FirstBank Review 1st Half of 2011

FirstBank Review | 1st Half 2011 3

I

From the Group Managing Director/CEO

I am pleased to present to you the maiden edition of our semi-annual publication, the FirstBank Review. Through the FirstBank Review, we seek to shed light on contemporary economic and business issues in a practical and readable fashion. The publication is targeted at business leaders, policy makers, legislators, academics, enthusiasts, and of course, our valued customers. It will be widely distributed amongst professional organisations, blue-chip institutions, growing businesses, government agencies, as well as local and international investors.

This journal is enriched with well-researched articles from our Research and Economic intelligence team, respected economic and financial analysts, seasoned business commentators, and is supported by an experienced editorial team. The scope of the Review will cover an assortment of topics over time, including recent economic developments, government policy pronouncements, local and global market updates, and perspectives on promising business opportunities within the Nigerian economy.

As the nation’s largest and most respected financial institution with over N2.5 trillion in assets, 5 million customers and 1.3 million shareholders, we remain committed at FirstBank to the development of Nigeria. One of the means by which we hope to do this is by stimulating intelligent fact-based discourse on salient business and economic issues of our times amongst decision makers and opinion leaders. It should therefore come as no surprise that we have chosen “Unlocking the Domestic Credit Market” as the theme for the maiden edition of our publication.

We hope that you find this publication stimulating and informative, and we welcome any feedback that you might have.

Bisi OnasanyaGroup Managing Director/CEOFirst Bank of Nigeria Plc

Contents

Editorial Note

The Economy at a Glance

The Nigerian Credit ConundrumTackles the question why banks with excess liquidity do not lend more.FirstBank Economic Intelligence

Regulatory Intervention: Towards Unlocking the Domestic Credit MarketHighlights the recent Federal Government’s assisted funds, directed at some key sectors of the economy.FirstBank Research

06

10

12

14

Credit Growth in AfricaExamines the potential bargains implicit in the credit markets across a number of African countries.Razia Khan

32Cover Image: YINKA OBEBE

VOL 1 ISSUE 1 | 2011

Credit Dynamics: Is It Better to Borrow in Naira or in Dollars?Describes the root cause of credit problem/conundrum. Financial Derivatives Company

Syndicated Loans Gaining Popularity in NigeriaProfiles the domestic syndicated credit market in the past few years.FirstBank Research

Definitive SME Guide to Getting A Bank LoanProvides practical tips for small business owners who desire to secure a bank loan.Patrick Akhidenor

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.

FirstBank Research

Sectoral PerspectivesOutlines emerging business opportunities across sectors.

FirstBank Research

About FirstBank

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6 FirstBank Review | 1st Half 2011

FEditorial Note

Getting Banks to Lend Again

Financial intermediation is fundamental to the success of market economies. The reason banks in particular have such pronounced influence on economic growth and development is simple: all businesses require financing. Financing is to any business venture what food is to the body – a source of energy that allows the consuming entity to conduct its activities profitably and to grow – and without which it would cease to be alive. And financing can come from multiple sources. As a child might drink milk until it is weaned and then eat solid foods, a business in its early stages typically requires startup equity capital and at a later stage expansion capital in larger portions and potentially different forms, and over the course of its life it may consume daily increasing rations of working capital which it continually replenishes to fund general activities as it grows. When a business is in poor financial health, it may require emergency infusions of capital to keep it alive, and conversely when it is doing well, it can also suffer from an excess of capital, when it consumes much more than it requires, and in forms and under terms that may not be the best for its long-term health.

Without over-emphasizing the metaphor, it becomes apparent why regulators and governments are so interested in keeping the flow of credit going. When companies become ‘starved’ of credit (and are not able to finance their operations internally or via other means), they run the risk of shrinking and eventually dying out - which in turn has broader social and economic implications as their employees find themselves out of work and as their creditors, suppliers, and customers are

affected. When whole sectors of the economy are denied capital, the social and frequently political consequences of such are enough to make governments very interested in ensuring the free flow of capital within a nation, and particularly in times of a recession when investments are required to create jobs, generate stronger economic output, and ultimately lead to recovery.

Against this backdrop, the actions of the Central Bank of Nigeria in the wake of our recent homegrown banking crisis are very understandable. When ten banks were deemed to be in grave condition in 2009, the Central Bank pumped in N620 billion to stabilize the financial sector and went on to champion the establishment of the Asset Management Corporation of Nigeria to purchase ‘toxic’ assets off the balance sheets of banks. It additionally guaranteed creditors who had lent to these banks and depositors who had placed their funds with them. The government could not afford a situation in which the failure of a few banks might bring down healthy banks and grind the financial sector and economy to a halt.

Paradoxically, in the wake of the interventions, the industry found itself awash with liquidity and interest rates dropped dramatically with the benchmark NIBOR overnight rate (the rate at which banks lend to and borrow from each other) averaging 2% in the first quarter of 2010 (it has since shot up again). In an effort to stimulate lending and jumpstart the economy, the CBN attempted during 2010 to maintain low interest rates which would theoretically allow bank customers to access cheap funds and deploy them

productively. The regulator also adopted several measures to promote lending to critical sectors of the real economy such as agriculture, manufacturing, power, and transportation. Notwithstanding, many of the healthy banks were slow to respond and individuals and businesses did not fare much better in trying to get bank loans. In fact, in the year ended December 2010, total credit to the private sector actually declined relative to the prior year!

In the same year, we as the FirstBank Group (the largest banking group and lender in Nigeria) grew loans at face value by 6%. However, because we wound down nearly N150bn in loans to our subsidiaries and replaced them with loans to customers, our actual loan growth to customers was much closer to 20%. We remain intrigued, notwithstanding, by this phenomenon which we call the ‘credit conundrum’. Why are banks who are awash with liquidity so reluctant to lend? Are the reasons to be found within the banking system, the broader economy or with the potential borrowers themselves? And what can be done to restore the vital flow of credit in the economy? In this edition of the FirstBank Review, we explore this topic and we hope that the ensuing pages will not just elucidate the causes but will also offer practical advice and knowledge to those who seek to take advantage of bank financing opportunities.

Onche R. UgbabeChief Strategy Officer, FirstBankEditor-in-Chief


EDITORIAL COMMITTEE

Bayo AdelabuChief Financial Officer

Onche Ugbabe Chief Strategy Officer

Morohunke Bammeke Group Head, Operations

Richard Ogunmodede Head, Business Performance Management

Folake Ani-Mumuney Head, Marketing & Corporate Communications

Bismarck Rewane MD/CEO, Financial Derivatives Company Limited

(External Reviewer)

Dr. Yomi Makanjuola Principal Partner, Thinck Metrics (External Reviewer)

Renuka Rayasam Roland Berger Strategy Consultants

RESEARCh/PRODUCTION TEAM

Vincent Nwani – Head, Research Unit

Tunji Inaolaji – Research Associate

Saheed Olajide – Research Analyst

INTERNAL REVIEWERS

Babatunde Salami Head, Local Currency, Treasury

Godspower I. Nkwopara Head, HR Strategy

Eloho Omame Head, Corporate Development

Akeem Oladele Head, Group Coordination

Ifeanyi Uddin Chief Economist

Kayode Osolaja Head, Special Projects

Oze K. Oze Head, Publications & Conferences

CREATIVE DIRECTION/DESIGN

Symon Adeji, Sleek Media

Ayoade Ojo, DesignCave

PROPRIETARY & ENQUIRIES

FirstBank Review is a publication of the Strategy & Corporate Development department, produced within the Research Unit. Further enquiries/comments and submission of articles should be directed to [email protected]

REPRODUCTION

Copyright © 2011 First Bank of Nigeria Plc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage device without written permission.

NOTE TO READERS

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.

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The Economy at a GlanceTa

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2011201020092008200720062005

5.0

6.27.0

5.0 4.6

6.6

9.0 9.0

6.97.4

?

GDP Growth

2011 may mark the secondtime in six years thatactual GDP exceeds theFederal Government'sbudgetary target for GDP.1Q2011 figures alreadyappear promising at 7.4%(in line with 2010 actual).

2011 Daily Average(YTD June 2011)

2.5m bpd

2008 July1.8m bpd

Crude Oil Production

Daily crude oil production is at its highest sustained levelWesince 2006. expect strong continued production given

the success of the recently-concluded general electionsand sustained peace in the Niger Delta.

Interest Rates

Interest rates have risen steeply since September 2010. Changes in the MPR and its corridors will continue to influence the direction of deposit and lending rates.

Exchange Rates

The Nairadepreciated by N2 at the Interbank FX market (Jan

- June 2011) driven by concerns about political risk

and high

commodityimportation levels. We expect demand for FX to

remain strong in the coming quarter.

