Taking control: The central bank’s efforts have paved the way for a more stable operating environment

Following a significant overhaul of the sector in 2012, Nigerian banks recorded their strongest performance since the onset of the banking crisis in 2009. With the cleaning of balance sheets over the past two years, a consolidated and restructured market has emerged, and competition and lending are set to increase over the coming years. The disposal of the three banks held by the Asset Management Corporation of Nigeria (AMCON) by 2014 will likely attract new investors to the sector. With narrowing returns from money and fixed-income markets, banks will have to create significantly more risk assets to grow from 2013 onwards, supported by the Central Bank of Nigeria’s (CBN) efforts to promote greater intermediation and inclusion.

A DECADE OF CONSOLIDATION: Lenders are only now able to focus on such growth prospects, following a severe banking crisis in 2009. This crisis had its origins in the “big bang” recapitalisation and rapid consolidation of the sector in the years following 2004, as well as excessive risk-taking and speculation, and corporate governance failures, at banks. As the then-CBN Governor Charles Soludo raised capital requirements tenfold to N25bn ($157.50m) by end-2005, the number of licensed institutions dropped from 89 in 2004 to 25 by 2006 (and 24 in 2007 after the Stanbic IBTC merger) following widespread mergers and acquisitions (M&A). The sector’s assets more than doubled from N3.2trn ($20.16bn) to N6.56trn ($41.33bn), and the average capital adequacy ratio (CAR) rose from 15.2% to 21.6% in the two years to 2006, according to CBN figures. A fragmented sector of small to mid-sized banks had consolidated into a smaller group of universal players competing in the areas of retail, corporate and investment banking. While these new heavyweights invested in expanding their geographical reach, with the number of branches jumping from 3535 to 4579 in 2006 alone, their balance sheets retained the traditional 80:20 bias towards corporate and investment banking as opposed to retail. According to the IMF’s note in May 2013 on the Financial Sector Stability Assessment (FSSA), “After the 2005 bank consolidation and capitalisation, Nigeria experienced rapid credit expansion, as banks broadened their activities and moved to the untapped retail sector, and borrowers speculated in the equity market.” By the time the global financial crisis hit in 2008, with the resulting reversal of portfolio investment flows to cover positions in core markets, banks that had extended margin loans to affiliated brokers were heavily exposed to drops in the local equity market. The slump in international oil prices during the crisis compounded these losses given banks’ significant exposures to refined fuel importers.

As the Nigerian Stock Exchange (NSE) dropped some 70% in 2008 and 2009, banks’ reported non-performing loans (NPLs) jumped from 6.3% to 27.6% in the year to December 2009. While the proximate cause for the NSE’s sell-off stemmed from global factors, homegrown faults in risk management and corporate governance compounded the effect on banks, revealing “widespread insider abuse and inappropriate related-party lending”, according to the IMF’s 2013 FSSA. By mid-2009, when the CBN’s new governor, Lamido Sanusi, was appointed to office, the sector as a whole was facing fundamental challenges.

SANITISATION: Moving to stabilise the sector, the CBN intervened in 10 banks – replacing management at eight of them – and injected liquidity and capital support of N620bn ($3.91bn) in unsecured unsubordinated debt, roughly equivalent to Tier-2 capital. An unconditional six-month guarantee was extended to all deposits, pension fund placements, foreign creditors’ claims and inter-bank exposures to guard against bank runs, rolled over until the end of 2011. The CBN also halted issuance of commercial paper (CP) for working capital in July 2009, curbing banks’ use of CP to reduce reported deposits and minimise payments to the Nigerian Deposit Insurance Corporation (NDIC) The regulator lifted the ban following new regulations in October 2009 requiring CP to be held on-balance sheet and registered with the Central Securities Clearing System (CSCS). By July 2010 the regulator had established 10-year term limits for bank management and supported corruption investigations by the Economic and Financial Crimes Commission (EFCC) into four deposed bank executives for money laundering and fraud.

A new “bad bank”, AMCON, was established in 2010 to support banks’ solvency and lead troubled banks’ resolutions by returning intervened lenders to positive net asset values. In all, AMCON converted a notional amount of N4.2trn ($26.46bn) in non-performing bank assets, acquired at a haircut price (the difference between prices at which market makers can buy or sell securities) of N1.76trn ($11.09bn), into bonds returned to the banks and the CBN. AMCON also supported the acquisition of five failing banks and nationalised the remaining three (which accounted for only 5% of sector assets), turning them into bridge banks. By December 2011 banking assets had reached N18.21trn ($114.72bn), or 53.6% of GDP.

