FirstBank Review 1st Half of 2011


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FirstBank Review 1st Half of 2011

  1. 1. From the GroupManaging Director/CEOII am pleased to present to you the maiden edition of our As the nation’s largest and most respected financialsemi-annual publication, the FirstBank Review. Through the institution with over N2.5 trillion in assets, 5 millionFirstBank Review, we seek to shed light on contemporary customers and 1.3 million shareholders, we remaineconomic and business issues in a practical and readable committed at FirstBank to the development of Nigeria. Onefashion. The publication is targeted at business leaders, of the means by which we hope to do this is by stimulatingpolicy makers, legislators, academics, enthusiasts, and of intelligent fact-based discourse on salient business andcourse, our valued customers. It will be widely distributed economic issues of our times amongst decision makers andamongst professional organisations, blue-chip institutions, opinion leaders. It should therefore come as no surprise thatgrowing businesses, government agencies, as well as local we have chosen “Unlocking the Domestic Credit Market”and international investors. as the theme for the maiden edition of our publication.This journal is enriched with well-researched articles from We hope that you find this publication stimulating andour Research and Economic intelligence team, respected informative, and we welcome any feedback that you mighteconomic and financial analysts, seasoned business have.commentators, and is supported by an experienced editorialteam. The scope of the Review will cover an assortment oftopics over time, including recent economic developments, Bisi Onasanyagovernment policy pronouncements, local and global Group Managing Director/CEOmarket updates, and perspectives on promising business First Bank of Nigeria Plcopportunities within the Nigerian economy. FirstBank Review | 1st Half 2011 3
  2. 2. ContentsVOL 1 ISSUE 1 | 2011 06 Editorial Note 10 The Economy at a Glance 12 The Nigerian Credit Conundrum Tackles the question why banks with excess liquidity do not lend more. FirstBank Economic Intelligence 14 Regulatory Intervention: Towards Unlocking the Domestic Credit Market Highlights the recent Federal Government’s assisted funds, directed at some key sectors of the economy. FirstBank ResearchCover Image: YINKA OBEBE 32 Credit Growth in Africa Examines the potential bargains implicit in the credit markets across a number of African countries. Razia Khan
  3. 3. 36 Sectoral Perspectives Outlines emerging business opportunities across sectors.18 Syndicated Loans Gaining FirstBank Research Popularity in Nigeria Profiles the domestic syndicated credit market in the past few years. FirstBank Research22 Definitive SME Guide to Getting A Bank Loan Provides practical tips for small business owners who desire to secure a bank loan. Patrick Akhidenor26 Nigerian Banking Sector – Set to ‘Resume’ Lending? Provides useful analysis on key policies/activities that will influence the dynamics of banks’ intermediation role in 2011. 47 About FirstBank FirstBank Research30 Credit Dynamics: Is It Better to Borrow in Naira or in Dollars? Describes the root cause of credit problem/ conundrum. Financial Derivatives Company
  4. 4. Editorial NoteFGetting Banks to Lend AgainFinancial intermediation is fundamental affected. When whole sectors of the productively. The regulator also adoptedto the success of market economies. economy are denied capital, the social several measures to promote lending toThe reason banks in particular have such and frequently political consequences of critical sectors of the real economy suchpronounced influence on economic such are enough to make governments as agriculture, manufacturing, power,growth and development is simple: all very interested in ensuring the free flow and transportation. Notwithstanding,businesses require financing. Financing of capital within a nation, and particularly many of the healthy banks were slow tois to any business venture what food is in times of a recession when investments respond and individuals and businessesto the body – a source of energy that are required to create jobs, generate did not fare much better in trying to getallows the consuming entity to conduct stronger economic output, and ultimately bank loans. In fact, in the year endedits activities profitably and to grow – lead to recovery. December 2010, total credit to the privateand without which it would cease to sector actually declined relative to thebe alive. And financing can come from Against this backdrop, the actions of the prior year!multiple sources. As a child might drink Central Bank of Nigeria in the wake ofmilk until it is weaned and then eat our recent homegrown banking crisis are In the same year, we as the FirstBanksolid foods, a business in its early stages very understandable. When ten banks Group (the largest banking group andtypically requires startup equity capital were deemed to be in grave condition in lender in Nigeria) grew loans at face valueand at a later stage expansion capital in 2009, the Central Bank pumped in N620 by 6%. However, because we woundlarger portions and potentially different billion to stabilize the financial sector and down nearly N150bn in loans to ourforms, and over the course of its life it went on to champion the establishment subsidiaries and replaced them with loansmay consume daily increasing rations of the Asset Management Corporation of to customers, our actual loan growthof working capital which it continually Nigeria to purchase ‘toxic’ assets off the to customers was much closer to 20%.replenishes to fund general activities as balance sheets of banks. It additionally We remain intrigued, notwithstanding,it grows. When a business is in poor guaranteed creditors who had lent to by this phenomenon which we call thefinancial health, it may require emergency these banks and depositors who had ‘credit conundrum’. Why