State of Tier-1 Nigerian Banking in 2019
Is there still a FUGAZ? And what to expect from the sector post Covid.
Story story?… yeah, you get the point.
FUGAZ — Street acronym for the Tier 1 banks in Nigeria across the key indices of loan and deposit volumes, profitability, and number of customers.
Unlike every other member of fab 5, FBN’s fortunes have been dwindling over the years, and as at the time of writing this, they are yet to release their annual report for the year 2019. Safe to say it’s the GAZU era of banking, and FUGAZ as we know it is done.
This post will try to discuss how these 4 banks performed in 2019 compared to 2018 and to look at what to expect for 2020 (if the Coronavirus doesn’t smoke us all out before December 2020).
Before we go into the number analysis (I hate this word because, have you seen it??? Analysis??? God, I beg o…)
It’s important we have a brief review of the banking sector in 2019.
2019 saw the Central Bank of Nigeria (CBN) play a larger role in the overall economy, not just in exchange rate and price stability policy, but also in lending and trade policy.
Here are some of the major events that shaped the Banking sector and greatly affected GAZU in 2019
- Diamond Bank / Access Bank merger: Herbert finally achieved his dream of owning the biggest bank in Nigeria (by customer base) . Kudos to everyone who slaved to pull this off, especially the analysts and the tech teams. The jury is still out on the overall success of the merger though, seeing as their profitability remained relatively unchanged, despite the deposit base acquired during the merger.
- Finance Bill vis-a-vis duties of Banks: this bill will affect day to day activities of banks especially as it involves information of bank customers. The CBN also followed with a revised guide to bank charges, ensuring the playing field remains competitive enough to drive customer satisfaction.
- Re-introduction of cashless policy: well, well, well… it was 2017 all over again.
- Differentiated Cash Reserves Requirement: Ordering banks to set a fixed portion of their deposits to be disbursed as loans, and ensuring those targets were met, aka LDR. It was set to 60:40 in July, and when the banks preferred to take a $1.4Billion penalty as against lending, the apex bank decided to increase the ratio to 65:35. That is, 65% of total deposits should be used as loans and 35% can be kept as deposits. This has led to every bank trying to outdo each other with clones of their credit products, and an increase in poor quality loans.
- Inflation, Foreign Exchange and Interest rates: Of course, inflation go inflate, have you seen Nigeria’s economy? Stuff like border closure and the instability of price of crude oil have affected the market and our economy, making CBN take decisions to continue its FX pricing and interest rates defence regime. Restricting local OMO participation, and even going to the extent of calling it poison, meant our popular sashe-banking, treasury bills sunk so low, and closed at 5.49% on the last auction day of 2019. Everything no stew again, even one of our profiled banks recorded a N93 Billion loss on derivatives trading.
Performance indices to be used for this analysis will be:
- Profit Before Tax (PBT) = As name implies dears
- Profit After Tax (PAT) = Again as name implies
- Gross Revenue = Total monies generated from doing business
- Total Assets = Simply put as total loans given by the banks to customers
- Total Liabilities = Simply put as total deposits with bank
Zenith Bank: A quick glance at the table above shows that Zenith Bank remains the most profitable bank in Nigeria, with a PBT of N243Bn — They and GTBank are also the only banks to join Dangote and MTN in the illustrious N200Bn club of publicly quoted Nigerian companies. The key drivers of bank revenues are still the mix of deposits and loans, and Zenith found a way to rake in N662 Billion off the strength of their strong balance sheet performance, and the fear of Goddy’s LDR fines. A regime change last year and rumours of an acquisition of another bank means they’re still everyone’s bet to remain excellent at number one (as their name implies).
GTBank: Someone once tweeted that the difference between GTBank and Zenith was that Zenith was a Range Rover while GTBank was a BMW sedan powered by a Range Rover engine. This entity is the definition of efficiency, which is exemplified by their recent completion of a 110 bed isolation center at the Onikan stadium for the fight against COVID-19 in the space of 5 days. The bank’s revenue growth remained flat, but that didn’t stop them from translating it into N231Bn in profits, from 65% of Zenith’s revenues in comparison — a testament to their ability to continually maximise resources and maintain the lowest cost-to-income ratio in the industry. They also felt the LDR heat, increasing lending by about N250Bn, largely driven by their quick credit product. Still needs to be repeated that their continuous ability to churn out impressive results above their peers, whilst having the smallest balance sheet and revenue stream needs to be studied. It’s the penultimate year of Segun Agbaje’s reign at the bank that just turned 30, here’s hoping for 30 more years of industry leading efficiency and profitability.