Following a restructuring of its obligations in 2013, AMCON has extended the window for debt recovery by 10 years. It also raised its levy on banks’ assets from 0.3% to 0.5% in 2013 (see analysis). As the sector’s ratio of regulatory capital to risk-weighted assets rebounded sharply from its nadir of 4.2% in June 2011 to 17.8% by December, AMCON purchases of eligible assets cut the sector’s NPL ratio from a peak of 28.8% in June 2010 to 4.9% by December 2011.

The CBN also established intervention funds in key sectors such as agriculture, power, aviation and small and medium-sized enterprises (SMEs). By 2012 ratings agencies like Standard & Poor’s (S&P) had returned the sector to a positive outlook based on the reforms. The IMF categorised the sector as “well capitalised, liquid and profitable” in its May 2013 note.

REGULATION: The CBN, which will be helmed by Governor Sanusi until June 2014 when his term is up, seized on the bank restructuring to implement broader structural reforms aimed at safeguarding against future crises. Abolishing the universal banking model introduced in 2004, the regulator introduced a four-tier banking licence model: national commercial banks with minimum capital requirements of N25bn ($157.50m); international banks with N100bn ($630m); merchant banks with N15bn ($94.5m); and specialised and development regional banks with N10bn ($63m). Requirements for nationwide microfinance banks were raised to N5bn ($31.5m), while those for non-interest ( sharia-compliant) banks were increased to N10bn ($63m) for national banks and N5bn ($31.5m) for regional ones.

Banks were also given the choice of divesting from their non-bank subsidiaries or incorporating into non-operating holding company (HoldCo) structures, with distinct subsidiaries for bank and non-bank activities. By mid-2012 four banks – First Bank, Union Bank, First City Monument Bank (FCMB) and Stanbic IBTC – had opted for the HoldCo structure, while Zenith Bank and Guaranty Trust Bank (GTB) opted for monoline international bank structures. UBA also became a standalone commercial bank locally, but it established a HoldCo structure for its international operations. In addition, the regulator moved to enforce the 20% single borrower cap more strictly, while it forged closer coordination with the insurance and capital markets regulators – through bi-monthly meetings of the Financial Services Regulation Coordinating Committee – and worked alongside the Financial Action Task Force, an intergovernmental organisation, to remove the country from the grey list for non-compliance with anti-money laundering measures. The apex bank has also kept a tight leash on monetary policy in an effort to curb inflation and support banks’ recovery, maintaining the monetary policy rate at 12% since 2011. The regulator’s hike of banks’ cash reserve requirements from 8% to 12% in July 2012 (up from 4% in 2011), designed to rein in excessive credit growth, is estimated to have added 400 basis points to rates on retail loan products, according to Stanbic IBTC. In a further tightening move in July 2013 the CBN directed commercial banks to keep 50% of public sector deposits (from the three tiers of government) as cash reserves, in a bid to curb excess liquidity.

In February 2013 the CBN also issued new three-tier know-your-customer (KYC) requirements to be implemented by the end of 2013, between low-value ( maximum balance of N200,000, $1260), mid-sized (up to N400,000, $2520) and larger account-holders (above N400,000, $2520). No minimum balance is required for low- and mid-sized accounts. Low-value accounts can be opened through agents and prohibit international transfers, while mid-sized accounts are strictly for savings purposes only. Nigerian banks were also given a deadline of October 2013 to register with the US’s Internal Revenue Service (IRS), in order to comply with the US Foreign Account Tax Compliance Act ( FATCA). In the same month the CBN released its new guidelines on agency banking, allowing banks to provide banking services through third parties. Although the significant branch network expansion that has taken place over the last decade has had a limited impact on financial inclusion, the CBN is hopeful that this move will help to extend outreach, particularly to Nigerians in semi-urban and rural areas.

NEW ENTRIES: The CBN licensed two merchant banks in November 2012, allowing them to take deposits: FSDH, traditionally a broker-dealer and investment bank, and South Africa’s Rand Merchant Bank, which established a West Africa office in Lagos. The South African bank has expressed interest in acquiring either two of the three bridge banks on sale by AMCON (see analysis). A number of other local institutions like Cordros Capital and foreign banks such as JPM organ, BNP Paribas and Bank of America Merrill Lynch are looking to open representation offices locally, following the examples of Barclays-Absa and Deutsche Bank.