are banks whoinfusions of capital to keep it alive, and placed their funds with them. The are awash with liquidity so reluctantconversely when it is doing well, it can government could not afford a situation to lend? Are the reasons to be foundalso suffer from an excess of capital, when in which the failure of a few banks might within the banking system, the broaderit consumes much more than it requires, bring down healthy banks and grind the economy or with the potential borrowersand in forms and under terms that may financial sector and economy to a halt. themselves? And what can be done tonot be the best for its long-term health. restore the vital flow of credit in the Paradoxically, in the wake of the economy? In this edition of the FirstBankWithout over-emphasizing the metaphor, interventions, the industry found itself Review, we explore this topic and weit becomes apparent why regulators and awash with liquidity and interest rates hope that the ensuing pages will not justgovernments are so interested in keeping dropped dramatically with the benchmark elucidate the causes but will also offerthe flow of credit going. When companies NIBOR overnight rate (the rate at which practical advice and knowledge to thosebecome ‘starved’ of credit (and are not banks lend to and borrow from each who seek to take advantage of bankable to finance their operations internally other) averaging 2% in the first quarter financing opportunities.or via other means), they run the risk of 2010 (it has since shot up again). In anof shrinking and eventually dying out effort to stimulate lending and jumpstart- which in turn has broader social and the economy, the CBN attempted during Onche R. Ugbabeeconomic implications as their employees 2010 to maintain low interest rates which Chief Strategy Officer, FirstBankfind themselves out of work and as their would theoretically allow bank customers Editor-in-Chiefcreditors, suppliers, and customers are to access cheap funds and deploy them6 FirstBank Review | 1st Half 2011
  5. 5. EDITORIAL COMMITTEEBayo AdelabuChief Financial OfficerOnche UgbabeChief Strategy OfficerMorohunke BammekeGroup Head, OperationsRichard OgunmodedeHead, Business Performance ManagementFolake Ani-MumuneyHead, Marketing & Corporate CommunicationsBismarck RewaneMD/CEO, Financial Derivatives Company Limited(External Reviewer)Dr. Yomi MakanjuolaPrincipal Partner, Thinck Metrics (External Reviewer)Renuka RayasamRoland Berger Strategy ConsultantsRESEARCh/PRODUCTION TEAMVincent Nwani – Head, Research UnitTunji Inaolaji – Research AssociateSaheed Olajide – Research AnalystINTERNAL REVIEWERSBabatunde SalamiHead, Local Currency, TreasuryGodspower I. NkwoparaHead, HR StrategyEloho OmameHead, Corporate DevelopmentAkeem OladeleHead, Group CoordinationIfeanyi UddinChief EconomistKayode OsolajaHead, Special ProjectsOze K. OzeHead, Publications & ConferencesCREATIVE DIRECTION/DESIGNSymon Adeji, Sleek MediaAyoade Ojo, DesignCavePROPRIETARY & ENQUIRIESFirstBank Review is a publication of the Strategy& Corporate Development department, producedwithin the Research Unit. Further enquiries/commentsand submission of articles should be directed toResearch@firstbanknigeria.comREPRODUCTIONCopyright © 2011 First Bank of Nigeria Plc. All rights reserved.No part of this publication may be reproduced or transmitted inany form or by any means, electronic or mechanical, including NOTE TO READERSphotocopying, recording or any information storage devicewithout written permission. The views expressed in the articles are the authors’ and not necessarily those of First Bank of Nigeria Plc. Whilst reasonable care has been taken in packaging this report, no responsibility or liability is accepted for errors or fact or for any views expressed herein by any member of the FirstBank Group for actions taken as a result of information provided in this publication. FirstBank Review | 1st Half 2011 7
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  7. 7. The Economy GDP Growth 9.0 9.0 7.4 7.0 7.0 6.6 6.9 7.0 7.0 ? 6.2 2011 may mark the second 5.0 5.0 time in six years that 4.6 actual GDP exceeds the Federal Governments budgetary target for GDP. ? 1Q2011 figures already appear promising at 7.4% (in line with 2010 actual). Outcome Outcome Outcome Outcome Outcome Outcome Outcome Target Target Target Target Target Target Target 2005 2006 2007 2008 2009 2010 2011 2.5m bpd Crude Oil Production 2011 Daily Average (YTD June 2011) Daily crude oil production is at its highest sustained level since 2006. We expect strong continued production given 1.8m bpd the success of the recently-concluded general elections and sustained peace in the Niger Delta. 2008 July n (Ja et h ark hig X m nd to k F isk a r FX an r fo US$ 153 2011 Daily Average terb itical and e In pol dem t th ut as at Jan 2011 2011) t es 2 a s abo xpec t (YTD June Ra N by cern We e r. ge ed n . iat y co evels uarte an rec xch b l ep iven tion ing q E ad r a air 1) d port e com e N 01 h Th ne 2 ity im in t g - Ju mod tron s com ain rem 8.0% MPR (as at June 30, 2011) Interest Rates @ 2 year high Interest rates have risen steeply since September 2010. Changes in 10.92% Interbank rate (overnight) the MPR and its corridors will continue to influence the direction of (as at June 30, 2011) deposit and lending rates. Down 2.5% from high of 13.46% in Nov. 2010 Was as low as 1.15% in June 2010 Where are the jobs? 19.7% Official Une m ployment Ra te 12.4% Nigerias of ficial unem Inflation - May rate is high Middle East er than that and North ployment of most of the 2011 African nati As econo currently w on mic activ itnessing re ity Nigeria ha volutions an s the chall enge to in rallies on post ele sa d aggregate flati ction resu Unemploym larger proportion of expendit on control lies in lts, ent (which youth. of inflati u understate is likely on in imp re and moderati containing d) remains orted go ng the im of the gove in our view ods. pact rnments to one p five priori10 FirstBank Review | 1st Half 2011 ties.
