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2013: Banks saw regulatory-induced reduction in income and increased funding costs

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Last Tuesday the Group Managing Director of UBA, Mr Phillips Oduoza had a panel discussion with some selected reporters. He debunked insinuations that Tony Elumelu was teleguiding the bank and why the share price of the bank is low at the moment. He gave insight into the tough banking environment in 2013. He also spoke on the bank’s journey in its foreign operations and what investors should expect going forward.


How will you react to the speculation that the former Managing Director of the bank, Mr. Tony Elumelu is the unseen hand behind the running of the bank?

 Tony Elumelu is into power, healthcare, hospitality, agriculture, oil and gas. He is fully engaged and does not have time for UBA affairs as being speculated. Recall he has been a CEO for 13 years and I have just spent three years.

finubaI like to tap into his experience and knowledge of the banking industry but he hardly has the time. So to answer your question, Tony is not involved in any way. He is preoccupied with his various businesses which he is growing not in just in Nigeria, but across Africa.

UBA is a bank that prides itself on continuity and stability. The good thing about a very big bank like UBA is that it is not a one man show. We came up with a blueprint and all of us were together when we were crafting the blueprint and deciding what we want to do. To a very large extent, we have continued with the blueprint which we all agreed together and that is what we are implementing. The question of who is in charge has been on for a while.

If Tony wants to come back to UBA, there is nothing that stops him from doing that. First and foremost, he has done the mandatory three years. You are also aware that effective from this particular month, we appointed a new chairman of the board. This happened towards the end of last month, so Tony was at liberty to become the chairman of the bank if he had wanted to.

As to running the bank, I have two Deputy Managing Directors assisting me. We have one of the largest numbers of executive directors in the industry. Our workforce both directly and indirectly totals about 25,000 people across the globe.

What will you list as your achievements in office in the past three years?
We have kept the bank profitable. The profit the bank made last year was over N50 billion. The African countries that were just being set up have started scaling up gradually from almost making losses to the profit level that we have today, with 14 of them making profits.

UBA came first and got an award from CBN as the most agric-friendly bank. The portfolio of UBA was such that the loan-deposit percentage level was in the 30s, today; the loan-deposit has moved up significantly, the loan portfolio has moved up significantly to the extent that the loan deposit-ratio is over 40 per cent.
The share price has moved to almost N10 today and it has been moving and this is value creation for the shareholders. There are very many things we can talk about. It starts from where the balance sheet was when we started in 2010 to where we are today. We have been able to re-establish ourselves in the domestic market, remaining a tier-one bank.

The future of the bank is very bright. We have laid a very good foundation. We have made our mistakes in the past and we have learnt from them. There are certain sectors we don’t operate. For instance, we don’t operate in the downstream, we don’t do margin trading in any form because this is an area that has created problems.

UBA has continued to grow very strong in the emerging sector. We have the telecommunications, power, infrastructure, oil and gas, in the upstream sector. In fact, there is no big transaction you can talk of today that the UBA is not participating in. Any of the major tickets, UBA is there. So the brand remains very strong.

In spite of the laudable efforts you have taken to clean your books and return to profitability, these measures are yet to reflect in the pricing of your stocks like other frontier banks in the capital market. What can you do more to convince the market that you are like other top banks in the country which will reflect in the payment of premium for your stock?

For UBA, you are right that the price to book is low compared with other banks and I believe this situation is going to change. In 2011 when we cleaned up our books, we declared a loss which was very strange in this environment. We had to meet all stakeholders at the stock market; stockbrokers, financial journalists and other players in the market and addressed them on why we decided to clean up our books. What we did was new in this environment but very common amongst major global financial institutions.  Given that we operate in major financial centres with regulators in 21 jurisdictions, it was expedient for us to do the right thing and it is in line with global best practice.

As you know, we operate in London where we are regulated by the Financial Regulatory Services Authority (FSA) and New York where we are regulated by the Office of the Comptroller of Currencies (OCC). In addition to that, we operate in 19 other jurisdictions in Africa, which makes us not a typical Nigerian bank. So, we wrote off all the distressed loans and sold others to Asset Management Corporation of Nigeria (AMCON) while taking the corresponding haircut.

Let me emphasize that when we presented this plan, people asked us, why do you want to do this? They told us we could write it off over a period of time but we said no. We insisted we had to do that. We believed that once we clean our books, we would then start on the path of renewal. Stakeholders on the Nigerian Stock Exchange (NSE) were initially alarmed.

