AT the backdrop of its 2017 Banking Sector Report, Managing Director, Afrinvest West Africa, Mr. Ike Chioke, in this interview, spoke on current developments in the banking sector. Excerpts:
WHAT are the implications of the widening market share gap between tier-1 and tier-2 banks.
The banking industry is growing and there will be specialization for everyone. Even from the report, the size of growth over the years using any of the metrics recorded double digit growth in the industry overall. But the tier-1 banks are growing faster. What will happen in the industry is that there will be areas of specialization.
There are certain transactions that tier-2 banks are better at handling because they are smaller and decision making is faster. But there are other transactions that may have wider implication for the country, or global linkages. These transactions work better with tier-1 banks. So, each bank will find space in areas of specialization.
Risk asset creation
A bank fundamentally needs to manage its balance sheet, and if a bank becomes careless with risk asset creation, there will be serious consequences. For example, the performance of Firstbank and Ecobank Transnational Incorporated (ETI) have been less than expected, simply because, they have taken probably a bite more than they can chew. So it’s not only restricted to only tier-1 banks. Tier-2 banks can also experience similar predicament if they bite more than they can chew.
As a result of the monetary policy and increased government borrowings, the role of banks in extending credit has been stifled. Did your report take into cognizance this liquidity squeeze? With this squeeze, where will the growth come from and what is the hope that Nigeria will reopen for business?
The banks are rational human beings. A rational human being would say ‘why should I take a risk to make 25 per cent of my money, when I can take zero risk and still make the 25 per cent’. So, if treasury bills are at 18 per cent and tax free basis, by the time banks look at the tax effected adjustment, they are well above 20 per cent. So, why bother give a loan to a business and charge them 25 per cent, only to be told at the end of the day that, the environment was difficult, there was no FX and so many other reasons why the business cannot pay back the loan. Banks are only being rational. Unfortunately, this is caused by the enormous borrowing by government which is crowding out the private sector. These borrowings are driving interest rates upward, hence making it more attractive for banks to lend to government and triple ‘A’ rating.
What the government ought to do if they need funds for some key projects, is to determine the projects required to actualize the economic plan. There are some projects in the ERGP that I do not understand. Why do we need a costal rail line? If the government had said it wants to build an East- West rail line from Lagos to Onitsha, that makes a lot of sense because that is where our goods are moving. Only then can they be telling us something that is music to our ears.
They should articulate some of the important projects and look at some of the access they have in discrete sectors e.g. oil&gas, aviation etc. If the government determines that they want to build an East-West rail line and they have an international airport they cannot manage, they can get foreign investors to build the airport while they pay only about 20% as contribution. Then they can decide to charge the passengers a tariff for the next twenty years. It could even be a public private partnership
Government must determine upfront the specific projects they plan on using proceeds to execute. This helps ensure accountability and transparency.
They tell us they want to do a lot of projects, but they do not give us the list of the specific projects. Then at last minute, they tell us they want to build a coastal railway. Why? Whose is on the coast? What goods are they transporting on the coast? They have not even done a water transportation system which is easier for us, but they want to do a coastal rail line.
Some of the projects may not have been ventilated properly to the public. When they have decided to spend on a large scale infrastructure which is meant to turnaround the economy, they should put it out so that the public can debate it. It is our common wealth. We should all know what they want to do. With our six geopolitical zone arrangement the FG can decide to construct one big project per zone that are connected and ultimately complement each other.
When the infrastructure is built, the enabling environment for businesses to thrive is built as well. I have seen a lot of improvement in the ‘ease of doing business’. Today, foreigners can fly-in and get Nigerian visas on arrival, although it is still not as easy as going to Ghana, kenya or Nairobi. Nonetheless, it is a significant departure from where we used to be. But that is just the soft infrastructure. The soft infrastructure must be supported with the hard infrastructure. And that is where we fail sometimes. We end up executing ‘white elephant project’- building a massive infrastructure, in the middle of nowhere, with very limited number of people enjoying the benefit.
In order to spur the growth without squeezing out the private sector, the government has to get these funds from other sources They are cannot go abroad to borrow everything. They can borrow some funds to finance some infrastructure projects that have been design to enhance the economy.
What did the report say about the non-performing loans?
From our analysis, following the devaluation of the Naira, NPLs (Non-Performing Loans) magnified because about 40% of the loans is denominated in foreign currency.
Foreign currency component
So if the exchange rate moves from N200 /$ to N305/$ it will be about one-third increase in the size of the loan book as a result of the foreign currency component. As I said earlier, some sectors which are exposed to the foreign exchange side were particularly challenged because of the illiquidity in the FX market and of course the consequence of going into a recession.
So if you are in the oil & gas or power sector and you are already having difficulties in servicing loans when exchange rate was N200/$ and suddenly it moves to N305/$, and you cannot even access the dollar, then you have no capacity to fund your loan. That is what leads to increase in non-performing loans.
We have seen a situation where the NPLs rose quite alarmingly particularly with some of the big lenders. We have also seen rises in fee and commission and net interest income because banks took their cash and put it in government securities to earn the income back or they booked foreign exchange revaluation to mitigate the negative consequences on their balance sheets.
Yes, NPLs have risen and there is concern that it is at worrying stage. A number of the tier-2 banks might have issues, but we think it is something that the system can tolerate, as long as we continue to further reform and view the current situation with more optimism. Optimism in the sense that we want to continue to reform and make the environment more beneficial.
On the flip side, if we take a hawkish stance, it could lead to trouble. As we go into 2018, we see that there will be increase in government spending in infrastructure and recurrent expenditure. This should be helpful for the banks.
If the challenges are managed diligently, the positions can be eased off to a benign one by 2018.
Can we say that the foreign exchange (FX) market has achieved stability?
We have achieved a balance in the FX market to an extent. I may term it ‘an uneasy calm’. It is still calm nonetheless. As I have explained, last year, we had illiquidity in the FX market; there was insufficient dollars in the market. However, this year, there is illiquidity in the Naira market. We have dollars now but insufficient Naira.
So, we need to move towards a better equilibrium, where there is enough Naira to chase valid projects looking for dollars, specifically, projects that can be used to spur the growth of the economy. That is really where we need to get to.
At this point, the exchange rate is stable. We should expect to see more government spending next year. Obviously, the CBN will be struggling to curtail excess liquidity in the system. Hence, there is still going to be an uneasy calm. Where, as soon as money comes into the system, there will be immediate mop-ups.
But, if this can be supported with very positive reforms that introduces viable opportunities for government to have funds without going into the banking system to borrow it, then, we can then get that equilibrium back.
That equilibrium that attracts income without borrowing, designed to lay the foundation for our infrastructure will lead us to a benign environment.