  8. 8. at a Glance Private Sector Credit Growth Private sector credit growth declined from an 97% 59% 27% -5% astronomical 97% in 2007 to a contraction of 5% in 2010. However, we expect gradual credit growth in 2011. Non Performing Loans (N billion) 2,922 Non Performing Loans Nigerian Banks’ non-performing loans (NPLs) which 869 ballooned from N151 billion in 2006 (shortly after the regulatory-induced recapitalization exercise) to 272 N2.9 trillion in 2009 reduced significantly in 2010. 209 151 Available data (for 13 banks) shows that NPLs have declined to N869 billion in 2010 – in part due to write-offs and the interventions of the 2006 2007 2008 2009 2010 Asset Management Corporation of Nigeria. an Market Syndicated Lo e syndicated and 2009, th e value of owdo wn of 2008 enin g. Th After the sl be reawak e t appears to 2011 is greater than th loan marke als in 09. the tw o biggest de ecuted in 2008 and 20 of deals ex total value Sectoral Share of Bank Loan The agricultural sector which contributes over 40% to the nations GDP accounts for less than 1% of total bank lending while telecommunications which contributes 4% of GDP accounted for over 12% of total bank loans in 2010. FirstBank Review | 1st Half 2011 11
  9. 9. The NigerianCredit ConundrumFirstBank Economic Intelligence T The larger context for the ongoing debate With the banks awash with new liquidity, about current constraints in the domestic questions have inevitably been raised credit market is the astronomical growth about a credit squeeze, and much effort in credit to the private sector, which spent trying to device new approaches to occurred between 2006 and 2008. In unlocking the domestic market for credit. excess of 100% per annum within this Again, the CBN’s intervention in this period, it is worth recalling that the bulk regard has been the most noticeable. The of this credit growth fuelled speculative jury is not yet in on the extent to which activity in non-productive sectors of the apex bank’s quasi-fiscal operations the economy, especially connected may have helped to improve credit flow party lending, margin lending, and oil to the real sectors of the economy, but importation. it is hard not to commend much of what the CBN has done thus far. It was inevitable therefore, that the Central Bank of Nigeria’s (CBN) intervention to Nevertheless, success in unlocking the reform and repair the sector would lead domestic market for credit will however to an attenuation of domestic credit depend on getting the right mix along growth. The latter consequence has four interconnected dimensions of the been the main upshot of stronger risk economy. First, the banks. Traditionally, management frameworks, and improved their business model has focused on governance arrangements. However, it generating retail liabilities and on-lending is hard to ignore another effect of the these to the top corporate names. As the apex bank’s attempts at cleaning up the structure of the economy has changed industry’s balance sheets. Along with the with successive reforms, this model has Asset Management Company of Nigeria’s been challenged by a noticeable bulge (AMCON) purchase of the industry’s in the middle of the economy. Along non-performing loan portfolio, the CBN’s with the transition in the trend growth guarantee on interbank transactions rate of the economy from around 4% helped push up bank liquidity beginning prevalent in the late 1990s to around 2011.12 FirstBank Review | 1st Half 2011
  10. 10. 7% today, there has emerged a new which ensure that the landing cost of noticed attempts by policy makers tomiddle class in the country with financing imports is cheaper than for domestic stimulate credit growth by loweringneeds which the banks are ill-prepared production have helped contract the interest rates to near zero. LIBOR whichto serve. Change would thus see the manufacturing sector. The challenge here came down to 0.5% per annum combinedbanks re-appraise their pricing models, is to reduce the cost of doing business with huge doses of quantitative easingrisk acceptance criteria, and the size of in the economy, including the provision did little to motivate banks into a bullishtheir loan packages if they are to take of infrastructure through the public- lending mode. The same happened inadvantage of the new vistas opening up private partnership, in the expectation Nigeria (March-June 2010) when OBB andin this sector. that growth in the manufacturing sector T/Bill rates declined to 3% per annum, will drive a resurgence in the demand and we did not notice a spike in lending.Much of the rest of what has to be for credit. This means that low interest rates anddone though is completely beyond the liquidity saturation do not on their ownbanks’ ken. Emergent sectors of the This latter challenge is a fiscal one. alter banking and lending behaviour.economy demand specific responses, Government must create the environment It is the perception of risk that makesstemming, among others, from the fact for this to happen. Government though, the difference. In the U.K. like otherthat they still suffer from a narrowness of has an added task: fiscal consolidation. advanced markets, it took approximatelyentrepreneurial competences. Most small Since 2006 and on the back of revenue 24 months after the stimulus before weand medium sized enterprises operating over-performance from elevated crude noticed any substantial increase in creditin the economy today still do not know oil prices, government spending has extension and flows to the market. Onehow to optimise their capital mix, cannot grown steadily. Government debt has thing that is common between lendersput coherent business plans together, grown too. And as banks have dealt with response to policy incentives acrossand often do not keep adequate books net interest margin pressure through various markets is that the trauma of theof accounts. So, even to the most increasing their holding of government financial crisis led to a high level of riskentrepreneurial of this class, it would be instruments, government has contributed aversion which takes time to thaw.hard to see much credit flowing their significantly to crowding out privateway unaided. sector borrowing. Adjusting the public All told, it would be necessary, in light expenditure management framework to of the feedback between these diverseIn spite of this, credit opportunities were take cognisance of this would thus be dimensions of the economy that aalways going to be constrained by the a useful contribution to the process of solution to the credit problem be allfact that manufacturing contributed unlocking the domestic credit market. inclusive. This was always going to be a4.19% of GDP in 2009. Ideally, one of challenge to be solved over the medium,the areas in which net capital formation As an international bank, there are certain and not the short term.should take place in the economy, and to characteristics of the global recoverywhich credit should flow for this purpose, which we noticed in the various marketsstructural constraints in the economy, where we operate. For example, we FirstBank Review | 1st Half 2011 13