Nigeria boasts a diverse financial sector where, in contrast to most other sub-Saharan markets, foreign banks controlled only 13.6% of sector assets in 2012, according to the IMF. The four banks out of 21 licensed that are foreign controlled are not amongst the sector’s largest. Five leading banks, all domestically controlled, account for 58.42% of banking assets, while the Togo-based pan-African bank Ecobank Transnational Inc. (ETI) expanded its share of assets to sixth in 2012 (see analysis). Together these Tier-1 banks accounted for 68% of the N21.3trn ($134.19bn) in banking assets in 2012, according to data from AfrInvest.

FBN: Established in 1894 but a latecomer to international expansion, with acquisitions in the Democratic Republic of the Congo in 2012 and Ghana in 2013 and six offices outside Nigeria, First Bank has restructured as a HoldCo, FBN Holdings. Accounting for 15% of industry assets in 2012 (N3.2trn, $20.16bn), the group has four key businesses – First Bank, FBN Capital, FBN Life Assurance and FBN Insurance Brokers, as well as FBN Microfinance Bank. With over 7m customers, FBN is investing in its network of 807 branches, opening 17 new branches in first-quarter 2013 alone. FBN is already one of the top two retail banks in Nigeria, according to a 2012 financial access survey from Enhancing Financial Innovation & Access (EFInA), a financial sector development organisation: some 13.2m adults use either First Bank or UBA as their main banks. FBN benefits from a low cost of funding, with 78% made up of deposits. Recording growth of 31.65% year-on-year ( yo-y) in operating profit in 2012, FBN has a cost-to-income ratio of 53.56%, profit after tax (PAT) of 21.79%, return on equity (ROE) of 17.24% and return on assets (ROA) of 2.37%, according to data from local research firm Proshare. The bank aims to slow its pace of lending growth from 23% y-o-y in 2012 to 10% in 2013 while boosting its ROE to 20%, balancing its capital requirements with the creation of risk assets. FBN is planning a $500m Eurobond issue later in 2013 as well.

ZENITH: Another bank that stayed away from both consolidation rounds – and recapitalised rather than merging – is Zenith Bank, the second-largest institution by assets. Founded in 1990, Zenith has operations in three other African markets (Ghana, The Gambia and Sierra Leone), a UK subsidiary and representative offices in South Africa and China. The bank opted for a standalone international banking licence, and has carved out a niche in Nigeria’s corporate and commercial segments. With 366 branches catering to some 2m customers, the bank’s cost-to-income ratio was roughly equal to FBN’s at 53.95% in 2012, down from 63% in 2011. Its operating profit grew 35.24% y-o-y in 2012, while its PAT was higher than FBN’s at 32.79%.

This was the first time a Nigerian bank’s PAT exceeded N100bn ($630m) annually, and represented PAT growth of a healthy 106.7% y-o-y. Zenith’s ROE stood at 21.75% and its ROA at 3.87% in 2012. Zenith listed the third set of Nigerian bank global depository receipts (GDR) in London in March 2013, raising $850m with 125 GDRs, with a market capitalisation at listing of $4.24bn. The bank has room for growth with a CAR at twice the regulatory minimum of 15%.

UBA: A product of the 2004 consolidation wave, United Bank for Africa (UBA), originally established in 1961 to take over the operations of the colonial British and French Bank, is the third-largest player in terms of assets. With the largest footprint of the big three banks, with over 700 branches catering to approximately 7m clients, including subsidiaries in 18 other African markets, and offices in New York, London and Paris, UBA consolidated its operations in the two years to 2012 after a period of rapid expansion. It divested from its non-bank operations domestically, but established a separate structure, UBA, to hold its operations outside Nigeria, alongside UBA Pension Custodian and UBA FX Market. At the same time, its non-banking subsidiary has been restructured into three groups: UBA Capital, Afriland Properties and African Prudential Registrars, all of which are to be listed on the NSE. UBA’s cost-to-income ratio remained at 67.01% in 2012, although its recent turnaround in performance is most evident in 292.55% y-o-y growth in operating profit. UBA’s ROE reached 28.85%, the second highest after GTB, while its ROA was an equally healthy 2.44%, second to Zenith’s. Having consolidated its operations, particularly international ones that accounted for 19% of its revenues in 2013, UBA is focused on driving local loan growth of 40% in 2013, particularly in the power and manufacturing sectors. It can afford to expand its domestic lending rapidly given its low NPL ratio of 2% and its loans-to-deposit ratio (LDR) of 45%, although it also has as its aim to raise the contribution of its international operations to 40% of group revenue by 2016.