8.0% MPR (as at June 30, 2011)

@ 2 year high

As economic activity rallies on post election results,

the challenge to inflation control lies in containing

aggregate expenditure and moderating the impact

of inflation in.

imported goods

Inflation

19.7%Official Unemployment Rate

Nigeria's official unemploymentrate is higher than that of most of theMiddle East and North African nationscurrently witnessing revolutions andNigeria has a larger proportion of youth.Unemployment (which is likelyunderstated) remains in our view oneof the government's top five priorities.

2011 Daily Average

(YTD June 2011)

12.4% - May 2011

(as at June 30, 2011)Down 2.5% from high of 13.46% in Nov. 2010Was as low as 1.15% in June 2010

Whereare thejobs?

as at Jan 2011

?7.0 7.0 7.0

10.92% Interbank rate (overnight)

US$ 153


Private Sector Credit Growth

Private sector credit growth declined from an astronomical 97% in 2007 to a contraction of 5% in 2010. However, we expect gradual creditgrowth in 2011.

Non Performing Loans

Syndicated Loan Market

After the slowdown of 2008 and 2009, the syndicated

loan market

Nigerian Banks’ non-performing loans (NPLs) which ballooned from N151 billion in 2006 (shortly after the regulatory-induced recapitalization exercise) to N2.9 trillion in 2009 reduced significantly in 2010.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 Asset Management Corporation of Nigeria.

appears to be reawakening.

the two biggest deals in 2011 is greater than the The value of

total value of deals executed in 2008 and 2009.

Non Performing Loans (N billion)

The agricultural sector which contributes over40% to the nation's GDP less than 1%of total bank lending while telecommunicationswhich contributes 4% of GDP accounted for over 12% of total bank loans in 2010.

accounts for

Sectoral Share of Bank LoanSectoral Share of Bank Loan

-5%27%59%97%

2006 2007 2008 2009 2010

151209

272

2,922

869

The Economy at a Glance


The Nigerian Credit ConundrumFirstBank Economic Intelligence

The larger context for the ongoing debate about current constraints in the domestic credit market is the astronomical growth in credit to the private sector, which occurred between 2006 and 2008. In excess of 100% per annum within this period, it is worth recalling that the bulk of this credit growth fuelled speculative activity in non-productive sectors of the economy, especially connected party lending, margin lending, and oil importation.

It was inevitable therefore, that the Central Bank of Nigeria’s (CBN) intervention to reform and repair the sector would lead to an attenuation of domestic credit growth. The latter consequence has been the main upshot of stronger risk management frameworks, and improved governance arrangements. However, it is hard to ignore another effect of the apex bank’s attempts at cleaning up the industry’s balance sheets. Along with the Asset Management Company of Nigeria’s (AMCON) purchase of the industry’s non-performing loan portfolio, the CBN’s guarantee on interbank transactions helped push up bank liquidity beginning 2011.

With the banks awash with new liquidity, questions have inevitably been raised about a credit squeeze, and much effort spent trying to device new approaches to unlocking the domestic market for credit. Again, the CBN’s intervention in this regard has been the most noticeable. The jury is not yet in on the extent to which the apex bank’s quasi-fiscal operations may have helped to improve credit flow to the real sectors of the economy, but it is hard not to commend much of what the CBN has done thus far.

Nevertheless, success in unlocking the domestic market for credit will however depend on getting the right mix along four interconnected dimensions of the economy. First, the banks. Traditionally, their business model has focused on generating retail liabilities and on-lending these to the top corporate names. As the structure of the economy has changed with successive reforms, this model has been challenged by a noticeable bulge in the middle of the economy. Along with the transition in the trend growth rate of the economy from around 4% prevalent in the late 1990s to around

T


7% today, there has emerged a new middle class in the country with financing needs which the banks are ill-prepared to serve. Change would thus see the banks re-appraise their pricing models, risk acceptance criteria, and the size of their loan packages if they are to take advantage of the new vistas opening up in this sector.

Much of the rest of what has to be done though is completely beyond the banks’ ken. Emergent sectors of the economy demand specific responses, stemming, among others, from the fact that they still suffer from a narrowness of entrepreneurial competences. Most small and medium sized enterprises operating in the economy today still do not know how to optimise their capital mix, cannot put coherent business plans together, and often do not keep adequate books of accounts. So, even to the most entrepreneurial of this class, it would be hard to see much credit flowing their way unaided.

In spite of this, credit opportunities were always going to be constrained by the fact that manufacturing contributed 4.19% of GDP in 2009. Ideally, one of the areas in which net capital formation should take place in the economy, and to which credit should flow for this purpose, structural constraints in the economy,

which ensure that the landing cost of imports is cheaper than for domestic production have helped contract the manufacturing sector. The challenge here is to reduce the cost of doing business in the economy, including the provision of infrastructure through the public-private partnership, in the expectation that growth in the manufacturing sector will drive a resurgence in the demand for credit.

This latter challenge is a fiscal one. Government must create the environment for this to happen. Government though, has an added task: fiscal consolidation. Since 2006 and on the back of revenue over-performance from elevated crude oil prices, government spending has grown steadily. Government debt has grown too. And as banks have dealt with net interest margin pressure through increasing their holding of government instruments, government has contributed significantly to crowding out private sector borrowing. Adjusting the public expenditure management framework to take cognisance of this would thus be a useful contribution to the process of unlocking the domestic credit market.

As an international bank, there are certain characteristics of the global recovery which we noticed in the various markets where we operate. For example, we

noticed attempts by policy makers to stimulate credit growth by lowering interest rates to near zero. LIBOR which came down to 0.5% per annum combined with huge doses of quantitative easing did little to motivate banks into a bullish lending mode. The same happened in Nigeria (March-June 2010) when OBB and T/Bill rates declined to 3% per annum, and we did not notice a spike in lending. This means that low interest rates and liquidity saturation do not on their own alter banking and lending behaviour. It is the perception of risk that makes the difference. In the U.K. like other advanced markets, it took approximately 24 months after the stimulus before we noticed any substantial increase in credit extension and flows to the market. One thing that is common between lenders response to policy incentives across various markets is that the trauma of the financial crisis led to a high level of risk aversion which takes time to thaw.

All told, it would be necessary, in light of the feedback between these diverse dimensions of the economy that a solution to the credit problem be all inclusive. This was always going to be a challenge to be solved over the medium, and not the short term.


E

Regulatory Interventions:

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:

Towards Unlocking the Domestic Credit MarketFirstBank Research


What happened to the Funds?Figures from CBN show that the funding schemes have been largely successful in terms of disbursement and utilisation. For instance, as at December 2010, over 60% of the funds directed at the agricultural sector had been disbursed. Updates of the funds utilisation are highlighted as follows:

• N109.628 billion out of the N200 bi l l ion CACS Fund has been released for disbursement to 115 beneficiaries (comprising 95 individuals/private promoters and 20 State Governments), through 12 banks (as at February 2011);

• N199.6 billion out of the N200 billion for re-financing/re-structuring of banks’ existing loan portfolios to the manufacturing sector and SMEs was disbursed to 539 beneficiaries across 12 different sectors of the economy (as at December 2010);

• N35.82 billion out of the N50 billion ACSS Fund has been guaranteed since inception (as at June 2010);

T h i s a p p a r e n t s u c c e s s notwithstanding, operators in the

target sectors still face onerous challenges that inhibit their ability to easily access financing. Key among the limiting factors are:

• Difficulty encountered in obtaining Irrevocable Standing Payment Order (ISPO) from state governments to guarantee loans disbursed to farmers in their various states;

• Mismatch between the mean time for processing credit and the timing/seasonality of the available business opportunities for which the loan is sought;

• Inability of the fund-seekers to provide the required security as stated in the Fund guidelines, especially when banks have to bear the credit risk.

Any Funding Gap?The r e cen t I n t e r ven t i on Funds pronouncement is positive confirmation that government is aware of the financing challenges facing the real sector of the economy. However, the available funds are just a fraction of the financing resources required by the sector to regain traction and achieve sustainable growth. Despite the ongoing funding initiatives

Profile of Recent Government Assisted Funding

Source: Funds’ Guidelines

Funding Intervention Year of Establishment Amount Sectors to be Funded Measures /Release of Guideline (N ‘Billion)

Agricultural Credit April, 2006 50 Agriculture (Establishment orSupport 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 SectorSector Refinancing/ Restructuring Fund

Power, Aviation & August, 2010 300 • PowerInfrastructure Fund (PAIF) • Aviation

by government, funding gaps have persisted (and appear to be approaching epic proportions), when seemingly the nation’s GDP growth is increasingly being disconnected from bank lending.

