Phillips Oduoza: Nigerian Banks’ Cost to Income Ratio Still the Highest in Emerging, Frontier Markets

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Amidst the complaints by members of the organised private sector over the prevailing high interest rates and the attendant strains on the real sector, Group Managing Director, UBA Plc, Mr. Phillips Oduoza, in an interview with select business editors last week explained that bringing down the interest rate would be possible when banks’ cost of operation, which he described as the highest in the category of emerging market countries, comes down  Festus Akanbi was there
How has the raft of tough regulatory measures put in place by the Central Bank of Nigeria in recent times affected UBA operation 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 percent to 50 percent, meaning that for every N100 that you generate from public sector you must sterilise 50 percent 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, 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 7 percent of our portfolio compared to the industry average of 4 percent. These were some of the strategies we adopted to cushion the impact of the crunch that we experienced last year.
Going by your response to the first question, can we conclude that it is more profitable to run banks outside Nigeria?
It is a different ball game and you cannot draw that conclusion. It is quite profitable but I will not say that it is more profitable than in Nigeria. Nigeria is still a very dominant market in sub-saharan Africa. The Nigerian market is very huge, when compared to other markets in sub-sahara Africa, with the exception of South Africa, Nigeria is the second largest.  I believe that after the rebasing of Nigeria’s GDP, which we are expecting  any moment from now, we are going to see Nigeria even becoming bigger than South Africa.  Our Nigerian operation commands about 75 percent of our group revenue, with other African countries contributing about 25 percent. But going into the future, other African countries will continue to increase the proportion of their contributions and the ultimate objective is to achieve a 50-50 between Nigeria and the various African countries in the medium term.
Does UBA’s support for power sector  symbolise belief in the power sector reforms?
For us, the power 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 power sector across all sectors of the economy. For us, as a bank, our support to the power sector is long term financing that will provide a steady cash flow and income for the period of that funding. Some of those funding 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 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 percent and for the group as a whole it was within 3 percent and this is within the Central Bank limit of 5 percent 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.
In view of the rising threats to online banking by the activities of internet fraudsters, what measures are you putting in place to make the platform safe for your prospective customers?
Online banking is actually the new direction for banking. 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.
It is unlike cheque fraud for instance  which may involve customer confirmation and therefore can easily be stopped at the stage of confirmation. For online fraud, once the fraudster presses a key  and the transaction is completed, 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 steal customers’ information from ATMs. That was one of the decisions we took at the Bankers Committee Retreat which just took place in Calabar in December last year. Every bank must have anti-scheming device in all its ATMs before end of this quarter.
What is UBA doing? We recently launched a Security Operations Center, the first of its kind in Nigeria to monitor every single transaction against potential fraud. We partnered with one of the best security companies in the world. It is a battle in which we have to remain ahead of the fraudsters because they come up with various attempts every day. The Bank’s robust IT infrastructure and world class security system is being constantly upgraded to ensure that we continue to effectively tackle e-banking fraud.
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 now start 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 has also 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 recognize that the bank’s  growth  has been a sustained growth. If anything at all, the balance sheet is very strong and robust. 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 an upward movement in our share price because our current performance shows that we are a bank to invest in.
Is there work to be done on the cost-to-income ratio. It’s still very high and that could give significant upside to the Profit after Tax of the bank?
It is true that the cost-income-ratio is high and I will explain why it is 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 for the future  which is not being priced 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 or amortising some of the pre-operating expenses in Africa, therefore, 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 percent. First quarter of 2013, we  came down to 65 percent and in the second quarter, it had come down to 62 percent and it has continued to reduce. Our ultimate objective is to come to the 50s and this will happen very soon given that revenue lags costs in the capital investments for the African countries.
What will you list as your achievements in office in the past three years?
We have turned around the bank from loss position post financial crisis and have extended the profitability to the newly established African subsidiaries. The African countries that were just being set up have started scaling up gradually from loss positions to the profit level that we have today, with 14 of them making profit out of the 18 African subsidiaries. Both the deposit liabilities and the loan books have shown significant growth in the past three years. UBA came first and got an award from CBN as the most agric-friendly bank and the bank has been winning numerous high profile awards from Euromoney, The Banker etc at both the Nigerian and Africa subsidiaries’ levels.