ACCESS: A relative newcomer, Access Bank was established in 1989 but came under new management in 2002, and subsequently acquired two banks in 2005 and Intercontinental Bank in January 2012. The combined entity has 349 branches and 5.7m customers in Nigeria, eight African subsidiaries and a London office, and is licensed as an international bank. Access Bank’s cost-to-income ratio is 61% but this is expected to drop with the rationalisation of the acquired bank. However, 2012 marked rapid growth of 649.9% in operating profit and 151% in PAT, with PAT margins of 20.58%. With a strong CAR of 23% and LDR of 51%, the bank aims to grow, raising $350m through its maiden Eurobond issue in London in April 2013. In May, S&P forecast lending growth between 15% and 20% over the next year, driven by larger and more credit-worthy customers, which should improve the ROE of 15.94% and ROA of 2.2% achieved by the bank in 2012. Despite the low cost of funding for the combined banking structure, S&P expects pressure on margins from a bias towards top-tier borrowers and the low interest rate environment.

GTB: Also created in 1990, GTB grew organically through both consolidation waves, like Zenith, and replicated its 1996 local public listing by raising equity on the London Stock Exchange and the Deutsche Börse in 2007 – the first Nigerian bank to list offshore. With subsidiaries in five other African markets, GTB aims to expand both domestically and abroad, and has stated expansion plans for five new East African and two West African markets. The 188 branches it currently has in Nigeria cater to some 4.3m clients, which the bank aims to increase to 10m in the next two years. With a cost-to-income ratio of 42.73% in 2012, GTB is efficiently run and has sustained its steady performance. Operating profit grew 25.49% y-o-y in 2012, while PAT growth reached 81.3%, with the market’s highest PAT margins of 39.06%, according to Proshare. Having divested from its successful non-bank operations at a healthy profit in 2012, GTB is by far Nigeria’s most profitable bank with 30.58% ROE and 5% ROA in 2012. Like Zenith, GTB crossed the threshold of N100bn ($630m) in PAT in 2012 for the first time. While the bank is competitive on the corporate segment, it has also carved out a niche in retail, with 11.2% of respondents to EFInA’s 2012 study using GTB. This makes it the fourth most commonly cited bank, with 8.3% naming it their main bank.

ECOBANK: Part of a pan-African group with operations in 33 countries on the continent, Nigeria is Ecobank’s single largest market by a wide margin, accounting for roughly 44% of the Togo-based group’s assets in 2012. Having acquired the ailing Oceanic Bank in October 2011, Ecobank became the sixth largest bank by assets and third largest by its network of 610 branches. Focusing on its advantage in cross-border deals, the bank has also been working to consolidate and rationalise its extensive retail business – Ecobank’s cost-to-income ratio was at 72% in 2012, according to Proshare. It is already the third most cited bank in EFInA’s survey, with 16.3% of respondents banking with it, and 12.1% using it as their main bank. Having extended a $285m loan to the Ecobank group in early 2012, South Africa’s NedBank (the smallest of the continent’s big four) expects to convert it into 20% equity by end-2013. While its operating profit grew 69.03% and its PAT grew 41% in 2012, with PAT margins of 12.56%, Ecobank will seek to leverage its newly combined infrastructure to drive ROE and ROA above the levels of 13.38% and 1.46%, respectively, recorded in 2012.

MID-SIZED NICHES: While the six Tier-1 banks have maintained their market share dominance over the past year, the other 14 banks have increasingly had to focus on niche strategies for growth. All top-tier banks achieved gross earnings in excess of N200bn ($1.26bn) in 2012, while average returns for mid-sized banks was N102bn ($642.6m), according to AfrInvest.

Mid-sized banks have strong growth potential, while smaller lenders have to be more targeted – yet all maintain healthy CARs of above 15%, higher than the 10% requirement. “While size is important, the quality and the efficiency of the balance sheet is more significant,” Alex Otti, Diamond Bank’s CEO, told OBG. “Any advantage through scale can be lost to inefficiency.”

Foreign-controlled banks like Standard Chartered and Stanbic IBTC, part of South Africa’s Standard Bank, have proven to be aggressive on trade and project finance, as well as cross-border deals. Both lenders typically syndicated deals between their Nigerian subsidiaries and affiliated subsidiaries worldwide – Standard Chartered’s Nigerian subsidiary can only lend up to $50m per deal. “The first banks approached in oil and gas deals are internationally affiliated banks like Stanbic IBTC and Standard Chartered, which also hold an edge in trade finance given their access to dollar liquidity offshore” Adebayo Adebowale, a corporate banker at Ecobank Nigeria, told OBG. “But domestic banks like GTB, FCMB and UBA have been making a growing push in this sector.”