  11. 11. RegulatoryInterventions:Towards Unlocking the Domestic Credit MarketFirstBank ResearchE Evidently, the Federal Government appears determined to influence and stimulate the level of economic activities in the real sector of the national economy. Within the last 20 months, the Central Bank of Nigeria (CBN) has released four guidelines for disbursement of funds totaling N900 billion, directed at boosting real activities across five sectors. The four Funds, with varying loan tenures, are Commercial Agricultural Credit Scheme (CACS), SME Credit Guarantee Scheme (SMECGS), SME/Manufacturing Sector Refinancing/Restructuring Fund, and Power and Aviation Intervention Fund (PAIF). The Funds are earmarked to finance five sectors: Agriculture, Aviation, Power, Education and SME/Manufacturing. Prior to 2010, the last time the Federal Government injected direct funds into the real sector was in 2006 (Agriculture Credit Support Scheme). In the table shown below, we highlight the funds’ basic framework:14 FirstBank Review | 1st Half 2011
  12. 12. FirstBank Review | 1st Half 2011 15
  13. 13. Profile of Recent Government Assisted Funding Funding Intervention Year of Establishment Amount Sectors to be Funded Measures /Release of Guideline (N ‘Billion) Agricultural Credit April, 2006 50 Agriculture (Establishment or Support Scheme management of plantations; cultivation or production of crops; livestock; farm machinery and hire services) Commercial Agricultural January, 2010 200 Agriculture (Production of cash crops, Credit Scheme food crops, poultry, livestock, aquaculture; processing; storage; and farm input supplies) SME Credit Guarantee March, 2010 200 • Manufacturing Scheme • Agricultural Value Chain • Educational Institutions • Any other activity as may be specified by the ManagingAgent from time wto time SME/Manufacturing April, 2010 200 • Nigerian SME/Manufacturing Sector Sector Refinancing/ Restructuring Fund Power, Aviation & August, 2010 300 • Power Infrastructure Fund (PAIF) • AviationSource: Funds’ GuidelinesWhat happened to the target sectors still face onerous by government, funding gaps have challenges that inhibit their ability to persisted (and appear to be approachingFunds? easily access financing. Key among epic proportions), when seemingly theFigures from CBN show that the funding the limiting factors are: nation’s GDP growth is increasingly beingschemes have been largely successful in disconnected from bank lending.terms of disbursement and utilisation. For • Difficulty encountered in obtaininginstance, as at December 2010, over 60% Irrevocable Standing Payment Order In the Nigeria Vision 20:2020 – Firstof the funds directed at the agricultural (ISPO) from state governments National Implementation Plan (2010–sector had been disbursed. Updates of to guarantee loans disbursed to 2013) Blueprint (draft copy) – releasedthe funds utilisation are highlighted as farmers in their various states; in May 2010, the Federal Government’sfollows: • Mismatch between the mean time planned investment across all sectors of for processing credit and the timing/ the domestic economy between 2010• N109.628 billion out of the N200 seasonality of the available business and 2013 is estimated at N7 trillion. billion CACS Fund has been opportunities for which the loan is The top-5 priority sectors are projected released for disbursement to sought; to account for 73.6% of the total 115 beneficiaries (comprising 95 • Inability of the fund-seekers to investment expenditure estimate. The individuals/private promoters and provide the required security as priority sectors, in descending order 20 State Governments), through 12 stated in the Fund guidelines, of indicative allocations, are: transport banks (as at February 2011); especially when banks have to bear (N2.43 trillion), power (N880.98 billion),• N199.6 billion out of the N200 the credit risk. education (N611.66 billion), agriculture billion for re-financing/re-structuring & water resources (N595.34 billion), and of banks’ existing loan portfolios to oil & gas (N541.79 billion). Any Funding Gap? the manufacturing sector and SMEs was disbursed to 539 beneficiaries The recent Intervention Funds Similarly, the expenditure in the power across 12 different sectors of the pronouncement is positive confirmation sector over the next ten years is projected economy (as at December 2010); that government is aware of the financing at about $100 billion (N15 trillion) – in• N35.82 billion out of the N50 billion challenges facing the real sector of order to increase electricity generation ACSS Fund has been guaranteed the economy. However, the available from its current level of less than 4,000 since inception (as at June 2010); funds are just a fraction of the financing megawatts to 40,000 megawatts by 2020. resources required by the sector to regain Projections of the other priority sectors This apparent success traction and achieve sustainable growth. will likely follow a similar pattern. notwithstanding, operators in the Despite the ongoing funding initiatives16 FirstBank Review | 1st Half 2011
  14. 14. The national and sub-national “Clearly, aggregated the impediments which have hamperedgovernments’ investment in these the private sector’s ability to access creditsectors is to enable a conducive investments in facilities from banks. In addition, suchenvironment and to galvanise the private these sectors will strategic measures should checkmate pastsector’s participation in the economy. pitfalls (e.g. ballooning of non-performingCumulatively, the funding required to open up investment loans, escalating interest rate, etc.), asachieve the anticipated sectoral/economic opportunities for the well as pre-empt future hindrances.development projections is massive. private sector. But it A related and festering concern is the needClearly, aggregated investments in will be very difficult to accelerate land reforms. In Nigeria, thethese sectors will open up investment primary collateral for bank loan requestsopportunities for the private sector. But for the private sector is landed property, and, over the years,it will be very difficult for the private solely to finance all this has created an incongruous barriersector solely to finance all the sub-sectorsof the real sector to the extent of their the sub-sectors of to entrepreneurship. Recognising this fact, government, in 2007, included landfunding requirements, without financing the real sector to the reforms in its 7-point agenda, statingassistance from the banking sector. extent of their funding “While hundreds of billions of dollars have been lost through unused government-In the Doing Business Report (2010), requirements, without owned landed assets, changes in the landa co-publication of Palgrave Macmillan, financing assistance laws and the emergence of land reformsInternational Finance Corporation (IFC) will optimise Nigeria’s growth throughand the World Bank, Nigeria ranked from the banking the release