The share price has appreciated so much in the last two years resulting in major value creation for shareholders. The future of the bank is very bright. We have laid a very good foundation. Infact, there is no big transaction you can talk of today that UBA does not participate in. Any of the major tickets, UBA is there. So the brand remains very strong. We have also witnessed seamless board (two board chairmen and other Non-Executive Board) transitions showing the robustness of the governance structure.
You recently pledged an increase in UBA’s funding of agriculture. What is your focus this year?
We have been funding agriculture and we will continue to do that and we have also added some other areas and that is why UBA became the biggest lender in the power sector. We are playing very big in the power sector, we are playing very big in infrastructure, and we are playing quite big in the upstream of the oil industry including gas. And these are the new areas  which we are driving the economy. Agriculture remains very important to us and most of the major names either in the production or in the processing are in the books of UBA. I also mentioned that seven percent of our portfolio is in agriculture as against industry’s average of lower than four percent. We have the highest, for any bank in Nigeria, as a percentage of contribution to the agriculture sector. We remain very strong on the entire value chain. Whether they are processing starch or processing cotton, cocoa in the value chain to the ones that are exporting and the ones that are providing storage, UBA is always present.
What is UBA doing with regards to retail banking given the challenge posed by the regulation on public sector funds?
We are very strong in retail banking. UBA has over seven million customers. We have the branch network and scale. We are able to reach quite a lot of customers and we also have the channels. UBA has a very substantial number of ATMs in the market and by the time the pronouncement on the cash reserve ratio was made by CBN, we had already diversified our deposit base and today, we have a very strong mix. In fact, the public sector constitutes just a paltry 10 percent of our total deposits and one of the things we did under project Alpha, is to drive the non-public sector deposits and that is basically, where our focus has been. If you look at our deposit mix, you will find out that a substantial part is coming from the retail and corporates and a very small portion is coming from public sector.
We will want to provide more consumer loans but there are existing challenges in Nigeria at this time. One is identity verification. It Is a very big problem. The identity issue is being addressed with the biometrics that we are rolling out in the banking industry as a whole.
The credit bureaus will also help consumer lending in Nigeria. They are still populating their database and we believe once this is done, it is going to improve the situation. UBA has also come up with some products that will drive financial inclusion. Some low “Know-Your-Customer” products. For example, we have a modified freedom savings account that requires little or no documentation to open. We also have the pre-paid debit cards that require you not to have any account to own and use. We also have U-mobile; which is the mobile banking platform. So these are some of the new products that we have launched in the market and they are gaining a lot of momentum.
Is UBA planning to acquire any of the bridged banks being offered for sale by AMCON?
UBA is not interested in any of the bridged banks that are being put up for sale. We do not see any strategic fit and any synergy with our existing business from any of the banks being put on sale. We have the customers and we also have the network and the channels.  So we don’t see any additional benefit that will accrue from such business combination.
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 digit. 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 be rolled out in all the states of the nation.  I also see some stability 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 pre-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 your view about the present interest rate regime given the complaints of organised private sector operators?
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. One of the reasons why interest rate is very high in Nigeria is because of infrastructure challenges. Deposit rate may not be as high as you will think but the additional costs that go towards the generation of that deposit is very high.
As we speak here, 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 of the branches that UBA has is using 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 and therefore build multiple redundancies. People are using our cards in Japan, South Africa and America.
Therefore that infrastructure has to be there. So all these are costs that if you have to remain in business you must bear. This is one of the reasons 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 every day. So you either replace them or get the people who repair them. You have tellers lined up.
This is why we are pushing  for cashless banking. As cashless 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. All the other emerging markets like Turkey,  Malaysia, India etc, their cost to income ratios 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 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?
Mr 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.  I 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 an unseen hand. He is pre-occupied with his various businesses which he is growing not  just in Nigeria, but across Africa.
UBA is a bank that prides itself on continuity, stability and strong governance. 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. If Mr Tony Elumelu 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 outside UBA as stipulated by CBN. You are also aware that we have just had a successful transition from one Chairman of the board to another. Our former Chairman Chief Ogbue just retired from the board having successfully served out his term in line with regulatory  requirement handed over to Ambassador Joe Keshi the former Vice-Chairman of the board effective from December 2013. This happened towards the end of last month, so Mr Elumelu 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 number of executive directors in the industry. Our workforce both directly and indirectly totals about 25,000 people across the globe.
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