In the Nigeria Vision 20:2020 – First National Implementation Plan (2010–2013) Blueprint (draft copy) – released in May 2010, the Federal Government’s planned investment across all sectors of the domestic economy between 2010 and 2013 is estimated at N7 trillion. The top-5 priority sectors are projected to account for 73.6% of the total investment expenditure estimate. The priority sectors, in descending order of indicative allocations, are: transport (N2.43 trillion), power (N880.98 billion), education (N611.66 billion), agriculture & water resources (N595.34 billion), and oil & gas (N541.79 billion).

Similarly, the expenditure in the power sector over the next ten years is projected at about $100 billion (N15 trillion) – in order to increase electricity generation from its current level of less than 4,000 megawatts to 40,000 megawatts by 2020. Projections of the other priority sectors will likely follow a similar pattern.


The na t iona l and sub -na t iona l governments’ investment in these sectors is to enable a conducive environment and to galvanise the private sector’s participation in the economy. Cumulatively, the funding required to achieve the anticipated sectoral/economic development projections is massive.

Clearly, aggregated investments in these sectors will open up investment opportunities for the private sector. But it will be very difficult for the private sector solely to finance all the sub-sectors of the real sector to the extent of their funding requirements, without financing assistance from the banking sector.

In the Doing Business Report (2010), a co-publication of Palgrave Macmillan, International Finance Corporation (IFC) and the World Bank, Nigeria ranked 125th position out of the 183 countries surveyed in the report. The ranking was a decline from the 120th position Nigeria achieved in 2009.

The difficulties that characterise the ‘Ease of Doing Business in Nigeria’ index have a strong direct correlation with funding. In a survey by the World Bank, “An Assessment of the Investment Climate in Nigeria (2009)”, it was reported that only 1% of the business financing needs in Nigeria are sourced from banks and other financial institutions. The remaining business financing comes from internal funds/retained earnings (70%), suppliers’ credit and advances from customers (25%), and borrowing from family and friends (4%).

Access to financing, according to the Global Competitiveness Report (2010–2011), was the most problematic factor impeding doing business in Nigeria out of the 15 factors considered in the report. The other factors, in descending problematic order, are: inadequate supply of infrastructure, corruption, policy instability, government instability/coups, inefficient government bureaucracy, inf lat ion, inadequately educated workforce, crime and theft, poor work ethics in national labour force, foreign currency regulations, restrictive labour regulations, poor public health, tax regulations, and tax rates.

Interestingly, one of the four cardinal pillars of the CBN’s ongoing reform is “ensuring that the financial sector contributes to the real economy, which is very critical to the type of growth that

translates to improved welfare”. Hence to realise this goal, the Bankers’ Committee “has identified three key sectors: power, transportation and agriculture, as most critical to the development of the real economy, as well as the change that will drive other sectors and contribute to economic development in Nigeria.”

Five key decision thrusts that would influence Bankers’ Committee’s lending provision to the three identified sectors are:

• Identification of initiatives in each of the focus sectors that the financial system will support;

• Determination of the requirements for success, including funding;

• Engaging in advocacy to effect government policy changes;

• Support for industry-wide capacity-building;

• Work on the development of regulation and legislation to support lending to the sectors.

Bridging the GapWith the apparent mutual understanding of the funding gap and remedial actions to bridge the gap, a new chapter appears to have been opened in the Nigerian real sector financing. However, to orchestrate tangible increase in credit to the private sector (real sector, in particular), all parties must concertedly design pragmatic strategies that will reduce actual and inherent risks in the real sector. By so doing, this should reduce

the impediments which have hampered the private sector’s ability to access credit facilities from banks. In addition, such strategic measures should checkmate past pitfalls (e.g. ballooning of non-performing loans, escalating interest rate, etc.), as well as pre-empt future hindrances.

A related and festering concern is the need to accelerate land reforms. In Nigeria, the primary collateral for bank loan requests is landed property, and, over the years, this has created an incongruous barrier to entrepreneurship. Recognising this fact, government, in 2007, included land reforms in its 7-point agenda, stating “While hundreds of billions of dollars have been lost through unused government-owned landed assets, changes in the land laws and the emergence of land reforms will optimise Nigeria’s growth through the release of land for commercialised farming and other large-scale businesses by the private sector. The final result will ensure improvements and boosts to the production and wealth-creation initiatives.”

Additionally, it is important to develop the primary and secondary markets for long-term debt. This is particularly important given the banks’ limitation in extending loans to the real sector (considering their loan/deposit maturity mismatch profile). The current practice whereby the bond market is dominated by government at the expense of the private sector is not sustainable for a country that has identified the private sector as its primary engine of economic growth. Both government and financial intermediaries should institute strategies that will reduce the crowding-out effect of government’s borrowing at the expense of private sector lending.

While the issues described above are considered crucial to unlocking the domestic credit market, all key stakeholders should ardently brainstorm and fine-tune the modalities to actualise the strategic objectives that would spur sustainable economic growth. This will facilitate deeper understanding of the funding schemes and the technicalities of lending to the real sector. This is a clarion call to all stakeholders to pro-actively champion and contribute towards Nigeria’s attainment of the enviable position of ‘one of the 20 largest economies by 2020’.

“Clearly, aggregated investments in

these sectors will open up investment opportunities for the private sector. But it will be very difficult for the private sector solely to finance all the sub-sectors of

the real sector to the extent of their funding requirements, without

financing assistance from the banking

sector.”


Syndicated Loans Gaining Popularity in Nigeria

When Etisalat Nigeria closed on a syndicated loan deal earlier this year, it was a sign of renewed dynamism in the country’s lending markets. Eight Nigerian lenders financed the N97 billion facility. The mobile operator plans to use the funds to aggressively expand its network across the country, buying new equipment and building new infrastructure.

In such transactions, several banks team up to structure and underwrite a single large loan, allowing them to share information and diversify their risks. As Nigerian banks continue to strengthen their balance sheets and stabilise their positions, syndicated loans represent the type of financing schemes that an increasing number of Nigerian firms will explore.

With the slow thawing of the credit environment in Nigeria, loan syndication deals offer companies a way to finance major capital-intensive projects, which are often too large for just one lender to undertake. According to the FirstBank

representative in the Etisalat syndicated loans deal, “just one bank may not be able to shoulder that level of borrowing because of the size of the facility”.

Etisalat first approached lenders in December 2010. Over the course of the next few months, the FirstBank team along with representatives of other major lenders met multiple times to flesh out the details. Although the banks strove to protect their own interests, there were nevertheless no major obstacles in agreeing stipulated terms. “While such deals take more time and co-ordination, they are worth it because they help banks to better evaluate risks, and ensure certain comfort in knowing that all the banks are in the same situation.”

Syndicated deals have for long been a staple in Western markets. In the U.S., they formed 51% of total corporate financing in 2007. By contrast, in Nigeria they were 12% of corporate lending that year. Since then, an increasing number of companies in mostly mature sectors

have taken advantage of loan syndication structures. Over the past five years, about 64% of syndicated lending in Nigeria went to the telecommunications sector and 20% to oil & gas. In recent years, the country has averaged only about four syndicated deals per year. But as the Nigerian government intensifies its power sector reforms, banks will be called upon to finance even more capital-intensive projects.

Clients seeking to approach lenders for a syndicated loan must be well-prepared. While it helps to have a good existing relationship with lenders, the most important selling point is a strong proposal. Potential borrowers must have a clear idea of what they are using the facility for, be able to show strong cash-flow projections and prove that they have good management. Clients make the deal as straightforward as possible for lenders by showing profitability, sticking to loan terms and communicating regularly with all lending partners.

Over the past five years, about 64% of syndicated lending in Nigeria went to the telecommunications sector and 20% to oil & gas.

FirstBank Research


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 Research

Supportive Operating Environment

Growing interest in loan syndication is a product of its intrinsic loan portfolio diversification attribute, as it reduces excessive single-lender exposure risk. It also serves the dual purpose of aiding financial institutions to comply with strict regulatory limits and in curtailing risk. In terms of earnings, it enhances mixed income sources through the collection of fees, while tackling lack of origination capability and origination costs.

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. It is our belief that the Freedom of Information Bill (FIB) passed by the National Assembly, once signed into law, will bolster information dissemination and disclosure, going forward.

