Interview transcript: Ladi Balogun, CEO, First City Monument
Bank
Ladi Balogun, CEO of First City Monument Bank, talks about
banking in Nigeria, competition with foreign banks, and the forex business.
Banking in Nigeria
Emmanuel Daniel (ED): How is banking in Nigeria like, and could you please
gives us some background on your bank and where it stands in the hierarchy of
the banking system in Nigeria.
Ladi Balogun (LB): The Nigerian banking industry is very dynamic. We
currently have 25 commercial banks operating in Nigeria, an industry size of
about 20 trillion Naira ($134 billion), which would be at an exchange rate of
160 to 1. First City Monument Bank (FCMB) have about 4.7% market share, close
to 5%, and are the eighth largest bank in Nigeria. We started as an investment
bank in 1983, known then as a merchant bank focused on corporate finance,
treasury activities and trade finance, wholesale funding.
My father founded the bank, he’s now
retired - he was an ex-investment banker who helped the Nigerian government’s
preeminent development bank set up a joint venture investment bank with
various international partners,and thereafter set up his own stock broking
business City Securities Limited (CSL).
CSL was set up in 1977 and handled
most of the listings of multinationals onto the Nigerian stock exchange when
they started listing here between 1978 and 1982. It was from the success of
that listings and brokerage business that we then set up the merchant bank.
Merchant banking then was an easier business to get into because you didn’t
need as much capital and was much more closely related to the securities
business that we had been doing. CSL is still in existence today in Nigeria and
is the largest domestic stock broker in the country and a subsidiary of our
holding company FCMB Group.
We ran with the merchant banking
model from 1983 until 2001 after which we changed into what we call a universal
bank in 2001. We ran as a universal bank from 2001 until 2012 when we created a
group structure where we have a holding company, which is FCMB group PLC at the
top, which is listed in Nigeria. Then FCMB the bank, which is a commercial and
retail bank, a subsidiary of the group, plus we have CSL, which is a stock
broking business, another subsidiary.
ED: So the evolution of your family’s business mirrored
the evolution of financial services in Nigeria.
LB: Absolutely.
ED: From the days of the securities industry and getting
the capital market up and running, Nigeria today is much more broad spectrum
financial services infrastructures in place, right?
LB: Yes.
ED: In terms of banking, how has that evolved? I guess
moving from universal banking to a group structure is something that you needed
to do to rationalize what you had but you also had a number of mergers in order
to grow, correct? So there was an inorganic portion of growth. When did that
start?
LB: That started in 2005. It came about because in 2004,
we had a very activist regulator in Nigeria, always trying to transform the
industry structure for the better of the economy. In 2004, the then Central
Bank Governor brought about a new policy, which required every bank, whether
they be merchant bank or commercial bank, to have a minimum capital base of
what was then 25 billion Naira ($155 million). We were then sitting on a
capital base of about two billion Naira ($12.4 million) so clearly, there was a
wide gap between where we were and what was required.
So we did a private placement
amongst most of the existing shareholders followed by a public offer. We were able
to get ourselves about 70% of the way required to meet minimum capital
requirement by doing a private placement followed a few months later by an
initial public offer. To cover the rest of the gap, we were required to make
some acquisitions. Now, fortuitously, those acquisitions also enabled us to
improve our distribution for what was then a commercial bank.
We were not into retail at the time,
and focused largely on corporate and larger SMEs so we acquired four fairly
small banks to give us regional coverage in each of the key regions. That
brought in an additional five billion Naira ($62 million) or so of capital.
ED: What was the dynamics of M&A at that time in
Nigeria? Who was giving in and who was growing? Who were the winners and who
were the losers?
LB: First of all, the organizations that had a clear
vision where they wanted to get to were the ones who choose whom to acquire it,
so it wasn’t necessarily those who had the largest capital base. I think also,
those who had some kind of corporate finance or investment banking
understanding, so they knew how to raise money, were also at an advantage.
Those with the corporate finance angle understood the dynamics of M&A and,
therefore, knew who to target, who to go into negotiations with because at the time
there were 89 banks in Nigeria, and a number of negotiations broke down.
We deliberately chose institutions
that did not see themselves as being independent at the end of the day, and we
presented ourselves as being a benign acquirer that was willing to give every
employee a fair chance. That really helped a number of organizations and often,
given the dynamics with M&A in Nigeria, management is as important as the
shareholder.
If the people in the organization
feel that they’re going to get a bad deal, often times, they would be able to
sabotage the deal going ahead, which is quite different in the west where you
would find that typically shareholders pretty much dictate what happens.