Backed by private equity firm Actis, which holds a 15% stake, Diamond Bank returned to profitability in 2012, with N27.4bn ($172.62m) in PAT margins, representing 258.6% annual growth. This reflects its push towards innovative means of attracting low-cost deposits, with a particular focus on its retail and SME franchises via its network of 220 branches. Diamond, a standalone bank, was the first bank to waive its N100 ($0.63) ATM use fee in 2012, for instance, a move which has helped to drive its retail growth. Its cost-to-income remains low at 44.34% in 2012, while cheap deposits account for some 60% of Diamond’s funding. Other mid-sized lenders like Fidelity, with 190 branches and a 70:30 split between corporate and retail banking, are making a push towards the mass market. Indeed, Fidelity has already benefited from depositor flight, with its deposit base growing 27% in 2012 to N716bn ($4.51bn). Having divested from its non-bank businesses, Skye Bank turned around in 2012 with a 869% y-o-y growth in PAT to N12.6bn ($79.38m).

ISLAMIC FINANCE: Following new rules on ethical lending (known as profit or loss-sharing lending in Nigeria) published in mid-2011, two sharia-compliant lenders have been certified: Jaiz Bank, a standalone northern-owned bank that issued a N8bn ($50.4m) private placement to seek a national licence, and Stanbic IBTC, which operates a sharia-compliant window. Whilst at a nascent stage, Jaiz estimates the segment’s assets could account for as much as 5% of the industry’s total in the next decade. The CBN supported the development by creating three sharia-compliant interbank instruments, in local and foreign currencies.

Heritage Bank’s managing director and CEO, Ifie Sekibo, told OBG, “Loans packaged as sharia-compliant products can attract funds to critical sectors from a broader swathe of investors, particularly those from the Middle East who may be interested in financing the country’s infrastructure projects.”

While these mid-sized banks are competing in retail alongside their core market of corporate banking, other similar players have specialised in the mid-sized to large corporate market. FCMB, which restructured as a HoldCo in 2013, has specialised in commercial banking, capital markets and corporate finance, but is expanding its retail and SME lending following its acquisition of FinBank in February 2012, a move which increased its network to 125 branches.

Union Bank, established in 1917, was the country’s fifth-largest bank by assets as of late June 2008, and was recapitalised in 2011 by a consortium led by private equity firm African Capital Alliance, which took a 65% stake for $750m, and AMCON, which holds a 20% stake. Stabilising the bank, which returned to a N7.3bn ($45.99m) profit in 2012 from a N82bn ($516.6m) loss in 2011, the new core investors replaced management in 2012. With around 333 branches and a strong retail legacy, the lender will have solid growth fundamentals once the restructuring is completed by 2015.

Smaller institutions like Sterling Bank, which acquired Equatorial Trust Bank in 2011, yielding it a combined 186 branches, and Unity Bank, the only entirely northern-owned bank and the traditional holder of Ministry of Defence deposits, are carving out niches in both targeted retail and corporate segments. Wema Bank, a regional bank able to operate in six to 12 states, raised N35bn ($220.5m) in private placement equity in March 2013 to convert its licence to a national one. Heritage Bank saw its banking licence returned, as a regional one, in 2012; it had been suspended in 2005, when it was known as Société Générale Bank of Nigeria, for holding insufficient capital.

LIMITED REACH: Despite combined assets of N21.3trn ($134.19bn), or 57% of GDP, the reach of banks remains at a limited level, and financial intermediation to the real economy is constrained, with penetration (loans to GDP) of a mere 32% in 2012, compared to 90% in South Africa. Conscious of the need for greater bank intermediation and to curb the potential for significant NPL increases following the AMCON clean-up, the CBN amended its risk management requirements for banks in 2013. By doubling the risk weighting applied to loans to the public sector to 200%, the CBN is seeking to encourage more private-sector lending over the traditional focus on the three tiers of government.

The economy’s under-leverage is also evident in the low share of adults served by some form of financial service. A mere 20% of the population of nearly 170m is banked, according to a KPMG report in April 2013, and the roughly 25m active accounts includes duplicate account-holders, a far cry from the country’s 110m-plus SIM cards in circulation. Despite a total of 20 banks, 876 licensed microfinance banks (MFBs), 107 finance companies and 104 mortgage lenders, the 2012 EFInA financial access survey found only 37.8m adults formally included and 34.9m financially excluded from either formal or informal institutions. This includes 28.6m people (32.5% of adults) served by banks, 9.2m (10.5%) served through other formal means like MFBs, and 15.2m (17.3%) served through informal channels such as savings clubs like esusu and ajo, moneylenders and remittances.

