Banks should create new private sector loans –Jimoh

Abu Jimoh

The Managing Director/Chief Executive Officer of Coronation Merchant Bank Group, Mr. Abu Jimoh, speaks on the outlook and new trends in the banking industry, including how technology is transforming the banking landscape and growth of the merchant banking sub-sector, in this interview with OYETUNJI ABIOYE

How would you assess the growth of the merchant banking sub-sector of the financial services industry over the years?

Prior to the banking consolidation of 2005, the merchant-banking segment represented a tangible percentage of the Nigerian financial services system. However, owing to the introduction of the universal banking regime coupled with the increase in the capitalisation requirement for banks from N2bn to N25bn, we witnessed a significant structural change within the Nigerian banking system which resulted in the extinction of merchant banks through various consolidation structures.

The introduction of the new banking model (that is, the repeal of the universal banking regime in 2010) resulted in the issuances of merchant banking licences to Coronation Merchant Bank, FSDH Merchant Bank, Rand Merchant Bank, FBN Quest Merchant Bank and Nova Merchant Bank from 2012 till date. This policy action earmarked the rebirth of the merchant banking system in the Nigerian banking industry.

The emergence of merchant banks in Nigeria reflects the changing structure of the economy due to the increasing need for specialised and sophisticated banking services from various corporates and institutions with a view of positioning their respective businesses with their chosen industries.  In the last five years of operation, several landmark transactions have been successfully executed by merchant banks in Nigeria.

Of the notable deals executed in 2017, Coronation Merchant Bank closed a total of 16 transactions in the year under review with a total transaction value of over N234bn, hence, making it a top five investment banking franchise in the investment banking league table.

What is your outlook for non-performing loans in the banking sector, considering the significant increase in banks’ toxic assets due to the recent economic challenges in the country?

Unfortunately, the current economic challenges in Nigeria which have been lingering in the last three years have adversely impacted both the individuals and corporate entities. The performance of the Nigerian banking industry softened in 2017 as events in the economic and regulatory environment heightened risk consciousness and the pace of credit expansion has considerably slowed down.

The significant decline in the foreign exchange earnings capacity of the country due to the slide in crude oil prices has resulted in depreciation of the naira in both the official and the parallel markets. The combined effect of all these factors invariably weakened borrowers’ repayment capacity thus affecting the performance of the risk asset in financial institutions.

Between 2015 and 2017, commercial banks were very focused on managing their portfolios of non-performing loans which to a large degree originated from lending to the oil and oil-related sectors and were in the United States dollars. But, as the oil price continues to strengthen and the production levels continue to stabilise this year, that focus has been left behind.  Banks can – and we think should – think about making new commercial private sector loans.

And then there is also the very slight impact of new reporting standards for banks. The introduction of IFRS 9 gives banks the option, if not the obligation, to broaden the scope of what they term NPLs.  The banks which have reported so far, all have good capital adequacy ratios, so this was an opportunity for them to take ‘big bath’ and record a high level of NPLs which otherwise might have been worked out over many years. It’s a smart move from a competitive perspective. Going into the second half of the year, I believe the industry NPL ratio will continue to reduce as the economy continues to improve. Also, we see monetary policy slanting towards a mid- point to accommodate growth. I expect GDP growth to surpass two per cent growth rate in 2018 giving room for healthy equities performance during the year.

The loan book growth in the banking sector is quite low at the moment owing to the recent recession and lender’s focus on treasury bills. Which sectors of the economy do you see lending opportunities at the moment?

Going into Q2 2018, I believe there will be a trend reversal as all Nigerian banks are facing a decline in interest income in 2018 as interest rates on government-issued T-bills and bonds continue to decline.  In fact, Q1 2018 brings to a close a two-year period when Nigerian banks could earn thick spreads between their deposits and the rates available on risk-free government paper.  So, it is not a surprise to see interest income under pressure.

The way out of this problem is for banks to make more customer loans to the private sector, where spreads are still available. However, not all banks have sufficient capital to do this in 2018. Following Nigeria’s exit from recession and the recovery of global commodity prices principally crude oil, we are seeing increasing credit / lending opportunities in the consumer, agriculture, industrials, oil & gas and retail segments of the economy.

The vision of your bank is to become Africa’s premier investment bank. Can you tell us a bit about your Africa growth strategy?

Although the bank is still very young, we are embarking on a remarkable ongoing transformation journey that will see us emerge as one of the Africa’s leading investment banks from our current position. So far, I believe we have made considerable strides on our journey towards becoming a foremost African investment bank especially when compared to where we started from. We are committed to this vision and we are confident that we have the requisite people and resources to convert this vision into reality.

In the meantime, we will focus on the Nigerian market and leverage our robust distribution network and strategic alliances to provide high quality services across West Africa and beyond. Sub-Saharan region retains significant potential for growth, supported by favorable long-term macroeconomic and demographic factors.