At the Monetary Policy Committee (MPC) meeting held on March 21 to 22, 2011, the CBN noted that the net foreign assets in the first two months of 2011 posted positive growth, the first time since January 2009. Therefore, enhanced credit flow to the private sector is envisaged due to the high potential for accelerated growth, the stabilisation of the banking sector and improving investor confidence, following the take-off of the Asset Management Corporation of Nigeria (AMCON). On the downside, the trending

up in monetary policy rates, in our view, signals higher interest rates on domestic debt instruments. CBN has indicated that it is prepared to tighten further should the inflation outlook worsen in 2011. It is our hope that fiscal consolidation and likely interest rate hikes later in the year will not be at the expense of the recovery of credit growth.

With about N1.5 trillion yearly investments estimated for the power sector over the next ten years, analysts have projected a three-digit growth rate multiplier effect in the power and ancillary sectors, provided the ongoing power reform programme intensifies and is sustained.


*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 Fund

Source: 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

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.


Definitive SME Guide to Getting A Bank Loan*Patrick Akhidenor

“Mr. Small-Medium Business” is likely to point accusingly to lack of access to bank loans as the greatest challenge he faces. But, is this real or mere exaggeration and possibly prejudice? If this conjecture is true, why is this so and, how can it be reversed? This short article will attempt to address this issue.

Lack of Access to Bank Loans – Fact or Myth?

Generally speaking, the small business is by design “unitary” with ownership centred on a “key man” and supported nominally by his close family and, sometimes, a few friends. Typically, the business derives its vision and dynamism from this key man who often has very limited funds at his disposal but almost unlimited ideas and boundless optimism. His inability to transmit the vision and potential he SEES to his banker often hampers his access to funds. On his part, his banker’s checklist would usually focus on the following:

• A clear loan PURPOSE. Clarity and conviction, exhibited by the prospective borrower for the requested bank loan, will make for easier and faster decisions to be

taken regarding the appropriate form of support, which may not always be direct lending. A business owner must be able to clearly express the precise financial need. A lender will need to know if, for example, the actual purpose is for the payment of salaries, financing of receivables, or if the request is more capital-oriented for, say, the construction of a factory. When the funding request is vague, what “Mr. Small-Medium Business” seems to be conveying is arbitrariness, ambiguity or evasiveness. Consequently, a lender would rather choose to err on the side of caution…;

• Business plan or FEASIBILITY study. This will readily indicate if the promoter, especially where start-up risk is envisaged or expansion into some new area of business is intended, has carefully thought through the business idea and is able to articulate its viability and back it up with documentary evidence. Otherwise, the promoter might simply come across as a spontaneous or impulsive risk taker;

The longer a business has been in existence, the more likely that

it has assimilated and weathered the vicissitudes of its operating environment;

“surprises” should therefore be less frequent

and financial projections

likely to be more realistic.


• CAPACITY to repay. After conduct ing appropr iate due diligence on the character and credibility of “Mr. Small-Medium Business” – usually sourced from past credit history, and professional relat ionship with employees, suppliers, trade partners, etc. – a lender would need to assess and determine from current business operations whether the loan can be repaid as and when due, towards achieving a win-win proposition for both parties. Business acumen and conservative financial management skills are two key attributes of successful and long-term business owners;

• Track record or EXPERIENCE. Obviously, the longer a business has been in existence, the more likely that it has assimilated and weathered the vicissitudes of its operating environment; “surprises” should therefore be less frequent and financial projections likely to be more realistic;

• Reliable FINANCIALS with good CASh FLOW Projections and supporting ASSUMPTIONS. More often than not, “Mr. Small-Medium Business” pays very little attention to keeping good, reliable, and readily accessible financial records. Often categorised as “one-man businesses”, such business owners characteristically focus more on cost savings (by not engaging the services of accountants or auditors) than on keeping good finance records. Obviously, the better the quality of available financial records, the more easily banks can understand and assess the needs of customers;

• Promoter ’s equity STAKE. Generally, the credibility of a proposal will reflect in the level of equity that the promoter has in the proposition. A lender is more inclined to support a request that puts the promoter’s own personal funds at risk than one where the promoter’s risk is tied to the expected margins or profit. Economic history has shown that business owners will usually go the

extra mile to ensure the success of a deal or transaction and not “abandon ship at the slightest signs of turbulence” if the borrower has personal funds at risk. Oftentimes, collateral stake is also required, in addition to equity where the risk is perceived to be quite high, and given the need to comply with regulatory requirements for lending.

With the above pointers as guidelines, the perennial claim by small to medium-sized business owners of poor access to bank loans should become less emotional but rather premised on hard-nosed reality.

*Patrick Akhidenor is a Senior Credit Analyst in FirstBank

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BRISCOE PROPERTIES LTD

B P L

LANDCRUISER


Nigerian Banking Sector - Set to ‘Resume’ Lending?

A 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’.

FirstBank Research


Catalysts in the Nigerian Banking IndustryKey policies/activities that will influence the dynamics of banks’ intermediation role in 2011 include the following:

CBN Policy on Cash Withdrawals /Lodgments Limits

In an effort to reduce the dominance of cash in the Nigerian economy and encourage the use of electronic payment systems, the Central Bank of Nigeria (CBN), in collaboration with the Bankers Committee, has set limits on cash withdrawals and lodgments by individuals (N150,000) and corporate institutions (N1 million) transacting with Deposit Money Banks (DMBs). This directive, effective from June 2012, is also expected to help moderate the cost of cash management and reduce related incidences of security breaches and money laundering activities.

Given its primary objectives, it is our opinion that this policy initiative is commendable. Majority of the world’s advanced and emerging economies have since transited from cash-dominant systems to electronic payment channels, hence a policy that will elevate Nigeria to the committee of nations that has entrenched electronic payment platforms in their financial culture is timely, appropriate and admirable. However, as laudable as the policy initiative may appear, the practical implications in a Nigerian economy that is traditionally cash oriented demands that all stakeholders pull together to discuss and agree its ‘operability’. The debate should also address the lingering risks associated with online banking in Nigeria.

New Banking Model

CBN, in its effort to promote a sound financial system in Nigeria, repealed the Universal Banking Guidelines (UBG), effective from November 15, 2010. The repeal was approved after months of deliberations, consultations and intensive review, in order to curtail the exposure of banks to higher operating risks, as well as prohibit investment of depositors’ funds into risky adjacent non-banking businesses that often heighten financial system instability.

The expected effective date for compliance is May 14, 2012 (i.e. 18 months from the regulation date) or such date as the CBN

may prescribe afterwards. Banks were required to submit their compliance plans on or before February 14, 2011. Except the four banks that have chosen to operate a holding company (Holdco) model (FirstBank of Nigeria Plc, United Bank for Africa Plc, Stanbic IBTC Bank Plc and First City Monument Bank Plc), many other banks plan to sell their subsidiaries. Even those that choose the Holdco model may not retain all their subsidiaries. Consequently, consolidation activities (joint ventures, alliances, mergers and acquisitions) are expected to intensify in 2011.

In addition, there could be a restructuring of customers’ composition across banks, depending on each bank’s operating model – coverage and ease of access to other financial services will be key determinants.

Sale of Toxic Assets

Plainly, the establishment of Asset Management Corporation of Nigeria (AMCON) in 2010 was the reform catalyst required to propel the recovery of the domestic money and capital markets.

21 deposit money banks (DMBs) met the December 30, 2010 deadline set by AMCON for all DMBs to sell their toxic assets to the company. The portfolio of impaired assets of the 21 DMBs comprised N2.43 trillion from 9 rescued banks and N581 billion of 12 healthy banks. The total value of toxic assets of the banks is within the limit of N3 trillion in bonds that AMCON plans to issue.

In line with the terms of the loan purchase agreement AMCON signed with DMBs on the purchase of their toxic assets, AMCON has started injecting funds into the banks. The action has facilitated more trading activities in the market shares of DMBs. Given the volume and influence of the banking industry’s shares on the movement of other stocks, the multiplier effect of the industry’s gains are also being felt across other sectors of the market.

With this development, we expect investors’ confidence in quoted bank shares to rise. This will facilitate financial stability and credit expansion, as well as further enhance the depth and liquidity of the domestic money and capital markets in 2011.

Extension of CBN Guarantee

At its meeting on March 21 to 22, 2011, the Monetary Policy Committee (MPC) extended the CBN Guarantee for all interbank transactions, and foreign credit lines, as well as pension funds’ placements with banks from June 30, 2011 to September 30, 2011.

A key issue that will determine how quickly CBN can withdraw its guarantee is the success record of the recapitalisation exercise/pending sale of the rescued banks. If mergers/acquisitions/recapitalisation exercise is successful, and with AMCON firmly in place, the likelihood that CBN will not extend the guarantee further from September 30, 2011 is very high, as both investors and creditors will have access to sufficient information to enable them assess the inherent risks before making commitments – thanks to uniform year-end, supportive regulatory regime and banks’ migration to International Financial Reporting Standards (IFRS).