of land for commercialised125th position out of the 183 countries sector.” farming and other large-scale businessessurveyed in the report. The ranking was by the private sector. The final resulta decline from the 120th position Nigeria translates to improved welfare”. Hence to will ensure improvements and boostsachieved in 2009. realise this goal, the Bankers’ Committee to the production and wealth-creation “has identified three key sectors: power, initiatives.”The difficulties that characterise the ‘Ease transportation and agriculture, as mostof Doing Business in Nigeria’ index have critical to the development of the real Additionally, it is important to develop thea strong direct correlation with funding. economy, as well as the change that primary and secondary markets for long-In a survey by the World Bank, “An will drive other sectors and contribute to term debt. This is particularly importantAssessment of the Investment Climate economic development in Nigeria.” given the banks’ limitation in extendingin Nigeria (2009)”, it was reported that loans to the real sector (considering theironly 1% of the business financing needs Five key decision thrusts that would loan/deposit maturity mismatch profile).in Nigeria are sourced from banks and influence Bankers’ Committee’s lending The current practice whereby the bondother financial institutions. The remaining provision to the three identified sectors market is dominated by governmentbusiness financing comes from internal are: at the expense of the private sectorfunds/retained earnings (70%), suppliers’ is not sustainable for a country thatcredit and advances from customers • Identification of initiatives in each of has identified the private sector as its(25%), and borrowing from family and the focus sectors that the financial primary engine of economic growth. Bothfriends (4%). system will support; government and financial intermediaries • Determination of the requirements should institute strategies that will reduceAccess to financing, according to the for success, including funding; the crowding-out effect of government’sGlobal Competitiveness Report (2010– • Engaging in advocacy to effect borrowing at the expense of private2011), was the most problematic factor government policy changes; sector lending.impeding doing business in Nigeria • Support for industry-wide capacity-out of the 15 factors considered in the building; While the issues described abovereport. The other factors, in descending • Work on the development of are considered crucial to unlockingproblematic order, are: inadequate supply regulation and legislation to support the domestic credit market, all keyof infrastructure, corruption, policy lending to the sectors. stakeholders should ardently brainstorminstability, government instability/coups, and fine-tune the modalities to actualiseinefficient government bureaucracy, the strategic objectives that would spurinflation, inadequately educated Bridging the Gap sustainable economic growth. This willworkforce, crime and theft, poor work With the apparent mutual understanding facilitate deeper understanding of theethics in national labour force, foreign of the funding gap and remedial actions funding schemes and the technicalitiescurrency regulations, restrictive labour to bridge the gap, a new chapter appears of lending to the real sector. This isregulations, poor public health, tax to have been opened in the Nigerian a clarion call to all stakeholders toregulations, and tax rates. real sector financing. However, to pro-actively champion and contribute orchestrate tangible increase in credit towards Nigeria’s attainment of theInterestingly, one of the four cardinal to the private sector (real sector, in enviable position of ‘one of the 20 largestpillars of the CBN’s ongoing reform particular), all parties must concertedly economies by 2020’.is “ensuring that the financial sector design pragmatic strategies that willcontributes to the real economy, which reduce actual and inherent risks in the realis very critical to the type of growth that sector. By so doing, this should reduce FirstBank Review | 1st Half 2011 17
  15. 15. SyndicatedLoans GainingPopularity inNigeriaFirstBank ResearchOver the past five years, about 64% of syndicated lending in Nigeria wentto the telecommunications sector and 20% to oil & gas.When Etisalat Nigeria closed on a representative in the Etisalat syndicated have taken advantage of loan syndicationsyndicated loan deal earlier this year, it loans deal, “just one bank may not be structures. Over the past five years, aboutwas a sign of renewed dynamism in the able to shoulder that level of borrowing 64% of syndicated lending in Nigeriacountry’s lending markets. Eight Nigerian because of the size of the facility”. went to the telecommunications sectorlenders financed the N97 billion facility. and 20% to oil & gas. In recent years,The mobile operator plans to use the funds Etisalat first approached lenders in the country has averaged only aboutto aggressively expand its network across December 2010. Over the course of the four syndicated deals per year. But as thethe country, buying new equipment and next few months, the FirstBank team Nigerian government intensifies its powerbuilding new infrastructure. along with representatives of other major sector reforms, banks will be called upon lenders met multiple times to flesh out to finance even more capital-intensiveIn such transactions, several banks team the details. Although the banks strove projects.up to structure and underwrite a single to protect their own interests, therelarge loan, allowing them to share were nevertheless no major obstacles in Clients seeking to approach lendersinformation and diversify their risks. As agreeing stipulated terms. “While such for a syndicated loan must be well-Nigerian banks continue to strengthen deals take more time and co-ordination, prepared. While it helps to have a goodtheir balance sheets and stabilise their they are worth it because they help existing relationship with lenders, thepositions, syndicated loans represent banks to better evaluate risks, and ensure most important selling point is a strongthe type of financing schemes that an certain comfort in knowing that all the proposal. Potential borrowers must haveincreasing number of Nigerian firms will banks are in the same situation.” a clear idea of what they are using theexplore. facility for, be able to show strong cash- Syndicated deals have for long been a flow projections and prove that they haveWith the slow thawing of the credit staple in Western markets. In the U.S., good management. Clients make the dealenvironment in Nigeria, loan syndication they formed 51% of total corporate as straightforward as possible for lendersdeals offer companies a way to finance financing in 2007. By contrast, in Nigeria by showing profitability, sticking to loanmajor capital-intensive projects, which they were 12% of corporate lending that terms and communicating regularly withare often too large for just one lender year. Since then, an increasing number all lending undertake. According to the FirstBank of companies in mostly mature sectors18 FirstBank Review | 1st Half 2011