Technology is fast transforming the banking landscape, what is the focus of your digital strategy?

In recent years, we cannot deny the impact technology has had on the Nigerian banking landscape; from payment systems to customer management, innovations in technology has continued to remodel the entire spectrum of service delivery and customer engagement in the financial services industry. These advancements in technology have not only remained a key factor in service delivery but have constantly shaped the way we work and engage with our customers. As a bank, we understand that a key part to staying relevant in the industry depends on our ability to leverage these technologies to deliver seamless banking service to our customers; whether it is through making a payment, buying into an investment  option or advisory services. We are continually transforming our business model to a digitally-savvy bank.

And so, today we are talking about incorporating digital innovations such as chatbots, machine learning, data science, and so on, and how we are leveraging these technologies to make banking, simpler, faster and more engaging for our customers. We have pioneered several innovative digital solutions to improve transaction processing time, handle existing and projected transaction volume, and enhance data management and security within the bank and across the subsidiaries businesses

Recently, we launched the Coronation e-trader- an online trading platform which allows users buy and sell equities online through the Nigerian Stock Exchange from anywhere in the world. The platform creates a world-class experience, bringing the broker to the comfort of investors’ homes and offices. The platform guarantees investors’ convenience as it enables investors, open virtual stockbroking accounts. In addition to this, the platform gives real-time notifications on trade executions and provides convenience for the investor to trade the way he/she wants while taking full control of their investments at all times. Another amazing feature of the platform is that it provides users with market data and information on all quoted companies, accompanied with quality research reports that help our customers make safer investment decisions.

How has Coronation been able to navigate the merchant banking business segment despite the recent economic challenges in the country?

Our journey towards unparalleled market leadership is driven by a combination of service excellence, product innovation and market intelligence. We demonstrate innovation by developing solutions to diverse customer problems, differentiating ourselves from competition with creative products and service offerings, and proactively initiating change and improvement measures.

Our unique value proposition is to deliver world-class solutions like this to our esteemed clients in a cost-effective manner while leveraging our local extensive knowledge and technology. Our aim of attaining industry distinction is evident in our first-rate service orientation and efficient information technology platform to supports our business operations.

Over our three years of operating as a merchant bank, Coronation MB has maintained a solid financial performance, growing our gross earnings by a CAGR of 50 per cent, to N25bn in 2017. Non-interest income and total operating income grew at a CAGR of 402 per cent and 57 per cent respectively over the period under review. The growth in the bank’s non-Interest income was largely driven by the outstanding performance of the bank’s non-banking subsidiaries and investment banking business.

The bank’s profit after tax also grew at a CAGR of 48 per cent to N4.7bn between 2015 and 2017. The bank’s profit before tax of N5.1bn in 2017 made it one of the most profitable merchant banks in Nigeria. Coronation MB maintains an industry leading risk management practice evidenced by zero per cent non-performing loans ratio. The bank grew its customer deposits, shareholder’s fund and total assets by 43 per cent, 14 per cent and 28 per cent, respectively between 2016 and 2017. The bank’s Capital Adequacy and Liquidity Ratios of 24.8 per cent and 53.4 per cent are comfortably above regulatory requirements. These factors resulted in the bank being awarded Merchant Bank of the Year by BusinessDay Newspaper. Coronation Merchant Bank’s credit rating of A+ by Nigeria’s foremost rating agency, Agusto& Co is the highest credit rating in the Nigerian merchant banking space. This reflects the bank’s good asset quality, strong liquidity profile, robust risk management framework, well skilled and stable management team.

During your last Annual General Meeting, you said you foresaw about $200m capital gap over the next five years. How prepared are you to execute this capital raising exercises?

We obtained the approval of the Board of Directors and shareholders to raise additional capital at the last AGM in line with the bank’s funding plan to finance our growth aspirations. The capital raising exercise will be done in series of tranches subject to the approvals of relevant regulatory authorities. I can comfortably tell you that the bank is well positioned for the various capital raising initiatives. We will continue to update our stakeholders as we proceed with the process.

How would you assess competition in the merchant banking segment of the financial services industry? Do you foresee any serious threats from new players?

As a bank, we always focus on what we are doing right and then try to leverage that to stay ahead in the industry. Our vision has always been to create an oasis within the industry, renowned for doing things right and get it right the first time. We strive to achieve this by demonstrating innovation in developing solutions to diverse customer problems, differentiating ourselves from competition with creative products and service offerings, and proactively initiating change and improvement measures.  For example, we creatively introduced a credit enhancement mechanism known as Liquidity Back-Stop Facility to the commercial paper offering of a leading real estate company in Nigeria. Our collaboration with the client in providing the back-stop facility is the first of its kind in Nigeria and its ingenuity boosted the investment grade of the commercial paper to “A-“, despite the issuer’s “Bb-“ Agusto rating – representing a six-notch improvement.