So, some people started selling their shares and UBA shares dropped to a low of N1.65. But some analysts saw the wisdom in our decision and they started buying gradually and the share price of UBA started to move back upwards. In the subsequent first quarter of 2012, UBA made a profit, second quarter, we made a profit and everybody started picking their shares. In 2012, UBA had the most appreciation in its share price in the stock market among financial services institutions and we closed 2012 with a return to profit.

In 2013, the share price sustained its upward momentum and by December of last year, UBA had seen a significant appreciation in the stock market. I believe the same thing will repeat itself in 2014. I also believe analysts will see UBA from a new perspective in 2014. Analysts will recognise that the bank’s growth has been a sustained growth.

If anything at all, the balance sheet is getting stronger. The profit margin is showing a significant improvement over and above competitors. So, I believe that an upward review of the bank’s rating is going to take place. Our current pricing is based on people’s memory not on our performance and prospects.

Investors also lost a lot of money during the financial crisis, so a lot of them have not come back to the market and may not come back to the market for some time. There is definitely going to be an upward movement in our share price because our current performance shows that we are a bank to invest in.

Does UBA’s support for the Power sector symbolise belief in the Power sector reforms?

For us, the Power sector reform is going to be a revolution just as we have experienced in the telecommunications industry. The overall impact on the economy is going to be very significant with a multiplier effect on the economy.

It is going to impact hugely on the operations of SMEs. The country is going to reap the full benefits of the privatization of the Power sector across all sectors of the economy. For us, as a bank, our support to the sector is long-term financing that will provide a steady cash flow and income for the period of that funding.

Some of those fundings are for seven years; others are for five years or thereabout. So, over that period, the bank will continue to enjoy that revenue stream. In summary, we believe the Power sector reforms, just like that of the telecoms sector, will have significant and far-reaching positive impact on the economy and the livelihood of Nigerians.

Secondly, we believe in the Power sector reforms because of the derived value that will come from banking the value chain of the Power sector.  The balance sheet of the bank is very robust. UBA still remains one of the banks that have significant room to create risk assets. So even in 2014, we look forward to more quality asset creation in the Power sector. The non-performing loans for UBA remains one of the lowest in Nigeria.

The previous year, for Nigeria, it was under one per cent and for the group as a whole, it was within three per cent and this is within the Central Bank’s limit of five per cent NPLs. If you recall, sometime in 2011, we cleaned up our balance sheet, realigned our position and this has resulted in one of the cleanest bank balance sheets.

How has the raft of tough regulatory measures put in place by the Central Bank of Nigeria in recent times affected UBA operations especially in the past one year?

Year 2013 was a very challenging one for financial services institutions in Nigeria with the resultant effects of regulatory-induced reduction in income lines and increase in funding costs. Commission on Transactions (COT), which used to be at N5 per mille maximum, was reduced to a maximum of N3 per mille.

As you know, COT is a major component of the income lines for banks. There was also the removal of the N100 that was charged by banks for ATM usage.  In addition, there was a an increase in savings interest rates leading to costs for banks because significant portion of our deposits comes from savings deposits especially for  banks like us that  have been around for a very long time.

Whilst these happened in the second quarter of last year, another major one was thrown in by the third quarter. The cash reserve ratio for public sector deposits was increased from 12 per cent to 50 per cent, meaning that for every N100 that you generate from the public sector, you must sterilise 50 per cent of the amount or keep N50 at zero yield.

How did we deal with this?  This is where our African operations came into play. All these initiatives basically affected the Nigerian market and they did not apply to the various African countries where we operate. UBA operates in 18 African countries outside Nigeria, so we intensified our activities in these countries.

The income losses that we suffered in Nigeria, we try to make from our 18 African countries where our subsidiaries operate. So, the first strategy was to increase revenue from the various African countries. Luckily for us, we had finished the first phase of our African expansion by last year, and had entered the consolidation phase.

Therefore, we deployed more resources; we made some changes at senior levels in the various African countries. We intensified activities in the area of remittances and intra-African trade and the non-interest income arising from these activities were very substantial though not enough to completely cushion the impact of all these changes in general.

The second thing we did was to start ramping up on our electronic banking services. Electronic payment generates revenue for us arising from the card usage (point of sale usage) and other income associated with e-banking play. Card usage also reduced our costs as customers migrate transaction from the banking halls to the electronic space.