If CBN removes its guarantee on all interbank transactions and foreign credit lines, the expectation is that there will be a surge in interbank rates, depending on the risk level, across various maturities.

Expiration of Rescued Banks Interim Tenures

August 14, 2011 and October 2, 2011 will mark the end of the 2-year tenure given to the interim Chief Executive Officers appointed by the CBN for 8 of the management teams of the 10 rescued banks.

The first batch (with August 14, 2011 tenure expiry date) includes Oceanic International Bank Plc (John Aboh), Intercontinental Bank Plc (Lai Alabi), Afribank Plc (Nebolisa Arah), Union Bank of Nigeria Plc (Funke Osibodu), and FinBank Plc (Susan Iroche).

The second batch (with October 9, 2011 tenure expiry date) comprises: Spring Bank Plc (Sola Ayodele), Bank PHB Plc (Cyril Chukwuma), and Equatorial Trust Bank Ltd (Gbolahan Folayan).

The CEOs of the remaining two banks (Wema Bank Plc and Unity Bank Plc) will remain in charge, but have been mandated to recapitalise their banks. We expect CBN to make specif ic pronouncements on the tenure of all the appointed CEOs before August 14, 2011.


The CEOs’ tenure may be extended if the bid to finalise the consolidation fails to materialise before these expiry dates.

Corporate Governance

As a fallout of the CBN’s special audit on all banks in mid-2008, the apex bank has renewed its efforts to enshrine good corporate governance in the banking sector. Two major pronouncements by the CBN in this regard relate to tenure limit for directors and external auditors’ independence.

Tenure Limit for Directors: On January 19, 2010, CBN released a circular, restricting the tenure of banks’ CEOs to 10 years, and non- executive directors’ tenure to 12 years.

Auditors Independence: On September 13, 2010, CBN released another circular, requesting banks to replace auditors that had spent over 10 years, effective December 31, 2010. The 10-year tenure for external auditors is in line with the provisions of paragraph 8.2.3 of the CBN Code of Corporate Governance for Banks.

The primary objectives of these circulars/directives/guidelines are to enforce succession planning and promote good corporate governance in the banking industry. Hence, we expect more robust corporate governance practices and enhanced investors’ confidence in the banking sector in 2011.

Update on Bank Account Information

On November 29, 2010, CBN directed all customers of banks and financial institutions in Nigeria to update their account information by January 31, 2011.

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

and protecting against money-laundering and terrorism financing, as well as help protect individual customer’s interests.

Increase in MPR, CRR & LR

At its third meeting in 2011, MPC unveiled its decision to raise the Monetary Policy Rate (MPR) – from 7.5% to 8.0%. It would be recalled that the CBN had also increased in January 2011 the Liquidity Ratio from 25% to 30% (effective March 1, 2011) and Credit Reserve Ratio (CRR) - from 2% to 4% (effective June 8, 2011). The overall effect of this tight monetary policy is a rise in interest rate, and possible decrease in inflation rate.

Nigerian Uniform Bank Account Number

On August 19, 2010, CBN released a policy on the standardisation of account numbering for all banks in Nigeria. NUBAN is a 10-digit code that will enable both the employer and the presenting bank validate account numbers. The deadline for the full compliance by the banks is May, 2011.

CBN expects “every bank to maintain their present Account Numbers and use them for their internal operations only as from the effective date of NUBAN, but every such account number would have to be mapped to a NUBAN code as an Alternate Account Number. The bank customer should be provided with only the NUBAN code which he/she would use as a means of account identity at every interaction with the bank.”

We expect the policy to have a positive impact on banking transact ions, by reducing error rates and undue delay in Automated Clearing House processing activities, and consequently, facilitate seamless payment processing nationwide.

A key issue that will determine how quickly

CBN can withdraw its guarantee is the

success record of the recapitalisation

exercise/pending sale of the rescued banks. If mergers/acquisitions/

recapitalisation exercise is successful, and with

AMCON firmly in place, the likelihood that

CBN will not extend the guarantee further from September 30, 2011 is very high, as both investors and creditors will have access to sufficient

information to enable them assess the

inherent risks before making commitments – thanks to uniform year-end, supportive

regulatory regime and banks’ migration to

International Financial Reporting Standards

(IFRS).


A 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.

Financial Derivatives Company

Credit Dynamics: Is It Better to Borrow in Naira or in Dollars?


Put simply, Forex Forwards are short-term instruments that help companies mitigate exchange rate risk. Because they can be used to anticipate quarterly positions, Forex Forwards allow companies to moderate unprecedented problems and smooth out earnings volatility. To fully take advantage of them, however, treasurers within the corporate finance function must learn the interplay between differing economic trends and their impact on credit markets. Corporations that successfully negotiate these dynamics are best positioned to improve financial performance and long-term success.

Generally, companies seeking an optimal solution to a particular financing need must consider a number of factors, such as access to foreign capital, relative bargaining power (multinational versus domestic firms), risk profile of the counterparty or operating environment, timing and degree of systemic liquidity.

Meanwhile, as the Naira moves towards convertibility, the domestic economy’s appetite for foreign currency credit is shrinking. Decisively, Nigeria must eliminate black markets and reduce regulatory arbitrage to adapt to new international financial standards. In addition, new international debit (payment) cards make money increasingly fungible.

Domestic Factors: Currency Depreciation and high Interest Rate Environment in 2011

In determining the currency in which to borrow, events in the Nigerian economy must necessarily be assessed within the context of the global economy. For example, in anticipation of fiscal expansion and the effect of high-powered money for extraordinary items (e.g. AMCON’s bailout of rescued banks), the Central Bank of Nigeria (CBN) is expected

to squeeze monetary policy, in order to quell excess liquidity and subsequent inflationary pressure. The impact will be a higher interest rate in the domestic economy, which should encourage local investment and depress demand for currency resulting from capital flight activities and speculation. Also, with crude oil expected to trade above $80 per barrel, and production over 2 million barrels per day, the CBN’s ability to support the local currency is enhanced. However, a cue from multi lateral institutions’ purchasing power parity analysis suggests that the Naira is overvalued by 15%. Therefore, the real equilibrium exchange rate is believed to be between N156 and N165 to the US dollar. As a result, we expect 4 to 5% depreciation in the Naira and a risk-neutral interest rate of above 8% per year.

International Factors: Increases in Foreign Benchmark Rates in Response to Inflation is Imminent

On the other hand, inflationary pressure in the international markets is likely to force policy makers to push up interest rates, albeit in a gradual but upward progression. A sharp and drastic increase in the benchmark rate is unlikely, as policy makers take cognizance of its impact on economic recovery. We expect LIBOR to move closer to 1% per year from the current 0.76% per year.

In conclusion, putting it all in context, we envisage prime lending rate of approximately 16.8% to 20.5% per year in Naira, as against foreign currency borrowing of 9.9% to 11.7% per year. (See table below).

In answering the question as to

what currency to borrow in, events

in the Nigerian economy must be put in context of

those in the global economy.

Domestic Borrowing Foreign Currency Borrowing

(% pa) (% pa)

Risk Free Rate (T-Bill and LIBOR) 8.8 /9.5 0.9/1.2

Risk Premium 6.0/9.0 2.5/4.0

Other Charges 2 0.5

Currency Depreciation nil 3.5

Hedging Cost nil 2.5

Total 16.8/20.5 9.9/11.7


Credit Growth in Africa

PPrior to the recent global financial crisis, Africa’s economic upswing – which went beyond the usual commodities boom – was noted for a number of factors: narrower fiscal deficits, lower inflation and lower debt-servicing costs, which were often driven by yield-curve extension and the deepening of domestic debt markets. Unsurprisingly, rising levels of household consumption and, in many countries, an increase in private-sector credit extension also featured heavily.

Although credit growth was most dramatic in Nigeria, following a ten-fold increase in banks’ minimum capital requirement, almost every African frontier market experienced rising rates of private sector credit, banking sector consolidation and a rush to grow assets as banks scrambled to maintain return on shareholder equity.While easy money typified the growth upswing the world over, in Africa the growth rate of private-sector credit – off an admittedly weak base - exceeded that seen in many other developing regions.

