Why Nigeria’s financial market remains sweet, attractive to foreign, local investors —Chioke

Afrinvest (West Africa) Limited, a Lagos-based investment banking and securities company, is set to launch its 2017 edition of the annual Nigerian Banking Sector Report at the London Stock Exchange (LSE). During a press conference heralding the launch, the firm’s Group Managing Director, Ike Chioke, spoke with journalists over the weekend. Chima Nwokoji brings excerpts from the interview session:

Can you give an overview of the banking industry as contained in the report you intend to launch in London?   

Nigeria’s financial market remains a sweet and attractive spot for both foreign and local investors. Although performance in the past year had been hampered by foreign exchange (FX) challenges, the improvements that have been witnessed since the introduction of better FX management policies suggest that the market still has potential to attain new heights. The country may have lost some of its luster in the past years, but in our view the glass is half full and filling up, albeit slowly.

Clearly, the depreciation in currency affected all of the banks. Obviously, some other key sectors that had trouble when you have devaluing currency, magnifies the problem.  For instance, those that extended foreign currency loan to the power sector and oil and gas sector which is traditionally foreign currency loan denominated, then the devaluation magnifies the problem. There are some banks that have depressed capital adequacy ratio and are looking for ways to boost their capital. But on the flipside, some of the tier one banks that have more foreign currency deposits that are risk assets, benefited from the devaluation and you see them booking foreign exchange gains.  The likes of GTB, Zenith, UBA and Access Bank belong to that group.

So, what we see is a continued widening of the gulf between the tier-1 and the tier-2 banks.  Once upon a time, tier-one banks accounted for about 60 to 65 per cent of the market share of the banking sector. In the universe of 14 banks we covered in this report, we have seen that per centage rise to over 70 per cent.

So the tier-1 banks continue to grow, often at the expense of the tier-2 banks. You might also recall that some of the members of the Monetary Policy Committee of the Central Bank have observed that some of the tier-2 banks might be challenged. While one may say that the system itself is sound, but if we have multiple tier-2 banks that are challenged, and if all of them were to go down at the same time, you could have a pack of a systemically important bank. The fact that we had foreign exchange illiquidity in 2015 which became massive in 2016 constrained growth across all industries particularly in the manufacturing sector.  But it supported and spurred growth in agriculture and more investment, because for the first time in recent years, we had pricing parity. The cost of production in Nigeria did not make our goods too expensive. So, we had a lot of people invest in agriculture.

However, it created problems in the power sector because a lot of people had borrowed money in foreign exchange to build gas pipelines, gas processing systems to deliver power to the power stations and now the power stations cannot pay for that. Again they have massive loans that are not performing.

But luckily, some of these bottlenecks have been resolved and we have seen that the positive profit momentum which most of the banks registered has given them some buffer to get away with some of the ailing problems that we mentioned. CBN has also been constructive and supportive. However, we are not totally out of the woods yet. The key question is, how do we bring back growth? Paradoxically, while we had illiquidity last year in the foreign exchange market, this year we are having illiquidity position in the naira market. There is dollar in the market. Exchange rate has stabilised after coming back from about N400 officially and N520 unofficially, to well below N360 and people are even talking as low as N330. Now dollar is available but people are looking for naira. CBN policy that requires putting cash down before getting dollars were designed to reverse speculations.

You said that teir-1 banks control about 70 per cent of market share of the sector. What is the implication for the banking sector? Are we likely to see a situation where tier-1 banks will take over the market?

No, there must be specialisation for everybody. The banking industry is growing and we have seen double-digit growth over all. It’s just that the tier-1 banks are growing faster. So it could be a tier-2 bank that may see its business double. There will be areas of specialisation. Even in Afrinvest, there are certain transactions we prefer we rather work with tier-2 banks because they are more specialized in that area and get decision making faster. So, you will always find space for each of the banks.

If banks do not lend to the government, how can government spur growth without squeezing out the private sector?

Government has to find that money from other sources. You can borrow some and tie to infrastructure projects that are designed to transform the economy.

Banks are rational human beings. A rational human being would ask why should I take risk and make 25 per cent of my money when I can take zero risk and the same amount. So, if you buy Treasury bills at 18 per cent on a tax-free basis, and by the time I put the tax- affected adjustment, am above 20 per cent. Why bother to give a loan to someone and charge them 25 per cent only to be told long story that the environment was difficult and there was no foreign exchange. Unfortunately, it is being caused by the government. Government is borrowing too much and crowding out the private sector. By so doing they are making it more attractive to banks.