A June 2013 Ernst & Young report highlights markets with GDP per capita above $2000 and banking penetration of roughly 30%, like Nigeria, as at a transition point where domestic banks control the market – from the $6000 per-capita mark regional and multinational banks will increasingly enter the market. Despite two rounds of consolidation, Nigerian banks’ lending to small businesses and individuals remains limited. CBN Governor Sanusi has publicly guarded against further consolidation. “I’m concerned about the concentration of the banks at the upper end because very large institutions tend to lend to large multinational corporations and invest in government securities,” he told local press in April 2013. “They don’t have time for the middle, which is where economic growth happens and jobs are created. I don’t think we’re looking for any more institutions that would be too big to fail.”

CAPITAL TO COMPETE: While mid-sized banks seek to compete with the big six in key niches, S&P forecast in March 2013 that “they [would] be unable to resist competing for low-cost retail deposits and for the expanding corporate sector” over the next 12-18 months. “A few mid-sized banks are looking to raise fresh Tier-2 capital in 2013, and as a result we expect a series of bond issues both onshore and offshore in 2013 and 2014,” Samuel Sule, deputy manager of the debt capital markets division of Stanbic IBTC Bank, told OBG. Buoyed by a stable currency insured by the CBN, banks have increasingly tapped cheaper debt offshore with a longer tenor, but also equity, as demonstrated by Zenith Bank. Eurobond issuers in early 2013 have included Fidelity ($300m) and Access ($350m), although most lenders have secured shareholder approval for debt issues in 2013, including Diamond, Skye and FBN offshore, and Sterling, Wema and Stanbic IBTC onshore. While Tier-1 banks generally have sufficient capital and high-enough CARs to back organic growth, mid-sized lenders are tapping wholesale funding in 2013 to grow, particularly to finance Nigeria’s oil, power and infrastructure projects. The need to expand risk assets through lending is exacerbated in 2013 in light of falling FGN bond yields and the interest margin squeeze.

FINANCIAL INCLUSION: In October 2012 the CBN launched its Financial Inclusion strategy aimed at increasing financial access to 70% by 2020 in the key areas of payments, savings, remittances, pension, insurance and affordable consumer credit. The agency model of banking is expected to significantly extend banks’ reach, with most banks in the process of recruiting and training agents (or concluding agreements with third-party bank agent providers) in mid-2013. Meanwhile, the bank-led model of mobile banking promulgated by the CBN is expected to expand both inclusion and accessibility for the country’s financial institutions. CBN-led efforts to establish a single bank ID system should also reduce barriers to lending, although this is only a preliminary step towards creating the long-delayed National ID Scheme for all citizens (see analysis).

Under the “cash-lite society” initiative, the CBN has also sought to develop the ecosystem for card and electronic payments, starting with a pilot in Lagos State in 2012 and generalised to six more states in 2013. Together, these account for roughly 90% of cash centres in Nigeria. In 2012 EFInA found some 16.3m individuals using ATM cards, given widespread dual ownership of the roughly 25m cards in circulation. “Companies operating in Nigeria are only gradually realising the true costs of cash. The cost of cash in most countries is between 0.5%-1.5% of the country’s GDP. As a country we need to have a frank discussion about the true cost of cash. This knowledge would then motivate us to find multiple strategies to migrate from cash to electronic payments,” Omokehinde Ojomuyide, MasterCard’s Area Business Head for West Africa, told OBG. “The cash-lite policy is thus a step in the right direction, which the CBN, after a year of implementation, is now fine-tuning.” From April 2012 processing fees (of between 2% and 5% of the amount above the threshold) have been applied to large withdrawals from individuals and businesses of above N300,000 ($1890) and N3m ($18,900), respectively. While these ceilings are seen as too high to have a significant impact – the EFInA survey found only 5% of respondents had withdrawn amounts over the ceiling in the last year – the CBN set restrictions of N150,000 ($945) for processing third-party cheques in Lagos State from June 2013. The regulator also restricted cash-in-transit (CIT) services to specific licensed CIT operators (such as Bankers Warehouse) from December 2011 and issued new guidelines on the use of point-of-sale (POS) terminals.