*Razia Khan


Fast-Forward to the Global CrisisIn theory, Africa, with its l imited dependence on cross-border lending, should have been more immune to the credit crunch or potential foreign contagion. Among financial intermediaries in sub Saharan Africa, dependence on domestic depositor bases for funding is greater than reliance on wholesale inter-bank markets. Only one major African economy – Nigeria – experienced its own home-grown banking crisis, with the rapid growth of credit during the upswing helping to mask (for the most part) an unsustainable asset market bubble, poor risk management practices, and – in some instances – outright fraud. Evidently, the authorities intervened in a timely way to prevent any of the undercapitalised banks from failing. However, Nigeria is not alone in exhibiting weak post-crisis credit growth.

Measured in y/y terms, credit growth in many other African economies is even weaker.

In South Africa, where financial sector regulation is often considered among the best globally, y/y rates of private-sector credit extension (PSCE) were contracting until May 2010. Even now, PSCE is still only weakly positive. What would explain this?

The longer lag which characterises African economic cycles has certainly played a role in the weakness of credit growth. Consumption baskets in Africa are dominated by food, and Africa was hit hard by the dual food and fuel price shock of 2008. Inflation soared above the single-digit levels that had briefly typified Africa’s macro economic stabilisation. While the rest of the world was able to move quickly to provide a monetary stimulus, with many major central banks introducing quantitative easing, continuing high inflation forced many African central banks to proceed more cautiously. It is only recently, with a clearer disinflation trend finally manifesting itself across Africa, that African central banks have shown more assertiveness in providing liquidity. The bias towards monetary easing persists in most markets, and this should eventually feed through into healthier levels of credit growth, albeit with a lag.

South Africa’s Pre-Crisis Credit BingeNonetheless, for a variety of country-specific reasons, concerns abound over the transmission mechanism of monetary policy. The pre-crisis years saw South Africa experiencing a credit binge of its own, with a new and growing middle-class proving to be receptive borrowers. Household debt as a percentage of disposable income soared from 52% in 2002 to over 80% at the peak of the cycle. Even after a recession in South Africa, debt levels remain high, inhibiting new demand for credit. Unemployment is over 25%, consumer confidence is generally weak, and even 550bps of easing by the South African Reserve Bank in this cycle has done little to lift credit growth.

Although anecdotally there has been some loosening of tight lending standards by the banks in recent months, this has not yet gone far enough. Tellingly, credit is not available on the same easy terms as it was pre-crisis. Both the supply and demand for credit are constrained, and further interest-rate easing – more than might take place in a more ‘normal’ cycle – may well be required.

Paltry Credit Growth in GhanaIn Ghana, despite significant interest-rate easing (500bps so far in this cycle) and the introduction of new minimum capital requirements for foreign banks, which – other factors being equal – should have lifted loan growth, commercial bank credit to both the private and public sectors over the twelve months to May 2010 was a paltry 3.2% y/y. The sector has certainly witnessed some improvement in financial soundness indicators – the capital adequacy ratio, for example, has increased to 19.2% from

14.5% a year ago, following the new minimum capital requirements. But even this has proven insufficient to compensate for the shock suffered by the sector as a result of Ghana’s 2008 twin-deficits crisis, which continues to negatively impact the country’s macro economy. The build-up of arrears in the energy sector has unsurprisingly translated (with some lag) into higher non-performing loans (NPLs) in the financial sector. Although NPLs at 18.7% in May 2010 have declined from the 20% recorded earlier this year, the figure is still higher than the 11% ratio registered only a year ago.

Moreover, new entrants into Ghana’s banking sector and increasingly fierce competition for liabilities have driven up deposit rates. Faced with a structural increase in their cost of funds, with high rates of deposit interest paid on time deposits in particular, official easing by the Bank of Ghana has had little impact. In time, this should change because the maturing of time deposits will see lower rates offered on new deposits, and with a lower cost of funds in place, loan rates should eventually decline. But all of this will take some time, suggesting that the transmission of monetary policy changes has slowed appreciably. In addition, with arrears in the region of 6% of GDP still to be resolved, and NPLs likely to remain high in the interim, it will be a while before credit growth reacts meaningfully to interest-rate easing by the Bank of Ghana, even as the country moves to oil producer status.

Nigeria: Disappointing Credit GrowthPerhaps, nowhere in Africa has the breakdown in the traditional transmission mechanism of monetary policy received more attention than in Nigeria. Although the costs of the banking crisis have been somewhat limited – to date, no bank has technically failed, and even the fiscal impact of the bank rescue effort seems well under control – credit growth is nonetheless disappointing. Given that the quantum of losses announced by the Central Bank of Nigeria (CBN)-rescued banks was sufficient to erode two-thirds of the Nigerian banking sector’s capital base, disappointing credit growth ahead of the formal establishment of a recapitalisation vehicle, namely, Asset Management Company (AMCON), was not a surprise. In the meantime, various measures have been implemented by the CBN to stimulate lending.

“...money typified the growth upswing the

world over, in Africa the growth rate of private-

sector credit – off an admittedly weak base - exceeded that seen in many other developing

regions”.


Interest rates have been cut, with deposit rates reduced to just 1% in order to encourage banks to lend rather than keeping funds on deposit with the CBN. The authorities have made long-term funds available for onward-lending at concessional rates to designated industries. The same facility can also be used for refinancing existing obligations in the manufacturing, airline and other industries. A credit guarantee scheme for SMEs has also been established, through which the CBN will repay 80% of the principal to banks in the event of a default. Finally, the 1% general loan-loss provisioning regime previously in place was temporarily suspended, on the grounds that it could prove too pro-cyclical.

Will it Work?While there is ample evidence that Nigerian banks are awash with liquidity (borrowing from the CBN’s discount window remains minimal), this excess

liquidity has not yet found its way in to the real economy. Perhaps it will take more time. Perhaps it requires an audacious confidence boost. Perhaps there is little prospect of a meaningful rise in credit until the NPLs that are constraining new credit growth have been purged from banks’ balance sheets. Following the establishment of AMCON, Nigeria may have to wait only a little while longer to see record liquidity transformed into private sector credit.

In the meantime, a telling trend can be observed, both in Nigeria and elsewhere in Africa. Given aggressive monetary easing, lows in interest rates, and banks’ excessive liquidity positions, even in an environment characterised by considerable risk aversion, the competition to lend to the best credit risks is growing. Spread compression has begun, and eventually, banks will seek higher returns by lending to riskier market segments. For now, however, the negative effect of the crisis may still have to run its course.

Monetary easing alone is unlikely to be sufficient. Greater confidence in real economy outcomes will be needed to see a more meaningful improvement in credit growth.

*Razia Khan is Head of Macroeconomics and Regional Head of Research for Africa at Standard Chartered Bank.


Sectoral PerspectivesFirstBank Research


Although Nigeria depends largely on the oil and gas sector for revenue generation, agriculture has remained the largest contributor to the nation’s GDP, ranging between 40% and 46% over the last few years.

In spite of its high growth potential, Nigeria’s agriculture sector continues to experience inadequate investment flows. Considering that agriculture provides employment for about 70% of the nation’s workforce, actual investment in the sector has been abysmally low, according to Business Monitor International (BMI), with Federal Government’s allocation to the sector a paltry 6% of the national budget in the last 6 years. Incredibly, it has fallen to as low as 0.8% in the 2011 budget appropriations bill. In 2009 and 2010, agriculture’s share of bank loans was put at an average of 0.85%, in contrast to the oil and gas sector’s share of 12.5%.

To further highlight the declining attention paid to agriculture in the national budget, rice importation alone for 2010 cost billions of dollars, a figure above the Federal Government’s total agriculture sector’s budget for that year.

Nevertheless, analysts still predict enhanced local agriculture production – with targets ranging from 30% to 100% by 2015.

Agriculture has a strong positive outlook in the years ahead, particularly in high growth areas of corn, soya, rice, cassava, and poultry, and beyond growing, in value addition/processing.

Agricultural Sector Outlook

Budget Allocation to Agriculture for the period 2005-2010

Year FGN Budget (N’bn) Agric Allocation (N’bn) % of Agric Allocation

2005 1,700.00 76.6 4.5

2006 1,800.00 107.2 5.9

2007 2,300.00 38.0 1.7

2008 2,450.0 89.95 3.7

2009 2,870.0 91.8 3.2

2010 4,080.0 148.7 3.6

2011 4,226.20 34.1 0.8

Source: FG’s Budget for several years

Agriculture has remained the largest

contributor to the country’s GDP,

ranging between 40% and 46% over the last few years.


Entertainment Sector OutlookNigeria’s large population, melting pot of diverse cultures and talents, as well as the ingenuity and enterprising persistence of practitioners are largely responsible for the phenomenal growth of the country’s entertainment industry over the last decade. A report by the United Nations Educational, Scientific and Cultural Organisation (UNESCO), released in May 2009, revealed that the Nigerian movie industry’s (‘Nollywood’) annual production density (number of movies produced per annum) has overtaken Hollywood’s, and is steadily approaching the volume produced in India.

