The banking industry has been under pressure due to policy measures of the Central Bank of Nigeria (CBN) to tighten money supply. In this interview, Mr. Oyewale Ariyibi, Head, Finance, FBN Holdings Plc explained how some of these policies impact the operations of the company, and efforts of the company to improve on its efficiency and deliver returns to shareholders. Excerpts

By Babajide Komolafe

These are very interesting times in the Banking industry, crude oil prices are down, there are concerns that the oil and gas sector which is the largest contributor to the economy will be affected, and a number of banks are heavily exposed to the oil and gas sectors. Also, further tightening of monetary policy by the CBN, increase in CRR and MPR pose a challenge.

Presently it is difficult for banks to access discounts through CBN with analysts speculating that this trend will have adverse effects on the profitability of Banks. What effects do you think these will have on the profitability of the entire banking industry as well as the profitability of FBN Holdings vis-à-vis FirstBank?

Oyewale Ariyibi

I believe that one of the key objectives of the regulator is to engender financial stability in the system by ensuring that banks are adequately capitalized and well-resourced for the businesses that they undertake. From April 2013 and up till now, there have been a number of pronouncements that have impacted income generation capacity of banks.

Some of these policies amongst others are increase in Cash Reserve Requirement (CRR) for both public and private sector deposits; mandatory payment of a minimum 30 percent MPR rate on Savings deposits; attaching a risk weight of 125 percent to oil and gas exposure of banks with 20 percent or more of its portfolio in oil and gas; progressive reduction in Commission on Turnover (COT) from N5 per mille to N3 per mille in 2013, N2 mille in 2014, N1 per mille in 2015 and zero in 2016. No doubt, these pronouncements have impacted earnings of banks including First Bank and ultimately the holding company.

Let me illustrate the impact with just the CRR at 75 percent for public sector deposits and 20 percent for private sector deposits, FirstBank, currently has about N560 billion sterilized with the Central Bank yielding no interest or return whatsoever. Hitherto, such funds would have been invested at an average interest rate of 12 percent per annum, thus the opportunity cost is an annual lost income of N67 billion.

The bank has complied with all these regulations and re-arranged its operating structure and created more efficient internal processes to ensure quality service delivery and minimize the impact of the regulatory pronouncements on earnings and the bottom line. Our financial results for the nine months ending September 30, 2014 showed that the group has made significant progress with a profit of N74 billion compared to N70billin for the equivalent period of prior year.

There are fears that non-performing loans, NPLs will spike in 2015 as a result of potential downward trend in government spending and the economy in general. What plans do you have in place to mitigate this risk?

You know before the bank extends facilities, there are risk acceptance criteria and credit assessment mechanisms that give some level of comfort that the obligor  has the capacity and capability to repay the loan from the cash flow point of view. If the fundamentals of the obligors’ businesses do not change, loans do not go bad; however, temporary macroeconomic challenges might impact margins and profitability. We have very competent and experienced personnel at the bank who are daily monitoring the bank’s portfolio and the obligors to ensure that the loan covenants are adhered.

Which of the regulatory policies would you want the CBN to review in the coming year?

The regulators have made policy pronouncements based on their research and data gathering system. As I said earlier, the objective would be to ensure that there is stability in the system and we fully align with some of these policies. One area, I wish the CBN can take another look is the issue of cash reserve requirement (CRR) vis-a-vis liquidity ratio.

The funds are sterilized in CBN for CRR purposes and these funds (N560billion in the case of Firstbank) do not count for liquidity but the banks are not relieved of the burden of liquidity ratio for the underlining deposits. Hence banks make provision for liquidity ratio on deposits that are not available for their use and do not count for liquidity. It is either those deposits are excluded from computation of liquidity ratio or the sterilized funds are counted as part of a bank’s liquid assets.

As the largest bank in terms of Assets, how do you intend to drive down cost and increase bottom line and profit in 2015 in view of changing regulatory headwinds?

We appreciate the strength in financial size and the size of the institution has been a major asset to us. Presently we have about 800 branches and service points across the enterprise, and there are attendant operational costs associated with this size. For example, for each branch, you need to have a transformer and a generator with the attendant costs of maintenance. With the benefit of experience, the bank can safely estimate how much it will cost per annum to operate different types of branches and quick service points. Hence, a template can be developed and deployed as benchmark across different branches and quick service points.

In addition, with current advances in technology and the deployment of online banking, mobile banking, over 2,200 ATMs and other platforms, the customers can transact their businesses from the comfort of their homes and offices without necessarily going to the physical bank locations. With this, we can begin to record savings in this area going forward. The group’s target is that by the end of 2016 which is the end of the current three year strategic planning cycle, we would have shaved off about 500 basis points (bps) in cost-income ratio compared to Year 2013. This is a stress target and all hands are on deck towards achieving this.