By capping merchant service commissions at 1.25% of payment and N2000 ($12.60) overall, as well as the amount charged by merchants for processing cards via POS, the new rules aim to significantly extend the POS network nationwide. The impact on Lagos State has been the most visible, and the pool of POS installed nationwide has expanded from 40,000 in 2011 to 150,000 in 2013. In the three years to 2015 KPMG estimates that Nigerian institutions will invest some €1.2bn in new POS terminals, ATMs and payment systems to reach the target of 75,000 ATMs, up from 10,000 in 2011, and 350,000 POS, up from 5300 in 2011. Yet while the policy has spurred a jump in electronic and card transactions, the policy has only impacted those already banked. “We have seen some impact from the implementation of the cash-lite pilot project in Lagos State. The total value of cash transactions has dropped, although there has not yet been an impact on financial inclusion, with more customers opening bank accounts,” Modupe Ladipo, EFInA’s CEO, told OBG. Cash transactions continued to fall in early 2013, from 83% of the total in April to 80% in May, according to data from the Financial Derivatives Company (FDC), while card-based transactions reached 20%. The value of electronic transactions on the Nigerian Inter-Bank Settlement system reached N2.4bn ($15.12m) monthly in June 2013, while electronic fund transfers and instant payment transactions totalling a combined N80bn ($504m) daily, as per FDC figures.

Aside from the bank ID card initiative, the Federal Ministry of Finance is also partnering with the World Bank to create a dynamic mortgage market by establishing a mortgage refinancing institution, most likely a reformed Federal Mortgage Bank of Nigeria. Outstanding mortgages by the end of 2012 stood at $1.89bn, compared to $1.90bn in Kenya, $44.28bn in Turkey, $106.68bn in Malaysia and $134.44bn in South Africa, according to Lafferty Cards and Consumer Finance figures quoted by Diamond Bank, while Nigeria’s ratio of mortgages to total consumer indebtedness stood at a mere 2.9%. The World Bank also intends to extend $300m at concessional interest-free rates, with 10 years’ grace period and 40 years repayment, although the ministry also aims to raise private investment. Six states including Lagos and the Federal Capital Territory have volunteered to pilot the project, although details to do with this initiative still remained unclear as of July 2013. With the CBN having raised capital requirements for the more than 100 primary mortgage institutions to N5bn ($31.5m), authorities expect a more consolidated sector with access to lower refinancing rates will significantly reduce barriers to home-ownership in a market with an estimated housing deficit of 16m units.

MICROFINANCE: While the main impetus for extending financial access is placed on banks’ agency forces, the CBN is also reforming MFBs to improve their capacities and reach. Despite there being a total of 876 licensed microfinance institutions, of which close to 600 are MFBs reporting to NDIC, a mere 6m Nigerians held MFB accounts in 2012, according to EFInA figures. Of these accounts, most are for savings and roughly 1.8m are held by micro-entrepreneurs in Lagos.

Nigerian MFBs charge interest on loans of between 3% and 6% monthly with average tenors of six months and average values of N230,000 ($1449), offering monthly deposit rates of 2-4%. “The absence of a national ID card is the single biggest problem for microfinance banks since proof of address is very challenging and documents often forged,” Nwanna Joel Ezeugo, chief commercial officer at Accion MFB, a state MFB in Lagos backed by the International Finance Corporation and banks like Zenith, Ecobank and Citi, told OBG.

Revision of the 2005 Microfinance Policy in 2011 segments MFBs into single-unit, state-level and nationwide groupings, with capital requirements of N20m ($126,000), N100m ($630,000) and N2bn ($12.6m), respectively. Full enforcement was delayed a year beyond the original end-2012 deadline, yet the vast majority are single-unit MFBs, often with local government or state involvement. The CBN wants local and state governments to formulate five-year exit strategies from these investments. It also introduced mandatory certification for MFBs, subsidising up to 60% of training costs, while also supporting the conversion of cooperative banks into MFBs. Having closed some 100 MFBs over the past two years, the CBN seeks to help the sector’s association to establish a dedicated regulator as well as certification and credit information bureaux.

Microfinance deposits reached N125bn ($787.5m) and lending totalled N97bn ($611.1m) by end-2012, according to CBN data, up from N99.4m ($626,220) and N649.6m ($4.09m) in 2001. By 2013 the CBN had licensed four national and 44 state MFBs, with the leading eight accounting for up to 60% of the market, according to Accion MFB, although more detailed statistics on the sector are still forthcoming. While the government launched a N50bn ($315m) Micro, Small and Medium Enterprises Development Fund at the CBN in 2006 to support MFBs’ access to funding, no money had been disbursed as of mid-2013. “The demand for microfinancing is huge, and if MFBs are to increase lending, they need sufficient capital reserves,” Bunmi Lawson, Accion MFB’s CEO, told OBG.