It is further estimated that every film produced in Nigeria has a potential audience of 15 million viewers within the country and about 5 million abroad. These statistics may be relatively conservative, considering that more than half of West Africa’s 250 million people are Nigerians and, according to the World Bank, slightly over 7 million Nigerians reside overseas, most of them in developed countries.

Evidently, the quality of nascent Nollywood movies is undoubtedly subordinate to Hollywood’s as a result of lack of funding and endemic piracy. Consequently, all stakeholders agree on the pressing need to enhance the production quality and profitability in the industry – by bridging the funding gap and curbing the spate of insidious piracy. Concerted partnership with government and its agencies should ensure improved adherence and enforcement of the necessary laws to drastically reduce the menace of piracy.

Other initiatives that could be harnessed include:

• Collaboration with cinema houses to sponsor movies and concerts, based on pre-determined and well-defined criteria;

• Public-private partnerships to build Film Studios of international standards;• Injection of credit facilities and/or venture capital in response to well-executed

feasibility studies, due diligence and contracts;• Adequate data-gathering and analysis of performance metrics such as the cost

of production of standard movies, average annual turnover of movie producers, income distribution of artistes, estimated time frame per movie production, etc.

It is our viewpoint that investors should place this budding and innovative industry on their ‘watch list’, especially as overall quality improves and international attention focuses on this dynamic domestic business. In the near term, more efforts should be expended to fully understand the evolution, trends, dynamics and investment outlook of this industry. Such insights will enable stakeholders and investors evaluate the parameters that will drive sustainable long-term growth.

The over 1,500 films released in Nigeria every year has a

potential audience of 15 million viewers within the country and about 5 million

abroad.

Number of Films Produced in Video in Nigeria

Years 1995 1998 2001 2004 2007 2010E 2011EFilms 3 356 843 1,082 1,588 2,035 2,167

Source: Ina global, FirstBank Research


Insurance Sector Outlook

Indisputably, Nigeria’s insurance sector holds great potential for sustainable economic growth. Key statistics from the National Insurance Commission (NAICOM) recently revealed that the Nigerian insurance industry grew appreciably in the last three years (premiums grew by 25% in 2008, 33% in 2009 and 26% in 2010), and that opportunities for further growth abound in the sector.

NAICOM hopes to attain N1 trillion gross premiums by 2012 (and N6 trillion by 2020) through full enforcement of the Market Development and Restructuring Initiatives (MDRI), by leveraging relevant provisions in the 2003 Insurance Act, Pension Reform Act of 2004 and Local Content Policy.

MDRI is a policy that mandates the public to comply with compulsory insurance regulations on six insurance products: group life Insurance (Pension Reform Act 2004), employers liability (Workmen’s Compensation Act 1987), buildings under construction (section 64 of the Insurance Act 2003), occupiers liability insurance (Insurance Act 2003), motor third party insurance (section 68 of the Insurance Act 2003) and health care professional indemnity insurance(section 45 of the NHIS Act 1999). These products, when fully enforced as stipulated in the Insurance Act 2003 and other sister legislations, hold the potentials to upscale activities in the sector.

As deposit money banks comply with the new banking model, we expect the wave of mergers and acquisitions to intensify within the insurance industry, as most banks are expected to shed their insurance subsidiaries. Inevitably, this will lead to industry consolidation and a reduction in the number of operators in the sector.

It is hoped that Insurance Industry

will attain N1 trillion gross premiums by

2012 (and N6 trillion by 2020) through full enforcement of the

Market Development and Restructuring Initiatives (MDRI) and Local Content

Policy.

Source: BGL 2010 Insurance Report, FirstBank Research

2003 2004 2005 2006 2007 2008 200 9 2010 2012 (E)

Gross Premium Income

0

200

400

600

800

1000

N' B

illio

ns


In 2010, Nigeria’s manufacturing sector faced multiple challenges (aside from the more predictable barriers), in the aftermath of the recent global financial crisis. Looking ahead, improvement in key economic and investment indices promise major relief in the medium term.

Ostensibly, poor power supply and dilapidated transportation networks continue to hamper the growth of industry. In fact, alternative power arrangements to replace public sector sources accounted for 35% of the sector’s 2010 production costs. Companies in turn passed some of those costs onto consumers by raising prices, but could only go so far before their products became uncompetitive.

Funding is critical to growth – whether organic or inorganic. But access to external funds attracts costs and implicit conditions. Effectively, the capacity of a company to accommodate recurring financing costs will, to a large extent, determine the quantum of debt it can service. Both costs of funds and credit (lending), including requisite conditions, are usually very difficult for Nigerian manufacturing companies to absorb. Hence, this explains the low funding levels from the major providers of funds, the banking industry, to the sector.

Unsurprisingly, the sector’s growth has stagnated over the years, with total contribution to Nigeria’s GDP growth declining every year, over the past five years, except for 2008.

However, due to government’s interventionist policies, the outlook for manufacturers appears to be improving. Specifically, power sector reforms (if well implemented) and infrastructure financing support should lower costs sufficiently to return the sector to profitability in 2012. Government-sanctioned higher minimum wage should boost consumer income and, in turn, demand for manufactured goods.

Furthermore, the Central Bank of Nigeria (CBN) has injected a N400 billion stimulus package to support manufacturing/agriculture/SMEs lending. It is envisaged that additional government assistance should be forthcoming in 2011, as Nigeria strives to meet the 2015 deadline of the United Nations’ Millennium Development Goals. For a country with a population of over 140 million and the largest market in Africa, Nigerian manufacturers should expect to thrive, once crippling factors are addressed. We therefore forecast manufacturers to lead the charge towards the realisation of Nigeria’s 20:2020 Vision, by forming a key component of the country’s growth trajectory.

Manufacturing Sector Outlook

Manufacturing sector growth has

stagnated over the years, with

total contribution to Nigeria’s GDP growth declining every year, over

the past five years, except for 2008.

Source: CBN, NBS, FirstBank Research

4.6

7.5

11.0

5.5

4.2 4.23.5

4.2

1960 1970 1980 1990 2000 2009 2010 (Q3) 2011

Manufacturing Sector Contribution to GDP (%)


Since early 2009, Nigeria has witnessed a strong and steady increase in both crude oil production and prices, with production today at over 2.5 mb/d, and prices comfortably in the $100 plus range. Notwithstanding the growth, however, the sector’s total GDP contribution, which the Bureau of Statistics (BOS) reported at a quarter (25%) of the country’s economic output in 2007, fell to 15.5% in 2009, and is estimated to have decreased to 15% in 2010. Interestingly, the faster growth recorded in the non- oil sector of the economy during the period moderated the oil & gas sector’s percentage contribution to GDP.

In BMI’s Nigeria Oil and Gas Report, Q2 2011, natural gas consumption by the African continent was estimated at 124 billion cubic metres (bcm) in 2010, and is forecast to reach 176 bcm by 2015. Meanwhile, the continent’s gas production estimate for 2010 was 218 bcm, and is projected to reach 321 bcm by 2015. Consequently, Africa’s natural gas net-export by 2015 will rise to 145bcm, up from 94bcm.

Nigeria’s relative gas consumption in 2010 was 10.51% of the region’s total, and is forecast at 14% by 2015. In terms of supply, Nigeria’s share of African regional oil supply is predicted to reach 23% by 2015.

As global economic recovery improves, the domestic, regional and global demands are expected to increase in 2011. While Nigeria has experienced a continuous decline in oil revenue’s contribution to GDP, crude oil proceeds’ contribution to total government’s revenue base has remained relatively stable, sometimes even higher than expected. The relative peace that has returned to the Niger Delta region, courtesy of government’s Amnesty Programme, has also boosted oil production since inception. Broadly, the sustained high oil price is good news for Nigeria and we expect this trend to continue all through 2011.

Oil & Gas Sector Outlook

Relative peace that has returned to the Niger Delta

region has boosted oil production since inception

of Amnesty Programme. The

sustained high oil price is good news

for the country and we expect this trend to continue

all through the year.

Source: OPEC, FirstBank Research

20

40

60

80

100

120

140

160

1900

2000

2100

2200

2300

2400

2500

2600

2700

Jan

'06

Jan

'07

Jan

'08

Jan

'09

Jan

'10

Jan

'11

Oil

Pri

ce (

$/b

)

Oil

Pro

du

ctio

n (

'00

0 b

/d)

Oil Production vs Oil Prices

Output Price


On August 26, 2010, President Goodluck Jonathan presented the Roadmap for the Nigerian Power Sector Reform to a cross-section of industry stakeholders. The Roadmap is a continuation of the previous administration’s reforms that led to the enactment of the Electric Power Sector Reform (EPSR) Act in 2005, and the unbundling of Power Holding Company of Nigeria (PHCN), formally known as National Electric Power Authority, into 11 distribution companies, six generating companies and one transmission company.

