Transcript Performance Analysis - Central Bank of Nigeria

CONFIDENTIAL
The Nigerian Banking System and
the Challenges of the Global
Economic Crisis
Mr. Francis Atuche
GMD/CEO, Bank PHB
14th CBN Seminar for Finance Correspondence and
Business Editors
Makurdi, Benue State
May 19th – 23rd, 2009
Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis : Impact on the Nigerian Economy and
the Banking Sector
SECTION 3:
Sustainability of the Nigerian Banking System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
1
Preamble
“The Phoenix represents to many the life cycle: birth, growth, death
and re-birth because from the ashes life arises anew often
strengthened through reinvention. But this happens not just from
reinvention of oneself but through innovation. And innovation helps
to propel us forward.”
Susan Cartier Liebel
(Jan, 2009)
2
Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis, impact on the Nigerian Economy and the
Banking Industry
SECTION 3:
Sustainability of the Nigerian Banking System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
3
Historical Review of the Nigerian Banking Sector
1st Reform Era
1929 – 1951
•Over 100 banks
established in the
banking boom between
1940 and 1950
•Attrition of 30 private
banks due to poor mgt.,
low capital, debt
overhang & the financial
shock induced by the
recession of the 1930s
•British and French Bank
established in 1949
•Agbonmagbe (Wema
Bank) established in
1945, ACB in 1948
2nd ‘Reform Era
1952 - 1971
 Enactment of the 1952
Banking Ordinance
 Establishment of CBN
 Number of tradable financial
instruments increased in
money market : T/bills (1960),
Money Fund (1962),
Commercial Bills (1968),
Treasury Certificates (1968),
Certificates of Deposit,
Banker’s Unit Fund and
Eligible Loan Stocks (1968)
 Banking Amendment Act of
June 1962 raised minimum
share capital to GBP250,000
 Banking decree No. 1 of
February 1969 & the Banking
Amendment Decree No. 3 of
1970 imposed more stringent
conditions in the industry
 Industry dominated by govt.
owned banks via
Indigenization Act of 1971
 Share capital raised to
GBP600,000 (local) & GBP1.5m
(foreign)
 By 1980 there were 26 banks
3rd ‘Reform Era
1982 - 2004
 National Economic Emergency
Decree in the wake of
Financial distress in the 80s
and 90s (SAP era)
 120 banks (66 Commercial, 54
Merchant)
 Prudential Guidelines
Introduced in 1990
 Bank branches jumped from
40 in ‘85 to over 2000 in ’92
 Public sector accounts
transferred from CBN to banks
in 1999
 Universal Banking in 2001
with N1bn capital base, later
increased to N2bn with 2004
as deadline
4th Reform Era
July 2004 – Date
 Increase in capitalization
requirements by 1150% to N25bn
 No. of Banks reduced from 89 to
24
 Industry revolutionized with
competition leading to increased
product roll out & growth in credit
to economy
 Total Assets rose 439% to N15trn
(latest available figures)
 International Expansion with over
43 branches in Foreign markets
 Nigerian banks accounted for over
65% of stock market capitalization
 Global economic crisis + structural
lapses in NSE forces a collapse of
the stock market with banks
exposed to increased NPLs
 Sharp downturn in oil price and
revenue leads to introduction of
unorthodox policies
 Standard & Poor’s downgrades
Nigeria’s outlook
 New CBN governor takes over
vows to sanitize banking system
with emphasis on regulation,
reporting & risk management
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The Nigerian Banking sector has continuously evolved…
 Reforms introduced during Obasanjo’s second term
has led to a:
 Reduction in Nigeria’s motley group of banks from 89
anemic banks to 24 bigger, stronger and more resilient
financial institutions.
 Revolution in the financial services industry leading to an
increase in the quality of services provided to the
average Nigerian
 Increased number and sophistication of financial
products offered by the traditional bank.
 The impact on the economy can be observed through
Stronger and more
Resilient Financial
Institutions
the:
 Availability of credit to private sector, which grew by
435% from N1.52trn in 2003 to N8.13trn in Feb 2009.
 Phenomenal growth in the usage of electronic payment
systems including the issuance of debit and credit cards.