  16. 16. FirstBank Review | 1st Half 2011 19
  17. 17. Top-10 Banks in the Nigerian Loan Syndication Market (2006–2010) Bank Amount (US$ ‘m) No. of Deals Platinum Habib Bank Plc 9,576.23 10 Access Bank Nigeria Plc 8,953.39 9 First Bank of Nigeria Plc 8,808.39 9 Oceanic Bank International Nigeria Plc 7,431.85 9 Stanbic IBTC Bank Plc 8,717.54 9 United Bank for Africa Plc 7,211.00 9 First City Monument Bank Plc 8,688.39 8 Guaranty Trust Bank Plc 8,688.39 8 Standard Chartered Bank Nigeria Plc 8,799.54 8 Zenith Bank Plc 8,684.65 8 Source: FirstBank ResearchSupportive Operating syndication scheme. It is our belief that up in monetary policy rates, in our view,Environment the Freedom of Information Bill (FIB) signals higher interest rates on domestic passed by the National Assembly, once debt instruments. CBN has indicated thatGrowing interest in loan syndication is signed into law, will bolster information it is prepared to tighten further shoulda product of its intrinsic loan portfolio dissemination and disclosure, going the inflation outlook worsen in 2011. Itdiversification attribute, as it reduces forward. is our hope that fiscal consolidation andexcessive single-lender exposure risk. It likely interest rate hikes later in the yearalso serves the dual purpose of aiding At the Monetary Policy Committee (MPC) will not be at the expense of the recoveryfinancial institutions to comply with strict meeting held on March 21 to 22, 2011, of credit growth.regulatory limits and in curtailing risk. the CBN noted that the net foreign assetsIn terms of earnings, it enhances mixed in the first two months of 2011 posted With about N1.5 trillion yearly investmentsincome sources through the collection positive growth, the first time since estimated for the power sector over theof fees, while tackling lack of origination January 2009. Therefore, enhanced credit next ten years, analysts have projected acapability and origination costs. flow to the private sector is envisaged three-digit growth rate multiplier effect in due to the high potential for accelerated the power and ancillary sectors, providedOne major challenge that arrangers and growth, the stabilisation of the banking the ongoing power reform programmeother players in the loan syndication sector and improving investor confidence, intensifies and is face is the uneven access to following the take-off of the Assetmarket information amongst them Management Corporation of Nigeriaand other participants in a given loan (AMCON). On the downside, the trending20 FirstBank Review | 1st Half 2011
  18. 18. One major challenge that arrangers and other players in the loan syndication market face is the uneven access to market information amongst them and other participants in a given loan syndication scheme.*Profile of Syndicated Loans in Nigeria Project Syndicated/Beneficiary Amt Banks Involved Year Involved (US$’Mn) Transcorp – Acquisition of 75% stake of NITEL 750.00 consortium of Nigerian banks 2006 Obajana Cement Plc – Construction 160.00 consortium of Nigerian banks 2006 Celtel – Network Expansion 1,584.00 12 Nigerian Banks and 13 International Banks 2007 Zenon Petroleum 1,500.00 BNP Paribas of France & 9 local Banks 2007 House for Abuja Civil Servants 769.00 Oceanic Bank and two other local Banks 2007 Xechem Pharmaceuticals 7.69 Bank PHB & Diamond Bank 2007 Eleme petrochemicals 123.00 Stanbic Bank, UBA and Fidelity Bank 2007 AES Nigeria Barge 270MW Power Station Project 25.00 Local Banks 2007 NLNG Trains 50.00 Local Facility Agent 2007 NNPC/MPN NGLII Project Financing 50.00 Nigerian Banks 2007 NNPC/MPN $600m Satellite Oil Field Financing 90.00 Local & International Banks 2007 Lekki Infrastructure Project 46.15 Local Banks 2007 Refinancing the New Lagos Airport Terminal Project 153.85 Access, FirstBank, GTB, Oceanic, Zenith, FCMB 2007 MMA2 Lagos Project 250.00 Oceanic Bank 2007 MTN Nigeria 2,000.00 consortium of 21 foreign and Nigerian banks and financial institutions 2007 Exxon Mobil - finance exploratory and 265.00 United Bank for Africa Plc, Oceanic Bank, 2008 production activities Standard Chartered Bank, Skye Bank, Zenith Bank, Bank PHB, Access Bank and Union Bank Plc Lafarge Cement- WAPCO - Ewekoro 268.74 Stanbic-IBTC, GTBank, Std Chartered, FirstBank, 2009 Expansion Plant UBN, Ecobank, Bank PHB, Access, FCMB Main Street Technologies 120.00 AfDB, DEG, First Bank of Nigeria Plc, Skye 2009 Bank Plc MTN Nigeria 2,150.00 Access Bank, Afribank, Bank PHB, Citibank, Diamond Bank, Ecobank, FCMB, Fidelity Bank, FirstBank, GTBank, Stanbic IBTC, Standard Chartered Bank, Union Bank,UBA, Zenith Bank, Industrial & Commercial Bank of China and KfW IPEX-Bank of Germany 2010 AccuGas Limited 60.00 Stanbic IBTC, UBA 2010 Etisalat - Network expansion 650.00 FirstBank, Zenith Bank, Access Bank, Fidelity Bank, 2011 Bank PHB, GTBank, UBA, and Oceanic Bank Shell Petroleum Development Company of Nigeria 30.00 FirstBank, Zenith Bank, UBA 2011 Limited - Shell Contractor Support FundSource: FirstBank Research*Commercial banks still dominate the primary syndicate market all over the world and they appear not in a hurry to leave the space FirstBank Review | 1st Half 2011 21
  19. 19. Definitive SMEGuide to GettingA Bank Loan*Patrick Akhidenor“Mr. Small-Medium Business” is likely to taken regarding the appropriatepoint accusingly to lack of access to bank form of support, which may notloans as the greatest challenge he faces. always be direct lending. A businessBut, is this real or mere exaggeration owner must be able to clearlyand possibly prejudice? If this conjecture express the precise financial need. The longer ais true, why is this so and, how can it be A lender will need to know if, forreversed? This short article will attempt example, the actual purpose is for business has beento address this issue. the payment of salaries, financing in existence, the of receivables, or if the request isLack of Access to Bank Loans – more capital-oriented for, say, the more likely thatFact or Myth? construction of a factory. When the it has assimilated funding request is vague, what “Mr.Generally speaking, the small business is by Small-Medium Business” seems to be and weathereddesign “unitary” with ownership centred conveying is arbitrariness, ambiguity the vicissitudeson a “key man” and supported nominally or evasiveness. Consequently, aby his close family and, sometimes, a few lender would rather choose to err of its operatingfriends. Typically, the business derives on the side of caution…; environment;its vision and dynamism from this keyman who often has very limited funds at • Business plan or FEASIBILITY “surprises”his disposal but almost unlimited ideas study. This will readily indicate if should thereforeand boundless optimism. His inability to the promoter, especially where start- be less frequenttransmit the vision and potential he SEES up risk is envisaged or expansionto his banker often hampers his access to into some new area of business and financialfunds. On his part, his banker’s checklist is intended, has carefully thought projectionswould usually focus on the following: through the business idea and is able to articulate its viability and back likely to be more• A clear loan PURPOSE. Clarity it up with documentary evidence. realistic. and conviction, exhibited by the Otherwise, the promoter might prospective borrower for the simply come across as a spontaneous requested bank loan, will make for or impulsive risk taker; easier and faster decisions to be22 FirstBank Review | 1st Half 2011