Power sector reforms, reactivated in 2010 (after a 3-year ‘technical’ suspension), appear to be fully on course and expert opinions suggest that they might be difficult to reverse. Indeed, stable power supply was a major campaign promise of the President-elect, Dr. Goodluck Jonathan. Towards achieving projected economic growth, there has also been increasing pressure from cross-sections of stakeholders: industrialists, investors, the media, civil society groups and others, on the Presidential Task Force on Power to deliver tangible results to Nigerian consumers.

With the commencement of the bidding process, there is strong indication that various consortia, comprising sub-nationals and international companies, may be selected in the near-term to acquire the distribution companies. Given the population density and higher per capita consumption rates of major cities, especially Lagos metropolis, Port Harcourt and Abuja, we anticipate that distribution companies in these areas (e.g. Eko Electricity Distribution Company Plc., Ikeja Electricity Distribution Company Plc, and Abuja Electricity Distribution Company Plc) would attract greater attention by prospective investors.

Furthermore, given government’s renewed commitment and the perception of stronger political will to finally execute power sector reforms, the likelihood that these reforms will yield positive results, similar to those recorded by the telecommunications industry in this past decade, is at the best, moderate: can only become high if there are well-planned structures to ‘co-opt’ other stakeholders to support the reforms.

Power Sector Outlook

Given the perceived stronger

political will to execute reforms in the power sector, the likelihood that the sector’s reforms will yield positive results similar to the one posted by the country’s

telecommunications industry over the

last few years is at the best, moderate: can

only become high if there are well-

planned structures to ‘co-opt’ other

stakeholders to support the

reforms.

Source: The New Power Roadmap

5,379

9,767

11,879

14,218

Dec '10 Dec '11 Dec '12 Dec '13

Target Generating Capacity (MW) articulated by Government


Following the liberalisation of the Nigerian telecommunications sector in 2000, the industry has experienced tremendous growth rates fuelled by new entrants and the launch of mobile and broadband services. With a population of about 150 million, teledensity of 64.98 (as at March 2011), and mobile penetration of 53.4% (as at December 2010), growth of the Nigerian telecommunications market is forecast to continue apace. In corroboration, Business Monitor International (BMI) projects that mobile subscription will reach 93 million by end-2011, and 128 million by end-2015; translating to a penetration rate of about 72%.

Medium-term, intense competition in the telecoms sector will assume an exciting dimension if number portability becomes operational. Nigerian Communications Commission’s (NCC) plan to introduce mobile number portability has been in view since 2007. We expect this plan to receive the Commission’s speedy attention in 2011 after the second phase of SIM card registration is concluded. Once it becomes operational, it is expected that service delivery, network coverage and relative service affordability will facilitate subscribers’ choice of service providers. Already, the prospect of number portability has enhanced the post-paid to pre-paid migration flexibility within a given network. As a result of increased competition, we expect marked improvement in the collocation and infrastructure-sharing services among service providers in 2011 – spurred primarily by the drive for cost- efficiency, safety, and environmental pollution reduction considerations.

To attain profitability and remain viable, owner-managed businesses in the CDMA segment will need to adopt credible survival strategies. This may lead to market-induced consolidation in 2011. Also, voice and data penetration rate is forecast to rise to 61.9% in 2011 and 77.6% in 2013.

The shift in intense competition from voice call to data and value-added services will become more pronounced in 2011, as Internet services become cheaper and faster for individual subscribers and companies, and as established operators seek new means to boost revenue amidst declining average revenue per user (ARPU).

Telecommunications Sector Outlook

Source: NCC, BMI, FirstBank Research

The shift in intense

competition from voice call to data services

will become more pronounced in

2011, as internet services become

cheaper and faster for individual

subscribers and companies.

40. 4

63. 0

73. 1

87. 3 90. 0

128. 0FMobile Active Lines (million)

2007 2008 2009 2010 Mar- 11 2015

Active Mobile Lines (million)


Next to agriculture, trade is the second largest contributor to the Nigerian economy. The contribution of trade and commerce to GDP has consistently risen since 2007, estimated at about 18.5% of GDP in 2010. Fast Moving Consumer Goods (FMCGs) have been the major driver of sectoral growth, thus reflecting government’s liberal trade policy and the gradual expansion of the Nigerian middle class with diverse tastes and sophistication.

Following the resuscitation of the middle-class in Nigeria, there has been a distinctive and steady increase in consumer loans for the purchase of FMCGs. This is not surprising, given the causal link between FMCGs’ demand and consumer credit trends in developed economies, characterised by advanced consumer credit schemes. Consequently, banks and some key players in the FMCGs trade have developed innovative product and sales strategies (e.g. sales discount, sales credits on the basis of periodic payments, etc.) to increase their turnover and profitability.

There is therefore the likelihood that structured trading activities, including the opening of shopping malls in major urban areas and influx of cheaper imported products from China and other labour-competitive economies, may benefit from this trend.

Business opportunities for FMCGs in 2011 remain positive, buoyed by the positive outlook of the economy. According to the United Nations Development Index (2010), close to 90% of Nigerians are below the age of 50 years, whilst the population growth rate remains slightly above 2%. Implicitly, this suggests that the potential and absolute market for FMCGs in Nigeria is huge.

Trade – Fast Moving Consumer Goods

Source: Economic Intelligence Unit

Consumer Goods Trade

2007 2008 2009 2010 2011(F) 2012(F)Consumer Goods Trade Retail sales (N bn) 6,896.2 7,734.4 8,928.8 10,233.0 11,370.5 12,569.3Retail sales (US$ bn) 54.8 65.7 73.8 82.5 89.9 98.2Retail sales volume growth (%) 3.6 2.9 6.3 6.1 3.7 3.9Retail sales US$ value growth (%) 11.7 19.8 12.4 11.8 8.9 9.2Non-food retail sales (US$ bn) 19 24.4 28.2 32.4 36.8 42.2Food retail sales (US$ bn) 35.8 41.2 45.6 50.1 53.1 56

FMCGs have been the major driver of trade growth, and this is a reflection

of the gradual expansion of the

‘middle class’ with diverse tastes and

sophistication.

About FirstBank

First Bank of Nigeria Plc (FirstBank) remains one of Africa’s most diversified and leading financial services providers. Since its establishment in 1894, the Bank has consistently built relationships with customers focusing on fundamentals of best-in-class corporate governance, strong liquidity, outstanding risk management, strong capitalization and succession planning. FirstBank has 1.3 million shareholders globally and is quoted on The Nigerian Stock Exchange (NSE), where it is one of the most capitalized companies. It also has an unlisted Global Depository Receipt (GDR) programme.

With more than 5 million customers, FirstBank has over 600 business locations and eleven (11) subsidiary companies in Nigeria, providing a comprehensive range of retail and corporate financial solutions, including capital market operations, private equity/venture capital, pension fund management, registrarship, trusteeship, mortgages, insurance brokerage, bureau de change, life assurance underwriting and microfinance. The Bank has international presence through its subsidiary, FBN Bank (UK) Limited in London and Paris, and its Representative Offices in Johannesburg and Beijing.

The FirstBank Group boasts of an unparalleled reputation for leadership, strength, and stability, even in uncertain times. The Bank has been at the fore-front of industry reforms over the past century and we are currently pursuing the most aggressive transformation initiative designed to enhance portfolio optimization, group coordination and reduce risks and duplications across our businesses; refocus non-bank services around Investment Banking/Asset Management and Insurance; and exploit synergies across these business lines while also pursuing selective international expansion with priority given to sub-Saharan African markets, driven by clear economic and investment rationale. Our main goal is to become Sub-Saharan Africa’s leading financial services group.

FirstBank has indeed reinforced its role as a leader in the financial services sector in Nigeria and sub-Saharan Africa with activities and interventions to depict the Brand Pillars of Leadership, Enterprise, Safety and Security, and Service Excellence. The Bank’s growth is hinged on its continued network expansion, product development, mergers and acquisitions and growth of its international foot print. With the Bank’s global reach through its operations on many continents, it provides prospective investors wishing to explore the vast business opportunities that abound in Nigeria, an internationally competitive world-class brand and a credible financial partner.

FirstBank Review 1st Half of 2011

Business

Transcript of FirstBank Review 1st Half of 2011