In your outlook for 2017, you titled your report “ reform or be relegated.” In your banking sector report to be launched this week, you are saying, “Nigeria opens for business,” does it mean you are satisfied with the level of reforms the country has achieved so far.

At the time we released that report, we were coming from an environment where there was massive illiquidity in the foreign currency market, which constrained growth. In October/November 2015, we had gone out of record to note that the country was heading towards a contraction as a result of a decline in the price of oil. So, how do you ensure growth while managing reduced income? At that point we were suggesting devaluation. However, we entered 2016 and the government was reluctant to do the right thing. Obviously, the combined effect of a perfect storm: fallen oil prices, massive government expenditure that led up to the last election, there was treasury single account that mopped up all the liquidity from the banking system and then we had disruption from the production volume. It was like someone who had an accident and instead of infusing more blood, you pull out the remaining one and he goes into coma. That was what happened in the economy. By the time they came to grips with it, they realized that there is need to relax certain things. That’s why we said at the beginning of the year, ‘reform or be relegated.’

But, with the expanded growth and the Economic Recovery and Growth Plan (EGRP), that has just been released by the Minister for Budget and Economic Planning has already pointed to the reforms government wants to do. In our opinion, the ERGP has broadly captured all the challenging macroeconomic areas with comprehensive plans on how to address them. Nevertheless, we note that the impact of these plans in the short to medium term will be based on the extent to which implementation is carried out. For the economy to achieve sustainable growth, we believe government must be committed to monitoring and evaluating the implementation of the plan. Furthermore, it is expedient that the structural changes needed to revamp the economy and place it on a sustainable growth path are continuous and proactive to build resilience against commodity price shocks.

If they achieve the EGRP, what we are saying is therefore appropriate that Nigeria reopens for business. Because you will see a series of sustained transformation in certain key sectors and that would be positive for the economy. But we can only recommend what they can do; we are not government itself to go into the business of implementing them.

Though we have seen the economy on recovery path, the issue of corruption and transparency is still a concern, did you consider corruption in your report?

In the report, we talked about corruption and the government’s new whistle blowing policy. But sadly, all these haven’t met our expectations. The government told us they recovered about N17 billion ill-gotten wealth. This amount is nowhere relative to the announcements about a lot of money they have seen here and there, even on this particular street, yet there has not been any arrest. We do feel that corruption has not been well-tackled. We would have added corruption as one of the areas that Nigeria has reformed but we didn’t have enough facts. There has been really positive noise. I recall what one of the legislators said. That when it comes to fighting corruption, the government has been using deodorants against its officials and when it is in the opposition camp, it will bring out insecticides.  So there are lots of work to do.  If you look at issues that came up from the minister of state for petroleum’s letter, it will tell you that corruption is not really trying to catch somebody when they are taking money. It is building the structure that prevents it from happening in the first instance.

Specifically, why did you arrive at the conclusion that Nigeria is ripe again for business?

We arrived at the conclusion that “Nigeria has reopened for Business” because of a number of reasons.  Nigeria has survived a turbulent phase from 2014 when the economy began to witness an economic downturn to the emergence of green shoots since Q2:2017. Three lessons from the recent episode are obvious:  there is a need for a wider diversification of government revenue and exports; institutional constraints need to be speedily removed, and there is an urgent need to increase investments in infrastructure in order to boost entrepreneurship and gain more to achieve competitiveness. The government has released an Economic Recovery & Growth Plan (ERGP), a Medium Term Plan for 2017 – 2020, amongst other efforts aimed at dealing with short to long term constraints to achieving economic prosperity.  Nigeria is yet to record a quantum leap in crop production yields or production per capita despite improvements in global farming techniques and technology which have buoyed productivity elsewhere. Nevertheless, the renewed drive to boost productivity in the sector has attracted big-ticket private-sector investments with the most prominent in recent times including the 120,000MT per annum WACOT Rice Mill commissioned in Argungu, Kebbi State in August and 750,000MT per annum OLAM Integrated Poultry Facility (consisting of Feed Mill, Hatchery and Breeder Farms) in Kaduna State. We are of the view that the reinforcement of these initiatives and policies will further revive and improve productivity in the agriculture sector and enhance food security.