How Nigeria’s banks are hunting for the next pot of gold

Regulatory pressures, declining yields and new opportunities push GTB, Access and Sterling to pursue holdco structures

If the history of the evolution of Nigerian Banks has taught us any lesson, it is that — “the only constant thing in life is change.”

Shortly after the 2008/09 Global Financial Crisis, the ‘universal banking’ model was halted in Nigeria, with banks given two major options: spin off non-banking subsidiaries or adopt a holding company (holdco) structure. Many banks opted for the former option, while Stanbic IBTC, FCMB and FBNH restructured as holdcos, to maintain their investments in insurance, asset management, investment banking and other activities.

Fast-forward to today and the trend is reversing; Access and Sterling have received approval in principle from the Central Bank of Nigeria (CBN) to restructure as holdcos, while GTB’s approval is in the works.

Five reasons why this is happening

1. Regulatory pressure — From arbitrary and punitive Cash Reserve Ratio (CRR) debits, to the conundrum of meeting the minimum 65% loans/ deposit ratio in a low-growth environment fraught with risk, core banking has never been more difficult to execute profitably.
2. Declining yields from loans — The recently reduced monetary policy rate by the CBN (now 11.5%), and lowered range of the asymmetric corridor (the cost at which lenders borrow) to +100/-700bps from +200/-500bps, is likely to further reduce the rates at which banks lend.
3. Declining yields on investment securities — In addition to customer loans, a substantial proportion of Nigerian banks’ assets are in the form of CBN bills (OMOs), Government Treasury Bills (NTBs) and Federal Government Bonds (accounting for c22% of total commercial bank assets as at Dec 2019). Given the depressed rates on both OMOs (averaged 1.9% at the end of Sep 2020 vs 13.2% at the end of Dec 2019) and NTBs (average 1.9% at the end of Sep 2020 vs 4.9% at the end of Dec 2019), investing in these securities are extremely unattractive.
4. Lower fees — Earlier in the year, the CBN changed the flat fee structure of NGN50 on all electronic funds transfers to a graduated scale, with transfers below NGN5,000 attracting a charge of NGN10, those between NGN5,001 and NGN50,000 attracting a charge of NGN25, and only transfers above NGN50,000 attracting NGN50. Also, reductions were made to card maintenance fees and ATM withdrawal fees, which all had negative consequences for the banks’ non-interest incomes.
5. The growing fintech threat — As we indicated in our report (“The Ultimate Guide to African Fintech”)¸ fintechs in Nigeria (especially payments, lending, investech and mobile money) are presenting themselves as formidable opponents for Nigerian banks.

These challenges present both near-term and long-term threats to the growth and profitability of the Nigerian banking sector. Meanwhile, there are a number of factors that make alternative activities attractive:

1. Higher margins — Businesses such as insurance, asset management and pensions require less operating costs and investment in physical assets compared to traditional banks, adding to profitability.
2. Long-term growth potential — These alternative business lines are at a younger growth stage than banking and offer long-term growth potential. For context, annual pension contributions have been increasing at an attractive rate (2009 to 2019 CAGR of 11.9%), while the net asset value of collective investment schemes crossed over NGN1.0tn in 2019 (2011 to 2019 CAGR of 38.6%).
3. New opportunities in pensions — Interesting developments are occurring in Nigeria’s pension space. This includes the possible opening of a transfer window, which would allow contributors to move their funds to an administrator of their choice (an option that did not exist before), and the new “Micro Pension Plan” to expand pension services to self-employed people and the informal sector. With these developments, a pension subsidiary with better service offerings and a strong affiliation to a bank can capture market share.
4. Financial inclusion — Fintechs offer a simpler solution than traditional banking, in capturing the large unbanked population in Nigeria.

This article first appeared on Tellimer.com. To read the full version online, click here.