Unions are not very strong. Any sort
of restructuring or rationalization that we had to do was done, and it was done
in a fair manner. The regulator also ensured that employees were treated
fairly, but that led to a significant rationalization in the industry only in
the short term because thereafter, with all the banks having much more capital
than they needed, there was massive expansion of the banking industry,
significant roll out of branches by most banks. With that level of capital, you
needed to go into retail. We concluded that consolidation exercise in 2005.
We had just 25 branches. If you fast
forward to 2013, we had moved to about 270 branches.
ED: What were the most important challenges in the
process? Did you just take on every employee that came with it, or was there
rationalization? How many employees do you have now?
LB: Today, we have 3,000 full time employees, and about
another 2,000 sales agents who help in acquiring accounts and also distributing
personal loans. I was very much involved at the time we were doing the capital
raising and the acquisitions. I was then head of strategy and business
development. I was also the one who had sort of championed the idea of going
more into the retail business, even before the consolidation thing came along.
It was new to us at the time.
The first set of acquisitions that
we did, the first four banks that we acquired, we were fortunate that they were
small. In three of the four banks we had very few people issues. One of the
banks, we had significant people issues because it was a state-owned bank.
There was really no performance culture there at all so they could not
understand why we would have to let people go. The approach that we took was
very much performance driven. We were in growth mode. We moved most of the
staff into sales.
Those that could perform well in sales
were retained. Those who were not able to perform were let go. But in most
instances we also set up entrepreneurship programs where we gave them seed
money to be able to set up small businesses if they chose or, alternatively, a
reasonable severance package.
ED: How many people took on the severance package?
LB: First of all, it was voluntary because we made it
quite generous, and we factored that into the cost of the acquisitions. Most
people took it voluntarily because they didn’t see much career upside. I would
say probably about 40% of the acquired banks’ staff ended up taking up those
packages. At that time, each of the banks had an average of about 200 to 250
employees.
If you’re looking at give or take
1,000 employees, maybe about 400 people.
ED: What were you buying these banks at, price to book?
LB: We paid a slight premium to book, but not more than
about 20%. About 1.2 times book. The reason we had to pay a premium to book at
that time was that if we hadn’t have bought those institutions, we would have
had to go and raise additional equity, which would have created probably much
more aggressive dilution of the existing shareholders to have sufficient equity
to meet the minimum capital requirement.
ED: Was that a golden period for acquisitions that doesn’t
exist today?
LB: Golden period in the sense that there were many
transactions happening. But in terms of the size of the transactions, as well
as the quality of the transactions, I would say that there was still a lot of
room for improvement. We saw that because there was a second round of
consolidation that started around 2010 in the wake of the financial crisis.
ED: That was when the regulator closed a number of banks.
LB: Exactly. They intervened. They actually didn’t close
any bank, but they intervened and insisted that the management and the boards
resign. They set up an asset management company that, in effect, acquired the
toxic assets of those banks, basically recapitalizing the banks or selling the
ones that couldn’t be recapitalized.
ED: How would you describe Nigeria’s banking industry
today in terms of margins, in terms of the deposit business, the competition in
deposit business, and the creation of credit, where is it going, and what phase
is it in?
LB: It’s very competitive, but the competition tends to
be focused more on the wholesale side. There is still quite a bit of
opportunity on the retail side. You have penetration of just about 20 million
bank accounts in a population of 170 million people. With very little effort, you
can grow your customer base fairly quickly in the retail space. The challenge
you have is profitability of those accounts because, obviously, poverty is
still a big issue in a country like Nigeria. A bank like us acquires about
50,000 customers every month. So give or take that’s close to about 600,000
accounts in a year. Under normal conditions the margins are fairly healthy. Net
interest margins on average in the industry are between six to seven percent.
However, it has come under a little bit of pressure because the monetary
authorities currently have a very tight policy where they’re taking quite a lot
of liquidity out of the system but asking banks to put a significant chunk of
their deposits into non-interest bearing central bank reserves. Currently,
you’re seeing about 27% of bank deposits in non-interest bearing reserves,
which puts some pressure on the margins.
Last year, I would say industry
average margins were about 7.5%, but may come down to about 5.5% this year.
Still, it’s fairly profitable. I think an industry average return on equity is
about 15%. Industry average cost to income ratio is in the very early 60’s -
not fantastic.
Competition with foreign banks
ED: Do well capitalized foreign banks have a better result
if they came in with technology and –
LB: No, I think the foreign banks used to be more
successful on the wholesale side because most multinationals would naturally
deal with them. But foreign banks throughout Africa, with the exception of
maybe Standard Bank, have found it very, difficult to build national
franchises, which ultimately is where you need to be if you want to gather
local deposits. So most foreign banks typically would have much of their
borrowings in foreign currency to companies that had foreign currency revenues.
