss of N492 million in Q1 2021.