  20. 20. • C A PA C I T Y t o re p a y . A f t e r • Reliable FINANCIALS with good extra mile to ensure the success conducting appropriate due CASh FLOW Projections and of a deal or transaction and not diligence on the character and supporting ASSUMPTIONS. More “abandon ship at the slightest signs credibility of “Mr. Small-Medium often than not, “Mr. Small-Medium of turbulence” if the borrower has Business” – usually sourced from Business” pays very little attention personal funds at risk. Oftentimes, past credit history, and professional to keeping good, reliable, and collateral stake is also required, in relationship with employees, readily accessible financial records. addition to equity where the risk is suppliers, trade partners, etc. – a Often categorised as “one-man perceived to be quite high, and given lender would need to assess and businesses”, such business owners the need to comply with regulatory determine from current business characteristically focus more on cost requirements for lending. operations whether the loan can be savings (by not engaging the services repaid as and when due, towards of accountants or auditors) than on With the above pointers as guidelines, the achieving a win-win proposition for keeping good finance records. perennial claim by small to medium-sized both parties. Business acumen and Obviously, the better the quality of business owners of poor access to bank conservative financial management available financial records, the more loans should become less emotional but skills are two key attributes of easily banks can understand and rather premised on hard-nosed reality. successful and long-term business assess the needs of customers; owners; • P ro m o t e r ’s e q u i t y S TA K E . *Patrick Akhidenor is a Senior Credit Analyst in FirstBank• Track record or EXPERIENCE. Generally, the credibility of a proposal Obviously, the longer a business will reflect in the level of equity that has been in existence, the more the promoter has in the proposition. likely that it has assimilated and A lender is more inclined to support weathered the vicissitudes of its a request that puts the promoter’s operating environment; “surprises” own personal funds at risk than one should therefore be less frequent where the promoter’s risk is tied and financial projections likely to be to the expected margins or profit. more realistic; Economic history has shown that business owners will usually go the FirstBank Review | 1st Half 2011 23
  22. 22. Nigerian BankingSector - Set to‘Resume’ Lending?FirstBank ResearchA As the global financial and economic recovery continues, the need for the domestic banking industry to ‘resume’ lending to the private sector gains higher credence, albeit with greater prudence and consideration to inherent risks in business transactions, especially those considered as ‘notable transactions’.26 FirstBank Review | 1st Half 2011
  23. 23. FirstBank Review | 1st Half 2011 27
  24. 24. Catalysts in the Nigerian may prescribe afterwards. Banks were Extension of CBN Guarantee required to submit their compliance At its meeting on March 21 to 22,Banking Industry plans on or before February 14, 2011. 2011, the Monetary Policy CommitteeKey policies/activities that will influence Except the four banks that have chosen (MPC) extended the CBN Guarantee forthe dynamics of banks’ intermediation to operate a holding company (Holdco) all interbank transactions, and foreignrole in 2011 include the following: model (FirstBank of Nigeria Plc, United credit lines, as well as pension funds’ Bank for Africa Plc, Stanbic IBTC Bank Plc placements with banks from June 30, and First City Monument Bank Plc), manyCBN Policy on Cash Withdrawals 2011 to September 30, 2011. other banks plan to sell their subsidiaries./Lodgments Limits Even those that choose the Holdco model A key issue that will determine howIn an effort to reduce the dominance may not retain all their subsidiaries. quickly CBN can withdraw its guarantee isof cash in the Nigerian economy Consequently, consolidation activities the success record of the recapitalisationand encourage the use of electronic (joint ventures, alliances, mergers and exercise/pending sale of the rescued banks.payment systems, the Central Bank of acquisitions) are expected to intensify If mergers/acquisitions/recapitalisationNigeria (CBN), in collaboration with in 2011. exercise is successful, and with AMCONthe Bankers Committee, has set limits firmly in place, the likelihood that CBN willon cash withdrawals and lodgments by In addition, there could be a restructuring not extend the guarantee further fromindividuals (N150,000) and corporate of customers’ composition across banks, September 30, 2011 is very high, as bothinstitutions (N1 million) transacting depending on each bank’s operating investors and creditors will have accesswith Deposit Money Banks (DMBs). This model – coverage and ease of access to sufficient information to enable themdirective, effective from June 2012, is to other financial services will be key assess the inherent risks before makingalso expected to help moderate the cost determinants. commitments – thanks to uniform year-of cash management and reduce related end, supportive regulatory regime andincidences of security breaches and Sale of Toxic Assets banks’ migration to International Financialmoney laundering activities. Plainly, the establishment of Asset Reporting Standards (IFRS). Management Corporation of NigeriaGiven its primary objectives, it is our (AMCON) in 2010 was the reform catalyst If CBN removes its guarantee on allopinion that this policy initiative is required to propel the recovery of the interbank transactions and foreign creditcommendable. Majority of the world’s domestic money and capital markets. lines, the expectation is that there will beadvanced and emerging economies a surge in interbank rates, depending onhave since transited from cash-dominant 21 deposit money banks (DMBs) met the risk level, across various to electronic payment channels, the December 30, 2010 deadline set byhence a policy that will elevate Nigeria AMCON for all DMBs to sell their toxic Expiration of Rescued Banksto the committee of nations that has assets to the company. The portfolio ofentrenched electronic payment platforms Interim Tenures impaired assets of the 21 DMBs comprisedin their financial culture is timely, N2.43 trillion from 9 rescued banks and August 14, 2011 and October 2, 2011appropriate and admirable. However, N581 billion