The Nigerian Banking System and the Challenges of the Global Economic Crisis

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The Nigerian Banking System and the Challenges of
the Global Economic Crisis
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CONFIDENTIAL
Mr. Francis Atuche GMD/CEO, Bank PHB 14th CBN
Seminar for Finance Correspondence and Business
Editors Makurdi, Benue State May 19th 23rd,
2009
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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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Preamble
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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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Historical Review of the Nigerian Banking Sector

• 4th Reform Era
• July 2004 Date
• Increase in capitalization requirements by 1150
  to N25bn
• No. of Banks reduced from 89 to 24
• Industry revolutionized with competition leading
  to increased product roll out growth in credit
  to economy
• Total Assets rose 439 to N15trn (latest
  available figures)
• International Expansion with over 43 branches in
  Foreign markets
• Nigerian banks accounted for over 65 of stock
  market capitalization
• Global economic crisis structural lapses in
  NSE forces a collapse of the stock market with
  banks exposed to increased NPLs
• Sharp downturn in oil price and revenue leads to
  introduction of unorthodox policies
• Standard Poors downgrades Nigerias outlook
• New CBN governor takes over vows to sanitize
  banking system with emphasis on regulation,
  reporting risk management

• 1st Reform Era
• 1929 1951
• Over 100 banks established in the banking boom
  between 1940 and 1950
• Attrition of 30 private banks due to poor mgt.,
  low capital, debt overhang the financial shock
  induced by the recession of the 1930s
• British and French Bank established in 1949
• Agbonmagbe (Wema Bank) established in 1945, ACB
  in 1948

• 2nd Reform Era
• 1952 - 1971
• Enactment of the 1952 Banking Ordinance
• Establishment of CBN
• Number of tradable financial instruments
  increased in money market T/bills (1960), Money
  Fund (1962), Commercial Bills (1968), Treasury
  Certificates (1968), Certificates of Deposit,
  Bankers Unit Fund and Eligible Loan Stocks
  (1968)
• Banking Amendment Act of June 1962 raised minimum
  share capital to GBP250,000
• Banking decree No. 1 of February 1969 the
  Banking Amendment Decree No. 3 of 1970 imposed
  more stringent conditions in the industry
• Industry dominated by govt. owned banks via
  Indigenization Act of 1971
• Share capital raised to GBP600,000 (local)
  GBP1.5m (foreign)
• By 1980 there were 26 banks

• 3rd Reform Era
• 1982 - 2004
• National Economic Emergency Decree in the wake of
  Financial distress in the 80s and 90s (SAP era)
• 120 banks (66 Commercial, 54 Merchant)
• Prudential Guidelines Introduced in 1990
• Bank branches jumped from 40 in 85 to over 2000
  in 92
• Public sector accounts transferred from CBN to
  banks in 1999
• Universal Banking in 2001 with N1bn capital
  base, later increased to N2bn with 2004 as
  deadline

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The Nigerian Banking sector has continuously
evolved

• Reforms introduced during Obasanjos second term
  has led to a
• Reduction in Nigerias motley group of banks from
  89 anemic banks to 24 bigger, stronger and more
  resilient financial institutions.
• Revolution in the financial services industry
  leading to an increase in the quality of services
  provided to the average Nigerian
• Increased number and sophistication of financial
  products offered by the traditional bank.
• The impact on the economy can be observed through
  the
• Availability of credit to private sector, which
  grew by 435 from N1.52trn in 2003 to N8.13trn in
  Feb 2009.
• Phenomenal growth in the usage of electronic
  payment systems including the issuance of debit
  and credit cards.
• Issuance of over 25 million cards being used to
  process payment transactions on over 11,000 POS
  terminals, 7,000 ATMs, 200 web locations and
  50,000 mobile devices. (per E-business experts)
• Improved standard of living via introduction of
  consumer finance products (i.e. Leasing of cars,
  electronic appliances, laptops/desktop computers
  and availability of mortgage loans and credit
  lines)

Stronger and more Resilient Financial
Institutions
Improved Service Quality
Increased number of Financial Products
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Available data on the robustness of the banking
sector indicates

• Increase in total assets/contingent liabilities
  after the reforms in 2005
• Successive capital-raising over the last 2-3
  years, which has enabled massive local and
  regional expansion with total bank branches
  jumping by 41 (4,591 branches)
• Average industry PBT growth rate of 141 in June
  2008 and CAR of 25.3 (higher than the regulatory
  benchmark of 10)
• Competition for dominance within the industry,
  leading to East, West and Sub-Saharan Africa

Source CBN
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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Bank System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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Significant challenges have already been
experienced in the Nigerian Economy

• Niger Delta crisis and OPECs quota restriction
  are twin factors undermining the budgeted
  production target of 2.92mbd
• Oil production has been declining since August
  08 impacting negatively on government revenue
• Nigerias continued dependence on crude oil
  exports exposes it to external shocks