Given your size and position in the industry, do you think that there is disconnect between returns and investors valuation of FBN financial performance

First, the market is currently bearish. Secondly, Pension Fund Administrators (PFAs) which constitute large institutional investors in Nigeria were barred from further investing in the shares of financial holding companies (Holdcos). This is because; holdcos were categorized as new companies in line with section 73 of the Pension Reform Act of 2004.

This section of the old law debars PFAs from investing in new companies that has not made profit or declared dividend in the last five years. Whereas, FBN Holdings Plc. (in substance over the form), is essentially a continuation of FBN Plc. A quick look at our five-year dividend history from 2010 to 2014, showed that the group had declared and paid 10 kobo, 60 kobo, 80 kobo, 100 kobo, and 110 kobo yielding a cumulative annual growth rate (CAGR) of 62 percent. Investing in FBN Holdings Plc. is like a fixed income security with en equity upside. The dividend CAGR is very commendable in view of the very challenging macroeconomic environment under which we have operated in the past five years.

With the promulgation of the new Pension Reform Amendment Act of 2014, the section has been amended and coupled with the release of the guidelines for the operations of a financial holding companies in Nigeria, we now await the release of the necessary circular from the National Pension Commission (PENCOM) that will enable PFAs to resume investing in the shares of financial holding companies. We are confident that once this circular is released, the shares of FBN Holdings Plc. will gravitate towards its full intrinsic value.

With the new regulatory pronouncement stipulating an interest rate of 3.6 percent to be paid on all savings accounts, does this further pose a challenge to FirstBank’s Profitability?

It  is not difficult to pay interest on deposits. Even before the pronouncement, Firstbank was paying interest on its Savings and the bank encourages people to save. When the rate is now indexed against MPR, this has increased interest expense and cost of funds slightly, but the bank has managed this appropriately with careful and profitable deployment of the funds.

FBN Holdings recently acquired Kakawa Discount House Limited. Is the company still targeting institutions across Africa or in Nigeria for acquisition?

The acquisitions that you have seen are in line with the group’s strategic plan for growth and earnings diversification. If I can take you back a little bit, you will recall that one of the key reasons for adopting the financial holding company structure is to extract synergies and optimize cross selling opportunities across our subsidiaries, hence the inherent value in the group will be harnessed with the financial holding company structure such that the holding company will focus on co-ordination and consolidation and allow each operating company i.e. subsidiary business to focus on the strategic core of its mandate.

The group is structured along four strategic businesses namely: Commercial Banking Group, Investment Banking and Asset Management (IBAM), Insurance and other Financial Services.  The commercial banking is focused strictly on commercial banking and related businesses, Investment Banking and Asset management focuses on asset management, corporate finance, and Capital market operations including issuing house and security dealing, advisory services etc., while the insurance group focuses on risk underwriting.

Prior to this time, the group held 46 percent of the Shares of Kakawa Discount House Limited and was an associated business. Kakawa offers a unique proposition to the group. It comes with a rich and unique blend of a fixed income origination and distribution capacity which can be integrated into our IBAM group and with this, we are not only reaching out to places we have not reached before but we are also able to deepen existing relationship, improve and increase the type of product offerings available to our customers.

This makes Kakawa a perfect fit in the FBN Holdings structure. In view of this, the group decided to acquire the 54 percent shares hitherto held by non-members of FBN group thus FBN Holdings Plc. has become the beneficial owner of 100 percent shares of Kakawa Discount House Limited. Previously, the commercial banking group through Firstbank had completed the acquisition of ICB West Africa operations in Ghana, Gambia, Guinea, Sierra Leone and Senegal.

Additionally, FBN Insurance Limited acquired Oasis Insurance Plc. thereby affording the company the opportunity to underwrite general insurance business in addition to its Life business license. FBN Holdings Plc. has not raised fresh equity in recent time, and the acquisitions were through internally generated funds. We monitor the group performance periodically and regularly with the objective of ensuring that we sweat the equity for efficiency.

You have made acquisitions and also made divestments too. Are there plans to further divest from underperforming assets?

FBN Holdings Plc. is like an investment management company. The company has expectations and usually set target returns for its operating companies in line with the group’s aspirations and strategic plan. Review of performance is a continuous process and the decision to invest or divest rests squarely with the Board of Directors. With this diversified business and revenue base, we are confident that we have laid strong foundation for the future towards improving the well-being of our stakeholders. For now we do not have any immediate plans of further acquisitions, but to focus on integration and getting the benefit before the investments.

CBN has consistently revealed that there is excess liquidity within the system and the fact that banks are supposed to be lending and not contributing to the excess liquidity pool. What do you think necessitated such excess liquidity policies?

This does not really apply to our group. The bank has constantly extended credit to the productive sectors and especially SMEs which explains why Firstbank has the largest loan portfolio in the entire banking industry.