 Issuance of over 25 million cards being used to process
payment transactions on over 11,000 POS terminals,
7,000 ATMs, 200 web locations and 50,000 mobile
devices. (per E-business experts)
 Improved standard of living via introduction of consumer
finance products (i.e. Leasing of cars, electronic
appliances, laptops/desktop computers and availability
of mortgage loans and credit lines)
Increased number of
Financial Products
Improved
Service Quality
5
Available data on the robustness of the banking sector indicates…
 Increase in total assets/contingent liabilities
after the reforms in 2005
 Successive capital-raising over the
last 2-3 years, which has enabled
massive local and regional expansion
with total bank branches jumping by
41% (4,591 branches)
 Average industry PBT growth rate of
141% in June 2008 and CAR of 25.3%
(higher than the regulatory
benchmark of 10%)
 Competition for dominance within
the industry, leading to East, West
and Sub-Saharan Africa
Total Assets (N'bn)
16000
14000
12000
10000
8000
6000
4000
2000
0
2003
2004
2005
2006
2007
2008
Source: CBN
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Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis, impact on the Nigerian Economy and the
Banking Industry
SECTION 3:
Sustainability of the Nigerian Bank System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
7
Significant challenges have already been experienced in the Nigerian Economy
Nigeria's Oil Production 2008/09
• Niger Delta crisis and OPEC’s quota
restriction are twin factors undermining
the budgeted production target of
2.92mbd
• Oil production has been declining since
August ‘08 impacting negatively on
government revenue
• Nigeria’s continued dependence on crude
oil exports exposes it to external shocks
2.500
2.000
1.500
1.000
0.500
Apr' 09
Mar' 09
Feb' 09
Jan' 09
Dec' 08
Nov' 08
Oct' 08
Sep' 08
Aug' 08
Jul' 08
Jun' 08
May' 08
Apr' 08
Mar' 08
Feb' 08
Jan '08
0.000
YoY Inflation 2008/09
16.00
14.00
• Increased inflationary pressure noticed
since Nov/Dec ’08 in line with the sharp
depreciation of the naira
12.00
10.00
8.00
6.00
4.00
2.00
APR '09
MAR '09
FEB '09
JAN' 09
DEC
NOV
OCT
SEP
AUG
JUL
JUN
MAY
APR
MAR
FEB
JAN' 08
0.00
8
… recent trends from the global economic crisis highlights the adverse impact on the
Nigerian banking sector
Impact
Declining PSG deposits
Factors
 Falling oil prices/production and dwindling government revenue
Lower Income
 Reduction in capital inflows into the economy
 Restrictive FX policies (Reduction in Net open positions enacted to defend the
naira, which has strangled the interbank FX market and related transaction
incomes)
 Reduction and re-pricing/freezing of credit lines from foreign banks
 Divestment by foreign investors
 Loss of business income for key financial institutions directly dependent on the
stock market (e.g. stock-broking firms, rating agencies, investment and asset
management companies, etc)
 Impact of global crisis on domestic economic & business activities
Increased NPLs
 Downturn in capital markets from facilities granted to investors in the stock
market
 Increase in counterparty risks amid growing business failures occasioned by the
global crisis, etc
 Impact of unemployment on performance of consumer loans and other
facilities
Increased Borrowing
(from PSG)
 Shortfall in government revenue and resultant crowding out of the private
sector
The global crisis has the overall impact of making banks more conservative and risk averse thus reducing
their propensity to advance credit to the economy to stimulate productive investments
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…hence, the expected slow down in performance and growth of the banking sector
• The ability of banks to withstand the impact of the global economic crisis is
highly dependent on the:
 Performance of the economy and the;
 Execution and successful implementation of appropriate regulatory
policies
 Strategic options taken by individual players to combat the emerging
negative trends in the market and the market’s perception of players
resilience
• However, the consensus forecast by international organizations for Nigeria’s
economic growth in 2009 is 2.8%, which is about half of the growth rate in
2008.
Consequently, stakeholders are concerned whether Nigerian banks are resilient enough to withstand the
impact of the global economic tsunami on the economy.
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Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis, impact on the Nigerian Economy and the
Banking Industry
SECTION 3:
Sustainability of the Nigerian Bank System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
11
Is the Nigerian Banking system capable of handling these economic challenges?
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What are the strategic options open to Industry regulators and market players?
Industry
Consolidation
International Analyst’s expect the Nigerian Banking system to outperform the
National Economy.