• Increased inflationary pressure noticed since
  Nov/Dec 08 in line with the sharp depreciation
  of the naira

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recent trends from the global economic crisis
highlights the adverse impact on the Nigerian
banking sector
Factors
Impact
The global crisis has the overall impact of
making banks more conservative and risk averse
thus reducing their propensity to advance credit
to the economy to stimulate productive investments
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hence, the expected slow down in performance and
growth of the banking sector

• The ability of banks to withstand the impact of
  the global economic crisis is highly dependent on
  the
• Performance of the economy and the
• Execution and successful implementation of
  appropriate regulatory policies
• Strategic options taken by individual players to
  combat the emerging negative trends in the market
  and the markets perception of players resilience
• However, the consensus forecast by international
  organizations for Nigerias economic growth in
  2009 is 2.8, which is about half of the growth
  rate in 2008.

Consequently, stakeholders are concerned whether
Nigerian banks are resilient enough to withstand
the impact of the global economic tsunami on the
economy.
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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry
SECTION 3 Sustainability of the Nigerian Bank System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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Is the Nigerian Banking system capable of
handling these economic challenges?
Rising Unemployment
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What are the strategic options open to Industry
regulators and market players?
Introduction of Innovative Measures
Rising Unemployment
Adoption of Macro-Economic Policies
Industry Consolidation
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International Analysts expect the Nigerian
Banking system to outperform the National
Economy.
Source EIU

• EIU expects average growth rate of 13.3 for
  total banking assets between 2009 and 2011
• Total deposits expected to grow by 22.3 on the
  average in the same period.

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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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The following strategic options are open to
Industry regulators and market players
Industry Regulators
Adoption of Macro-Economic Policies

• Introduction of monetary policy stabilization
  programmes and fiscal stimuli to restore
  confidence in the economy.
• Isolation of toxic assets nestling in the banks
  balance sheets and parking them in a special
  purpose vehicle to be called bad bank or bad
  fund which would be treated as a long-term
  facility for both liquidity and accounting
  purposes.

Surgical Intervention/Piecemeal Remediation

• Injection of liquidity into the banking system
  via government funded soft loans and
  recapitalization
• Strengthening of capabilities and competencies
  via appropriate regulatory policies increased
  supervision
• Regulatory induced consolidation encouraging
  the big/strong to acquire the weak/anaemic
• Liquidation of weak and anemic banks to avoid
  contagion effect on total industry

Market Players
Introduction of Innovative Measures

• Articulation of self-emancipation strategies to
  battle negative consequences of the current
  global economic meltdown
• Incremental, radical, and revolutionary changes
  in thinking, products, processes and service
  delivery to customers.
• Increased value to both the customer and the
  shareholders to boost investor confidence
• Increased productivity and focus on core
  competencies, which should drive additional
  inflow of wealth into the economy .

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Contents
SECTION 1 Evolution of the Nigerian Banking Sector
SECTION 2 Global Economic Crisis Impact on the Nigerian Economy and the Banking Sector
SECTION 3 Sustainability of the Nigerian Banking System
SECTION 4 Strategic Options for Industry Regulators and Market Players
SECTION 5 Key Learning Points
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Key Learning Points

• Declining oil prices and the production
  shortfalls driven by OPECs restrictions and the
  Niger Delta conflict means consistently lower oil
  and government revenues in the medium term. This
  implies lower statutory allocations and hence
  reduction in public sector deposits. It is
  therefore unwise for banks to continue to depend
  mainly on a declining sector in these dire times
• Banks need to imbibe strict governance
  principles, including increased disclosure and
  transparency. The time-worn practice of
  operational opacity must be avoided completely in
  this dispensation of banking. Increased
  transparency will endear international and local
  investors and will help in building confidence.
• Diversification of the sources of liability
  generation is vitally important (e.g. creating
  liability pools that adequately compensates
  investors for the risks assets that such pools
  are supposed to fund given the increasing
  sophistication of investors). This ensures a
  reduction in concentration risk.
• The press corps/media plays a crucial role in
  driving the change needed to propel the banking
  sector to safety and profitability in these
  trying times. Consequently, the standards of
  reporting and knowledge of financial products and
  the industry in general must be deepened in order
  for the press to effectively perform this task.
  Reports on financial markets must be based on
  adequate research, responsible reporting and
  discipline.
• Unless the above mentioned issues are given due
  consideration, the vision of making Nigeria one
  of the top 20 economies in the world and a
  leading emerging market country by 2020 will
  remain a mirage

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Disclaimer
This presentation may contain certain
forward-looking statements, estimates and targets
with respect to the operating results, financial
condition and business of the Bank PHB Group.
Such statements and information, although based
upon Bank PHBs best knowledge at present are
certainly subject to unforeseen risk and change.
Future results or business performance could
differ materially from those expressed or implied
by such forward-looking statements and forecasts.
The statements have been based upon a reference
scenario drawing on current market conditions,
economic forecasts and assumptions, competitor
analysis including the regulatory environment.