While some MFBs have raised equity publicly to fund growth, including the Nigerian Police Force’s (NPF) MFB, which is the largest MFB by geographical footprint and present in all states, and Fortis MFB, most other lenders have struggled to gain the necessary scale and deposits. The sector boasts only four foreign-linked institutions, two of which opened as national MFBs in 2012 – Lafayette and FINCA. Russian investment bank Renaissance Capital opened the fifth in November 2012, targeting consumer credit to the middle class with an aim of reaching N1bn ($6.3m) in lending in its first year.

Roughly 70% of MFBs are located in the south of the country, and the majority are focused on urban centres. “Social cohesion tends to be stronger in rural areas than in semi-urban ones, entailing higher repayment rates,” Nwanna Joel Ezeugo, Accion’s chief commercial officer, told OBG. “Yet the challenge in expanding to areas less covered by MFBs is the lack of infrastructure ranging from roads to bank branches.”

CORPORATE GROWTH: Bank lending has seen a skew of 80:20 towards corporates, despite more recent attention to retail. Demand for naira and US dollar loans has begun to diversify in recent years, however, as reflected in the growing confidence in naira bonds. Omar Hafeez, the managing director of Citibank Nigeria, told OBG, “Foreign investors now have greater access to Nigerian sovereign debt with very few restrictions.” The growing role of local exploration and production (E&P) firms has combined with new local content rules requiring oil producers to give first consideration to Nigerian banks to drive growth in lending to the upstream segment. “The number and size of oil and gas transactions are on the increase due largely to the higher participation of Nigerian companies in the sector,” Samuel Egube, Diamond Bank’s corporate banking director, told OBG. “However, transaction sizes for power deals should become larger cumulatively by 2014.” The industrial, infrastructure and telecoms sectors are also raising significant funding, including from local sources.

While larger banks like FBN and Zenith have the capacity to lend up to roughly $400m, the number of deals of $200m or more remains limited. “Nigerian banks’ ability to finance equity stakes in large oil and gas deals is growing, as is their expertise, although they remain constrained by their 20% single borrower limit as well as their access to dollar liquidity,” Ladi Bada, the CEO of local oil firm Shoreline Natural Resources, told OBG. “Nigerian banks cannot typically finance more than $150m to $200m per transaction.”

Although larger lenders have prioritised unstructured deals, the pace of loan syndication by other banks has increased. “While there is growing competition between Nigerian banks for deals, we are also seeing increased interbank cooperation through more syndication and club deals. Given the emerging larger transaction sizes and increased transaction complexity, the culture of risk sharing and the orientation for business inclusion among banks is growing,” Diamond Bank’s Egube told OBG. With corporate lending rates averaging Libor+7.5%, and as low as Libor+4% offshore to blue-chips like Dangote, the appeal of corporate bond issues was limited in 2012. “Financing for indigenous oil firms acquiring oil and gas assets in Nigeria has typically exceeded Libor+7.5%,” Osam Iyahen, senior vice-president of natural resources at Africa Finance Corporation, told OBG. “We have not yet seen any local corporate bond issues by these firms.”

OUTLOOK: This growth in risk assets is precisely what the banking sector needs to drive expansion going forward. Given the amount of lending focused on oil trading and speculation, banks need to diversify their books (see analysis). While net interest margins are as high as 8%, twice as high as in South Africa and rising by as much as 34% y-o-y at UBA in 2012, and still represent a substantial share of Nigerian banks’ revenue, the outlook for money market yields given falling yields on government bonds is tighter in 2013. The record ROE growth of 166.7% y-o-y achieved in 2012 following sanitisation will not be replicated in 2013. Banks will need to restructure their asset mix to drive profitability from the significant capital base they have accumulated during the recent banking consolidation.

A low NPL base of less than 5% of all loans will enable lenders to aggressively expand credit growth, which reached 18% on average in 2012, according to AfrInvest. S&P expects growth of 20% y-o-y in lending and 30% in deposits in 2013. With banking assets forecast to grow by a compound average of 10% per year to reach $168bn by 2015, according to KPMG, the key to the success of the banking sector in Nigeria will be to balance a strict focus on risk management, while also expanding financial access and product diversification.