Access Bank: What do you do after you’ve taken a massive bet, by deciding to erode short term shareholder value on the altar of being the biggest bank (by customer base) in the land? You take out a full page ad heralding your new dawn rising from the waters in front of Jim’s house. If that’s not big dick energy, I don’t know what is. Legend has already been written and fabricated, of how Aig and Hebert have gone from owning bank #65 to bank #3 in the space of 17 years, acquiring 4 banks in the process. Displacing UBA last year as bank #3 may was down to their operational efficiencies, despite the relatively flat and unexpected profit of N115Bn. The merger also saw them acquire a healthy deposit base and an industry leading rock star IT department. If you come for the king, you better not miss, and as their new dawn ad showed, we hope in their first full year as a combined entity, they come out swinging, sterilise their loan books, end the derivative losing streak, and begin to reap long term rewards of the merger.
UBA: Afro-Capitalism: an ethos repeatedly preached by the head honcho at our truly global Pan-African Bank, they (and Ecobank) are the only top tier Nigerian banks that have truly hacked their diaspora business in comparison to their peers, opening up new shops and starting operations in Mali and the UK, and raking in N41Bn of their N111Bn in profits from these operations. Consistently delivering stellar results in a cut-throat environment is TOE’s legacy, with a healthy revenue stream of N559Bn and about N500Bn increase in both deposits and loans last year, fully expect the Marina Mafia to fight to retain their place at the podium, by any cuts, clones and star power necessary.
In terms of outlook for the year, most banks already started cutting their 2020 projections after the CBN released the new guide to bank charges. We believe however that revenue from charges are a minute portion of the business, and that since everyone is racing to zero and free banking, it is time to create new revenue streams. Everyone cooked and ate well last year, but, with cooking conditions already being threatened by natural and man-made tragedies, we expect that some of these banks will not have equally impressive 2020 results. Normal yahoo-yahoo placements are currently plagued with low interest rates, and Coronavirus is showing humanity that we really aren’t all that. With oil prices and global stock markets plummeting faster than a crashing meteorite in recent times, we can only hope for a miracle or else this might be the end of (F)UGAZ as we know it.
Devaluation: As Goddy has “price adjusted” the Naira, he has offered the economy and the banks some reprieve in terms of Naira performance. Expect Access bank to finally stem their streak of FX loses, and UBA to realise massive gains here off the strength of their diaspora businesses. (First Bank), Zenith and GTB are rumoured to have the most talented trading desks in the industry so they will capitalise on the conducive cooking environment this devaluation offers.
Monetary Policy: No one can predict how Goddy wields his big stick in the fight against inflation and ensuring market liquidity. From his applaudable but poorly implemented executive order of an LDR policy to the tight CRR regime, and finally calling local OMO participation poison. Kudos to Goddy for his COVID 19 response of over $4.2Bn to stimulate the economy, and the decision to adjust the exchange rate rather than a full devaluation, if we make it out to a post-Covid world, that would prove to be a good decision. In a bid to avoid fines and stimulate this corona decimated economy, the banks are going to keep competing with each other on lending to whichever businesses are still open, pending when Goddy allows local OMO participation again.
Oil Prices: It’s been theorised that the Nigerian God only accepts two prayers. It was looking like the year was going to start on a good foot for the economic prayer warriors, when the US assassinated the Iranian General Qassem Soleimani, triggering WW3 paranoia and agitations in the region. But China said “hold my beer”. With the exponential spread of the Coronavirus affecting economic activity and oil demand, Russia backed out of the shaky OPEC deal launching an all out price and supply war against Saudi Arabia and the US Shale producers. When elephants fight, the ants are trampled on. As Brent Crude currently trades at $23 as at the time of this post versus our initial benchmark of $57, Nigeria’s incomes will take a hit, and the various oil and gas loans will go bad or be restructured this year. Say a prayer for your banker friends this period please.
Merger Talk: Another wave of consolidations are coming soon, and these banks are expected to defend the moats they’ve created for themselves. Access bank is expected to go lean and continue shedding excesses from their merger last year, and Zenith has denied rumours of them taking over Union Bank. UBA will be expected to keep exploring other markets and opening up shop in new countries. We expect First Bank to close its mega merger and return to market dominance. Surprisingly GTBank has started exploring avenues to revert to a HoldCo structure, and acquire a PFA, an asset management business, an insurance business and a Telco Licence(?). In all we expect lots of market activity and chatter once we defeat Covid.
Overall we posit that Zenith and GTBank will maintain their positions in the N200Bn club, social distancing their peers by a mile. Banks are going to be even more inventive this year. We wish them luck.
Thoughts and comments welcome, stay safe and wash your hands.
Okiki X J.S.