Serving customers through electronic banking is just a fraction of what it actually cost you to serve the customers through the banking hall. So, increased electronic banking did two things for us, significant reduction in our operating cost and an increase in the income level.

Our third strategy was shift that we made from investment in government securities, in treasury bills, and related instruments, into quality asset creation. Our risk asset portfolio last year increased significantly as you are going to see when we release our 2013 full year results. We are focusing basically on emerging sectors, like telecommunications, the Power sector, oil and gas upstream, agriculture and Power thereby optimizing the balance sheet of the group.

UBA is probably the biggest lender in the power sector under the new power sector reform and we are going to do more this year. Agriculture remains a very big area for UBA. Today, it actually contributes about seven per cent of our portfolio compared to the industry average of four per cent. These were some of the strategies we adopted to cushion the impact of the crunch that we experienced last year.

What is driving the high interest rates charged by banks?

It is true we are all feeling the pain of high interest rates. I also want a lower rate. But when you look at it, you find that banks are an integral part of the economy.   The actual reason why interest rate is very high in Nigeria is because of infrastructure that are not there, the deposit rate may not be as high as you will think but the additional cost that go towards the generation of that deposit is very high.

As we speak, UBA has about four generators that run simultaneously. Each of them is 1,500 KVA. So this office alone is generating six megawatts. It’s a mini power station. Diesel consumption alone is extremely high. Each UBA branch has two generators. One is the main generator while the other is for standby. We have cards all over the world; we cannot afford to go down for one second. People are using our cards in Japan, South Africa and America. Therefore, that infrastructure has to be there. If you go to our offices you will see a whole lot of security people that are in place. We have to pay for that.

So all these are costs that if you have to remain in business you must bear. This is why interest rate is very high. The cost of taking care of the cash is also very high. If you go to the banking hall, you will see how the note counting machines break down everyday.

So you either replace them or get the people who repair them. You have tellers lined up. This is why we are pushing cashlite banking. As cashlite banking takes firm root, you will find out that the cost of handling cash will go down significantly, impacting positively on interest rates.

If you compare the financials of the Nigerian banks with those of other emerging and frontier markets, the cost-to-income ratio of the Nigerian banks are in the 60s. Some extreme ones are in the 70s. The cost-income ratios of all the other emerging markets like Turkey, Malaysia and co, are in the 40s. So, if we are able to deal with all these cost elements, I can tell you that the interest rate can come down to single digit.

How are you addressing the relatively high cost-to-income ratio of the bank?

It is true that the cost-income ratio is relatively high and I will explain why it looks so. The amount of money we have invested in Africa, if we were to bring that capital, put it in treasury bills, our performance today is going to be totally different.

However, it is an investment in the future which is not pricing into our share price yet because investors are not looking long-term. Fourteen of our African subsidiaries are making profit out of 18, apart from Nigeria. When all of them start operating at full steam starting from this year, the contribution will be totally different altogether.

At the same time, we are writing off investments and amortising, and so we are bound to experience the current seemingly high cost-to-income ratio. We have recognised the expenses but the income will come in future. Already, the cost-to-income ratio has been coming down. Don’t forget that in 2012, we closed with cost-to-income ratio of 78 per cent. First quarter of 2013, we came down to 65 per cent and in the second quarter, it had come down to 62 per cent and it has continued to reduce. Our ultimate objective is to come to 50s. It’s going to happen, very soon.

How has the bank been able to manage the security of online banking transactions considering your array of e-banking products?

As you rightly noted, our online bank offerings has expanded very fast. Today we have seen about 40 percent of transactions done online and 60 percent done offline. Some years back, we had just about 17 percent online and 83 percent done offline. Online fraud is a very big cause for concern for the industry as a whole and I will tell you why it is so. Online fraud is instantaneous. You really can’t stop it once it is initiated.

It is unlike, for example, cheque fraud, which has to go to clearing and someone has to confirm it and so can be stopped. For online fraud, all the fraudster does is press a key  and the money is gone. The industry is tackling the challenge jointly.

As an industry, we have decided that all ATMs in Nigeria, with effect from this quarter, must have anti-scheming devices, so that it becomes difficult for fraudsters to pick information from people. That was one of the decisions we took at the Bankers Committee meeting that took place in Calabar in December last year. Every  bank must have anti-scheming device in all its ATMs from this quarter.