of 12 healthy banks. The will mark the end of the 2-year tenureas laudable as the policy initiative may total value of toxic assets of the banks given to the interim Chief Executiveappear, the practical implications in a is within the limit of N3 trillion in bonds Officers appointed by the CBN for 8 ofNigerian economy that is traditionally cash that AMCON plans to issue. the management teams of the 10 rescuedoriented demands that all stakeholders banks.pull together to discuss and agree its In line with the terms of the loan purchase‘operability’. The debate should also agreement AMCON signed with DMBs The first batch (with August 14, 2011address the lingering risks associated with on the purchase of their toxic assets, tenure expiry date) includes Oceaniconline banking in Nigeria. AMCON has started injecting funds into International Bank Plc (John Aboh), the banks. The action has facilitated more Intercontinental Bank Plc (Lai Alabi),New Banking Model trading activities in the market shares of Afribank Plc (Nebolisa Arah), Union DMBs. Given the volume and influence Bank of Nigeria Plc (Funke Osibodu), andCBN, in its effort to promote a sound of the banking industry’s shares on the FinBank Plc (Susan Iroche).financial system in Nigeria, repealedthe Universal Banking Guidelines (UBG), movement of other stocks, the multiplier effect of the industry’s gains are also The second batch (with October 9, 2011effective from November 15, 2010. The being felt across other sectors of the tenure expiry date) comprises: Springrepeal was approved after months of market. Bank Plc (Sola Ayodele), Bank PHB Plcdeliberations, consultations and intensive (Cyril Chukwuma), and Equatorial Trustreview, in order to curtail the exposure of With this development, we expect Bank Ltd (Gbolahan Folayan).banks to higher operating risks, as wellas prohibit investment of depositors’ investors’ confidence in quoted bank shares to rise. This will facilitate financial The CEOs of the remaining two banksfunds into risky adjacent non-banking stability and credit expansion, as well as (Wema Bank Plc and Unity Bank Plc)businesses that often heighten financial further enhance the depth and liquidity of will remain in charge, but have beensystem instability. the domestic money and capital markets mandated to recapitalise their banks. in 2011. We expect CBN to make specificThe expected effective date for compliance pronouncements on the tenure of all theis May 14, 2012 (i.e. 18 months from the appointed CEOs before August 14, 2011.regulation date) or such date as the CBN28 FirstBank Review | 1st Half 2011
  25. 25. A key issue that will The CEOs’ tenure may be extended if and protecting against money-laundering the bid to finalise the consolidation fails and terrorism financing, as well as help determine how quickly to materialise before these expiry dates. protect individual customer’s interests. CBN can withdraw its guarantee is the Corporate Governance Increase in MPR, CRR & LR As a fallout of the CBN’s special audit At its third meeting in 2011, MPC success record of on all banks in mid-2008, the apex bank unveiled its decision to raise the Monetary the recapitalisation has renewed its efforts to enshrine good Policy Rate (MPR) – from 7.5% to 8.0%. It exercise/pending sale corporate governance in the banking sector. Two major pronouncements by would be recalled that the CBN had also increased in January 2011 the Liquidityof the rescued banks. If the CBN in this regard relate to tenure Ratio from 25% to 30% (effective March mergers/acquisitions/ limit for directors and external auditors’ 1, 2011) and Credit Reserve Ratio (CRR) - independence. from 2% to 4% (effective June 8, 2011).recapitalisation exercise The overall effect of this tight monetary is successful, and with Tenure Limit for Directors: On January policy is a rise in interest rate, and possible 19, 2010, CBN released a circular, decrease in inflation rate.AMCON firmly in place, restricting the tenure of banks’ CEOs to the likelihood that 10 years, and non- executive directors’ Nigerian Uniform Bank Account tenure to 12 years. CBN will not extend Number the guarantee further Auditors Independence: On September On August 19, 2010, CBN released a 13, 2010, CBN released another circular, policy on the standardisation of account from September 30, requesting banks to replace auditors numbering for all banks in Nigeria. 2011 is very high, as that had spent over 10 years, effective NUBAN is a 10-digit code that will enable both the employer and the presenting both investors and December 31, 2010. The 10-year tenure for external auditors is in line with the bank validate account numbers. The creditors will have provisions of paragraph 8.2.3 of the deadline for the full compliance by the access to sufficient CBN Code of Corporate Governance for banks is May, 2011. Banks. information to enable CBN expects “every bank to maintain them assess the The primary objectives of these circulars/ their present Account Numbers and use directives/guidelines are to enforce them for their internal operations only inherent risks before succession planning and promote good as from the effective date of NUBAN, making commitments corporate governance in the banking but every such account number would industry. Hence, we expect more robust have to be mapped to a NUBAN code as – thanks to uniform corporate governance practices and an Alternate Account Number. The bank year-end, supportive enhanced investors’ confidence in the customer should be provided with only banking sector in 2011. the NUBAN code which he/she would use regulatory regime and as a means of account identity at every banks’ migration to Update on Bank Account interaction with the bank.” International Financial Information We expect the policy to have a positive Reporting Standards On November 29, 2010, CBN directed impact on banking transactions, (IFRS). all customers of banks and financial institutions in Nigeria to update their by reducing error rates and undue delay in Automated Clearing House account information by January 31, processing activities, and consequently, 2011. facilitate seamless payment processing nationwide. We expect this account update, which forms part of the Customer Due Diligence (CDD) and Know-Your-Customer (KYC) requirements commonly applied internationally to assist in monitoring FirstBank Review | 1st Half 2011 29
  26. 26. Credit Dynamics:Is It Better to Borrow inNaira or in Dollars?Financial Derivatives CompanyA As Nigeria’s financial markets have evolved this past decade, one of the most compelling concerns for investors, speculators and businessmen has been how best to navigate the stormy waters of the country’s credit markets. Undoubtedly, this is a highly pertinent issue in an economy dominated by trade, where the relative propensity to import hovers around 65%. Peripherally, the introduction of a financial instrument, Forex Forwards, appears to be breathing new life into the debate of whether it is better to borrow in local or foreign currency.30 FirstBank Review | 1st Half 2011