BY MICHAEL EBOH

The ongoing reforms in the Nigerian banking sector and the repeal of the universal banking licence are expected to bring about further transformation in the industry over the next couple of years, according to analysts in a report titled: ‘Banking Sector Consolidation – The Road to Economic Stability.’

The analysts are of the view that the transformation in the sector is likely to be defined by a few large scale banks and a number of smaller niche players, leading to the evolution towards a banking structure as found in the UK, Australia or South Africa where 4-5 scale banks dominate market shares.

Analysis of the Nigerian banking sector shows that crises in the sector in the year 2009 resulted in a repositioning of industry forces, especially as it affected three of the six largest banks in Nigeria – Intercontinental, UBN and Oceanic.

Economics of scale

Presently, the larger scale banks are already benefiting from the economies of scale and scope in a consolidating banking sector.

Experts are of the view that enhanced market shares, coupled with large distribution networks and access to low cost deposits will allow these banks to maintain strong levels of profitability and returns, despite being required to hold higher levels of capital by the CBN.

To this end, it is expected that the inflated levels of operating expenses that currently underscore the Nigerian banking sector will be manageable for the scale banks given improved revenue expectations.

GTBank Plc and First Bank Nigeria Plc have been major players in the banking industry in the wake of the 2009 crisis, having energised and deployed an aggressive retail orientation which has aided their positioning in the industry.

However, with the increased pace of merger transactions between First City Monument Bank/FinBank, Access/ Intercontinental Bank and Ecobank Transnational Incorporated/Oceanic Bank, both banks will no longer enjoy such monopoly, as the stage will be set for fierce competition for industry leadership.

There has been a significant improvement in resources available to Nigerian banks in the last decade. Banks in the country have enjoyed growth in capital, deposit and assets, while, however, there has been a significant decline in margins and escalating cost of risk in corporate banking, a traditional source of revenues for some of the leading banks.

 New business models

The analysts are of the view that for the banks to continue to thrive, it is necessary that they adopt new business models to benefit from the emerging and glaring opportunities in the retail banking segment.

“With a population of 150 million, a growing middle class, a vibrant economy, young population, over 40million unbanked yet bankable population and an evolving/modernizing payments system, Retail Banking offers the viable means of gaining scale for any serious Nigerian Bank,’ the analysts said.

Speaking further, the report said, “A case in point is Access Bank, which since 2002, has set ambitious growth targets towards attaining industry leadership position through scale and has positioned itself very well within the opportunities thrown up by the ongoing CBN Financial Crisis Resolution Framework to enhance its present franchise position.

“In this perspective, the Access-Intercontinental Business Combination holds the potential for producing an industry giant. The synergies and complementarities of both institutions point to the emergence of a banking institution which will be a formidable competitor in the industry.”

 Challenges of consolidation

The analysts further stated that in spite of the enormous benefits of the on-going consolidation in the sector, a number of challenges will occur, such as staff rationalisation, as the acquiring banks seek operational efficiencies by optimising viable areas of the recapitalised banks.

However, the analysts are of the view that once the respective combinations begin to realise the transaction synergies, the industry will experience new areas of growth leading to renewed search for talents.

 Robust retail banking model

“Beyond manpower challenges will be critical issues of infrastructure — power, broad-band availability and network adequacy. These are all fundamental to efficient retail banking services. Similarly, issues such as appropriate risk management framework for managing retail business will constitute a major challenge to building a robust retail banking model.

“Increasing customer sophistication enabled by ICT convergence and rapidly changing customer behaviour will challenge the creativity and the ingenuity of banks especially in the face of proven research evidence of customer price sensitivity, decreasing loyalty, willingness to switch banks and products and propensity to shop around.

Furthermore, an underestimation of the speed and scale of change required for channel development and integration will pose significant challenges to the ability of banks to ride the crest of opportunity the retail business presents for Nigerian banks,” the analysts added.

The analysts said further, “The future will require superior efficiency and operational excellence from all banks, while industry leadership will be attained by those institutions most adept at harnessing product, service and process innovation to anticipate and meet customer needs.