3-Year Macroeconomic & Financial Forecast
Nigeria Economic & Financial Indicators
Macroeconomic Indicators
Nominal GDP ($bn)
2009
2010
2011
118
129.6
151.7
Real GDP Growth (%)
2.7
4.4
5.3
Inflation (%)
11
8.5
8.2
15.8
15
13.7
5.5
4.0
2.0
Exchange Rate (N/$)
158.5
162.5
160
Oil Price ($pb)
35.0
50.0
54.5
Oil Production (mbpd)
2.018
2.123
2.238
Bank Assets (Ntrn)
9.51
10.80
12.21
Bank Deposit (Ntrn)
8.33
10.21
12.45
Bank Loans (Ntrn)
4.80
5.72
6.87
Lending to Public Sector/total lending
44.9
47.9
51.1
Lending Rate (%)
Fiscal Deficit
(% of GDP)
Financial Indicators
Indicators
%YoY Growth 2010
%YoY Growth 2011
%Avg Growth YoY
Total Assets
13.56
13.06
13.31
Total Deposits
22.57
21.94
22.25
Total Loans
19.17
20.10
19.64
Source: EIU
• EIU expects average growth rate of 13.3% for total banking assets between 2009 and 2011
• Total deposits expected to grow by 22.3% on the average in the same period.
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Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis : Impact on the Nigerian Economy and the
Banking Sector
SECTION 3:
Sustainability of the Nigerian Banking System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
15
Market Players
Industry Regulators
The following strategic options are open to Industry regulators and market players
Adoption of MacroEconomic Policies
Surgical
Intervention/Piece
meal Remediation
Introduction of
Innovative
Measures
 Introduction of monetary policy stabilization programmes and fiscal stimuli
to restore confidence in the economy.
 Isolation of toxic assets nestling in the banks’ balance sheets and parking
them in a special purpose vehicle to be called “bad bank” or “bad fund”
which would be treated as a long-term facility for both liquidity and
accounting purposes.
 Injection of liquidity into the banking system via government funded soft
loans and recapitalization
 Strengthening of capabilities and competencies via appropriate regulatory
policies & increased supervision
 Regulatory induced consolidation – encouraging the big/strong to acquire
the weak/anaemic
 Liquidation of weak and anemic banks to avoid contagion effect on total
industry
 Articulation of self-emancipation strategies to battle negative consequences
of the current global economic meltdown
 Incremental, radical, and revolutionary changes in thinking, products,
processes and service delivery to customers.
 Increased value to both the customer and the shareholders to boost investor
confidence
 Increased productivity and focus on core competencies, which should drive
additional inflow of wealth into the economy .
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Contents
SECTION 1:
Evolution of the Nigerian Banking Sector
SECTION 2:
Global Economic Crisis : Impact on the Nigerian Economy and the
Banking Sector
SECTION 3:
Sustainability of the Nigerian Banking System
SECTION 4:
Strategic Options for Industry Regulators and Market Players
SECTION 5:
Key Learning Points
17
Key Learning Points
• Declining oil prices and the production shortfalls driven by OPEC’s restrictions and the Niger Delta
conflict means consistently lower oil and government revenues in the medium term. This implies
lower statutory allocations and hence reduction in public sector deposits. It is therefore unwise
for banks to continue to depend mainly on a declining sector in these dire times
• Banks need to imbibe strict governance principles, including increased disclosure and
transparency. The time-worn practice of operational opacity must be avoided completely in this
dispensation of banking. Increased transparency will endear international and local investors and
will help in building confidence.
• Diversification of the sources of liability generation is vitally important (e.g. creating liability pools
that adequately compensates investors for the risks assets that such pools are supposed to fund
given the increasing sophistication of investors). This ensures a reduction in concentration risk.
• The press corps/media plays a crucial role in driving the change needed to propel the banking
sector to safety and profitability in these trying times. Consequently, the standards of reporting
and knowledge of financial products and the industry in general must be deepened in order for
the press to effectively perform this task. Reports on financial markets must be based on
adequate research, responsible reporting and discipline.
• Unless the above mentioned issues are given due consideration, the vision of making Nigeria one
of the top 20 economies in the world and a leading emerging market country by 2020 will remain a
mirage
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Disclaimer
This presentation may contain certain forward-looking statements, estimates and targets with respect to the
operating results, financial condition and business of the Bank PHB Group. Such statements and information,
although based upon Bank PHB’s best knowledge at present are certainly subject to unforeseen risk and
change. Future results or business performance could differ materially from those expressed or implied by
such forward-looking statements and forecasts. The statements have been based upon a reference scenario
drawing on current market conditions, economic forecasts and assumptions, competitor analysis including
the regulatory environment.
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