So we’re export oriented, typically, the oil industry in the case of Nigeria.
In terms of size, they’re much
smaller. The technology that you talk about gives you much greater advantage in
the retail business than in the corporate business. Because none of the foreign
banks are that strong in the retail business, it hasn’t conferred any real
advantage. In addition to that, the dynamics of the Nigerian banking scene,
which is probably similar in some respects to Kenya, Ghana, and some of the
more developed African markets, differ very much from what you find in the
West.
There’s a much bigger push around
mobile banking and agency banking where you have third party agents helping you
perform very basic transactions, money transfer, cash payments in and cash
withdrawals, particularly in rural areas or areas where it would not be
profitable to set up a branch, and similarly with mobile banking. Today, you
pretty much have equal access to the vendors of these technologies in Nigeria
and other African countries as you do in the West.
ED: What about in trade finance, transaction banking?
LB: No.
ED: How are the small businesses in Nigeria growing, given
the fact that you had a strong IPO business? This onboarding of small business
to become middle market and corporate, how is that evolving in Nigeria?
LB: It’s only a very small percentage of SME’s that will
migrate to become corporates. So while that is the theory that you would help
these companies grow to that state, we found that you really need to create a very
distinct SME business. Transaction banking is equally relevant for us in the
corporate space as well as in the SME space, although we find the needs are
very different in some respects. Corporates like to do everything online. If
they’re multinational they tend to need systems that will somehow integrate
with their global treasuries, therefore, it’s very much about online corporate
banking.
With the SME’s, the biggest
challenge they have is cash collection, so you’ve got to give them solutions to
be able to collect their cash and bank their cash. A lot of the SME’s are quite
happy using mobile banking rather than internet banking. So we offer business
accounts that, even though they’re business accounts, key offices can have
mobile access to them. The simple reason is that most SME’s in a market like
Nigeria would be owner managed businesses. People may, for example, need to
have access to their accounts when they’re in China buying supplies.
Therefore, having a mobile banking
platform - rather than an internet banking one that they’d have to open up
their laptop for - they find that much more convenient. Trade finance is
certainly very big in Nigeria. Currently, we’re about the fifth largest bank in
terms of trade finance in the market. That largely comes from the corporate
sector. In fairness, I would say that probably about 40% of our trade finance
business is in oil, and the rest is in largely imports of consumer goods and
industrial raw materials.
The foreign exchange business
ED: So how does a bank like yours acquire foreign
exchange? Is that a strong part of your business, and how do you play that?
LB: It’s a very important part of our business. We rely
very much on flow business of foreign exchange rather than position taking in
foreign exchange. The reason that we don’t take larger positions in foreign
exchange is in Nigeria, the maximum open position limit that you can carry is
one percent of your shareholders’ funds. So you can’t take big positions.
You’ve got to square your books at the end of every day so you have to be
strong on the export side. Now, the key sources of foreign exchange in Nigeria
are inward remittances and crude oil exports.
On the corporate side, we are a very
strong financier of most of the oil producers in the country. Unlike a number
of other African countries, there’s an increasing number of indigenous oil
producing companies that have been buying assets in marginal fields from the
traditional international oil companies.
ED: So it’s becoming more diverse and in itself a creator
of small businesses.
LB: Yes, it is. The indigenous players would be very much
corporate at this stage. They have diversified shareholding because if you need
$500 million or one billion to buy a producing asset from a Shell or a Chevron,
you pretty much need to be a corporate to be able to access that level of
capital. Gradually, you’re beginning to see oil service companies come through
as well that are really in the SME space, but they haven’t matured so much. On
the FX side, if you can capture a good chunk of remittances as well as export
dollars from oil companies that you may work with, you would tend to have
fairly healthy FX flows.
You can always buy from the Central
Bank - they regularly sell to any bank that needs it, or any authorized dealer.
ED: What’s the central bank’s bias in terms of commercial
banks? Did you wish that you had a good trading book? Are you thinking of
building an active treasury side of your business, and is the central bank
supportive of moving in that direction?
LB: Because we were a merchant bank, we were very active
in the treasury space. In fact, in our merchant banking days, FX trading was
where we made most of our income because the lending business, the margins were
razor thin with your high cost of funds that are associated with wholesale
banks typically. The regulator, I would say, is not very supportive of markets
business. They respect the markets. They see them as a means of creating
efficiency. But they don’t encourage excessive position taking.
Therefore typically, most banks,
while they would make income from foreign exchange trading and so on, if you
look at – in our case, I think about 40% of our net revenues are noninterest
net revenues. Of that 40%, I would say another 60% would be fees and commissions.
So 40% would really be trading income. In effect, as of today, we’re probably
making around 15% of our net revenues in trading income.