What is UBA doing? We have invested significantly in security operations. We have built a state of the art security centre. This was a significant investment. We partnered with one of the best security companies in the world.   The security centre protects our customers against online fraud.   We call it Security Operations Centre. Sometimes last year, we actually commissioned it with regulators from Central Bank and a representative from the Economic and Financial Crimes Commission (EFCC). This is the kind of things we have been doing and we will continue to invest in. It is a battle in which we have to remain ahead of the fraudsters because they come up with various attempts every day.

As the nation awaits the appointment of a new Central Bank Governor, what are your expectations?

I’m not sure who is going to emerge as the new CBN Governor but whoever emerges, I do not think we are going to see a reversal in the key policies.   These policies are working very well. For example, Nigeria is the only country among the emerging markets that have not suffered major currency depreciation for a long time.

The inflation rate has been brought down to single digits. I don’t see any easing of the monetary policy rate. The cashless policy has been very good and I believe it is something that should be embraced by all.

This year, the cashless policy is going to roll out in all the states of the nation.   I also see some flexibility in interest rates. One of the reasons why I believe there won’t be any easing in the monetary policy is because we are going into the election year.

The pre-election spending is inflationary in nature and you will not ease the monetary policy when there is so much liquidity in the system.   If anything at all, I believe we might experience some further tightening of the monetary policy. It is possible that the cash reserve ratio is going to go up further, not only for the public sector deposit but for also the private sector deposits and I believe that the CBN will continue to use its reserves to defend the local currency.

What is the bank’s project Alpha initiative about?

Project Alpha is our focused strategy for industry leadership across Africa, and it is a multi-year programme. The key elements of the project include; focusing on low cost deposits which are non-public sector, focus on customer appreciation and rapidly growing our customer base. We are also focused on intra Africa-trade, using our platforms in Africa to drive trade across Africa. We are focused on the remittance business and we are also focused on creation of third party quality risk assets, and customer service delivery is another aspect of the project.

What we have done is that, having laid the components of project Alpha, we are focusing the resources that are required in delivering on the project.

UBA is probably the only bank in Nigeria that has an executive director that is in charge of customer service and human resources, I don’t think there is any other bank that has that. So, we believe that for us to deliver on project Alpha, we must have people that are well motivated and well equipped with human management skills.

A particular aspect of this is talent management and that is why the bank is attracting very good people and we are using them to drive Project Alpha. The second is customer service; we have seen the need for the re-alignment of our customer service delivery.

In a nut shell, project Alpha is our focused strategy to drive leadership across Africa. And since 2013, we have been able to achieve some key parameters and by this year end, we will achieve more milestones.   In the next three years, we should be through with all the major milestones as mapped out in Project Alpha.

Do you have plans of further expansion in Africa?

That is a very good question.   When we started the Africa expansion, we decided to have a phased programme. We have just concluded the first phase which was to cover the key strategic markets in Africa. The only exception is Angola which is supposed to be a part of that phase but which has not been actualized.

We are still reviewing our interest and strategy for Angola. However, we can we can say that we have completed the first phase of the expansion. We are now in the consolidation stage, which means you are not going to see further expansion from us across Africa for now until whenever we enter into the second phase, which is still far in the future and I probably will not be the one that will drive that expansion.

Is there any plan to raise capital this year?

We do not have a reason to raise capital.   When we raised capital, we use it to expand our presence in Africa and because we have completed that phase, there is no need for raising capital at this particular point in time. We will rather continue to consolidate our play in the various African countries and expect the revenue to come from these investments. Currently, we are expecting to crystallize the benefits from our investments in Africa.

How have you managed the transition between your predecessor and you?  

To a very large extent, there has been continuity. The good thing about a very big bank like UBA is that it is not operated in silos. Operations are based on a well articulated blue print jointly drafted by all of us and agreed to, and except the environment changes, you don’t deviate from that road map.

It is not a question of saying this bank is doing this and you now jump into doing it when you don’t know the basis of what they are doing. To a large extent, we have continued with the blue print which the board agreed on together and that is what we are implementing now. And once you have a blue print that we all drafted and believe in,  it becomes very easy for you to implement.

If you need resources, you are going to get it and if you need people, you know how to make provision for them.   You will also be able to measure your progress against your investments, though you have a long term blue print, there are specific milestones that you need to achieve as you implement.   So, by and large, we are still operating within the provisions of the blue print.




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