ED: What is the pressure being put on you by regulator for
capital, and what do you need to do on your capital front to make sure that you
continue to scale? Is there kind of a diversification to raise capital through
a bond issue?
LB: We are very well capitalized. We have a Tier-1
capital adequacy ratio of 19%. We have no Tier 2 capital for the moment because
we don’t need it as of now, so we’re not under any pressure on the capital
side. The regulators themselves are very focused on risk based supervision and
want to ensure that the banks are adequately capitalized, with regular stress
testing of balances. It’s important, especially in an industry where you will
see non performing loan ratios typically hover around five or six percent. It’s
important that the banks do stay fairly well capitalized.
For us, the focus right now is on
leveraging the balances some more because we do quite a lot of foreign currency
lending.
ED: What’s your loan to deposit ratio?
LB: Our loan to deposit ratio is in the early 60’s right
now and we’re going to leverage that further. But increasingly we’re looking at
more of our corporate lending tending to be foreign currency nowadays because
there’s a big sort of export push. So we’re active in the syndicated loan
market where we raise money from international banks but lend to Nigeria. It
tends to be cheaper than the euro bond market. For us that would be a last
resort to access euro bonds. We do have international ratings - we’re one notch
down from the sovereign.
We will continue to focus on
syndicated loan markets before because it tends to be significantly less
expensive than the euro bond market, unless you time it right. There are
certain times in the year where the euro bond market may be cheaper than it is
now.
ED: Is this the point at which you make yourself
attractive so that when it comes to capital raising, your story will be out
there –
LB: You mean equity capital raising?
ED: Yes.
LB: We’re fairly well known to a lot of the international
investors who focus in Africa. Typically, about 50% of our shareholder base is
currently international portfolio investors. Our brokerage business is one of
the leading conduits of foreign portfolio investment into Nigeria. They also
know us through our brokerage business and, from time to time, make inquiries
about the stock performance of the bank and the underlying fundamentals.
You are right that it’s important we
continue to work on our profile internationally because the Nigerian banking
industry will continue to grow at not less than about 20% or 25% year-on-year,
which is what we have been seeing. Total assets, not risk assets really fueled
more by liability growth. As the industry scales up, and as the economy
continues to grow now being the largest economy in Africa, certainly, I see the
banks continuing to need to grow their assets naturally. Eventually, we’ll need
more capital.
ED: What is the composition of your lending assets?
LB: We have defined retail as purely lending to
individuals. In the short timeframe that we’ve been in retail banking our entry
strategy was really to focus on the asset side and acquire customers that way.
So, about 50% to 60% of our customer acquisitions are because of an asset
proposition. That’s enabled us to become very quickly the largest consumer
lender in Nigeria. We currently distribute about 25,000 personal loans every
month, with consumer lending representing about 20% of our entire loan book.
SME lending represents about another 20%. The balance is corporate and
government.
Relative to the rest of the Nigerian
banking industry, we probably have an average between five to ten percent of
their book being consumed. We are a very significant player.
I do expect though, just the last
point on that that the rate of growth that we’re seeing on the personal loan
book is about 35% to 40% year-on-year, so we expect pretty quickly we will
probably get to about 40% of our loan book being personal lending.
ED: Given that 2010 was when a lot of Nigerian banks got
into trouble because of corporate lending more than anything else, how did you
stay out of that and what is your NPL ratio now?
LB: We certainly were not immune to the issues, but the
problems of lending in the Nigerian banking industry really came from three
sectors. There was a lot of margin lending that was happening because the stock
market had experienced prior to the boom in margin lending about four or five
years of 30% or 40% year-on-year growth in the index. Everyone just felt the
only way was up for the stock market. So every bank ended up going heavily into
margin lending. Again, because we had an associate company who was a leading
stock broker, we had quite a lot of analysis on all the stocks in the market.
We were highly disciplined on margin
lending because we understood it through our brokerage business, and had strict
limits in place. The other set to where you saw a bit of a high level of NPL’s
at the time of the crisis was real estate lending, mostly to developers. Again,
we were disciplined and weren’t too hard hit by that. The third area was oil
importers, not exporters, many of whom were getting trade finance to bring in
petroleum products, refined petroleum products, and not hedging those.
So when the markets crashed, oil
prices crashed, they suddenly found that the price of their inventory was way
above where the market was. There was also devaluation in the currency, and a
lot of them were borrowing in foreign currency at the time for their trade
finance, even though it was short term borrowing. We were quite hard hit on the
oil trading side but certainly nothing that threatened our capital base in any
way. It affected our profits for a couple of years but not the capital in any
way.
Nigeria really took the bull by the
horns. We set up an asset management company that bought the toxic assets off
the books of the banks.
