A recent finding by a University of Cambridge department that examines systemic risks revealed that the novel coronavirus (COVID-19) could cost the global economy up to $82 trillion over the next five years. A base case projection they give is around $26.8 trillion, or 5.3%, of global GDP in the coming five years.
This is notwithstanding efforts by regulators across the globe, including Nigeria, to support banks and other financial institutions from the onslaught of the COVID-19. However, the reality is that lenders will face significant pressure on their asset quality, capital liquidity, and will have to come to terms with the new norms post-pandemic.
As many businesses take the heat, banks are not guaranteed immunity.
Economists, who are counting the cost, say even best efforts as seen in Europe where banks and their regulator, European Central Bank, attempt to stabilise the banking system by freezing dividend payments, cutting bonuses to managers, rolling out a massive bond-buying programme and providing cheap loans are tentative.
In a similar manner, Fitch Ratings notes that forbearance measures announced by the Central Bank of Nigeria (CBN) will help the flow of credit into the economy and “support reported asset quality metrics in the short term (the average Stage 3 loans ratio for Fitch-rated banks was 5.7% at end-2019) but asset quality could deteriorate significantly depending on the duration and severity of the oil price shock and coronavirus turmoil.”
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Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative.
The risks to Nigerian banks were also outlined in a recent report by the Nigerian unit of PricewaterhouseCoopers LLP, which says the economic slowdown from the novel coronavirus outbreak intensifies risks to the Nigerian banking industry.
One of the premises of that outlook is the fact that banks’ loan books are exposed to some of the sectors that are the worst-hit, like the oil sector and hospitality.
The oil and gas sector represented around a third of Nigerian banks’ gross loans, and if history serves any guide, oil price downturn (and currency devaluation) makes it harder for bank customers to meet their obligations especially dollar-based loans.
The banking industry also faces risks from a reduction in fee and trading income as well as on net-interest income, while cyber-security breaches, operational constraints of keeping employees safe and meeting customer expectations and deterioration of IT and other support services because of internal challenges or vendor problems that will plague banks, according to PwC.
Banks, like other businesses, will have to re-adjust to these new realities. Even in the most optimistic scenario, lenders will have to change their modus operandi and make critical IT investments to help (further) transit from brick and mortar to a digitally-driven model.
The new social-distancing culture emerging will result in fewer customers in banking halls, and most transactions would be done via means that limit the need for physical interaction.
In this era where efficiency is sine qua non, banks will have to redirect their investment from brick and mortar banking to digitally-led banking solutions or they simple lose their customers and phase-off.
The implication for banks as businesses is that there must be organisational and business operational restructuring with the possibility of fewer on-ground resources at work stations.
This is the natural short-run outcome of the decision many other businesses in the economy will also take and have already implemented.
Economists say structural unemployment will arise as businesses digitalise processes but ultimately, the very survival of that businesses and consequent improvement in its efficiency will lead to better growth and create more jobs in the long-run.
A disservice to customers, shareholders and the economy would be for lenders to approach the threat to banking in a dismissive way, as sociology and health experts have now come to warn that the coronavirus will leave a lasting mark on the way people live their lives.
With so many banking jobs now threatened due to impact of the virus on the scale of their operation, lenders may have no choice but to join other businesses in the economy in implementing cuts as the only logical solution to keeping their business from going under completely.
One of the best ways to do so would be to take the humane approach lenders like Access Bank which implemented a progressive cut, with its CEO taking a 40% salary cut while staff down the ladder took much smaller cuts.
The bank’s move to reduce its operating cost will ensure that no staffer is laid-off.
Post-lockdowns, banks will also have to invest more in technology and AI to guide in understanding customers better. One advantage of digital-inclined banking is that it becomes much easier to understand customer need and gaps in the market.
As businesses move online more, there would be the need to invest in cyber-security systems that would ensure that there is no data breach and customers are safe.
As banks accept the new culture of remote working and operations, human resource re-skilling & re-tooling will make take-off of the new era seamless. Banks will have to pinpoint those activities that are top priority and plan around them carefully investing in processes and people that ensure their viability.
According to PwC, protecting one’s people and planning one’s workforce requires identifying the critical work which delivers banks’ P&L, the workforce that does this and the capacity of the organization to move labour to sustain those critical activities.
While traditional banking is not going to completely phased off, the emergence of a new generation of bankers, i.e. digital bankers will be necessary to complement the traditionally skilled resources for enhanced service delivery.
To reduce cost, there might be a need to retrain and reassign existing teams to new tasks that support migration to digital banking. This, however, is not dismissive of the fact that banks may still have to resize their workforce appropriately.
On the brighter side, the coronavirus outbreak could result in a net benefit for Nigeria, especially for the country’s financial inclusion goal.
According to Financial Inclusion Insights (FII), banking leads the way to financial inclusion in Nigeria with nearly three in ten adults (29%) having bank accounts.
The reduced need for brick and mortar means banks can do more without rolling out more branches across the country to capture the unbanked.
E-banking will accelerate the integration of more Nigerian into the financial system; Mobile applications like the AccessMore app can help take banking to the customers instead of waiting to bring the customers to the bank.
Overall, the outbreak of the coronavirus is a major economic, social and health event that will alter the course of event and usher in a new era – one where challenges have to be squarely faced and issues dealt with pragmatically.
For the banks, it means they have to honestly assess their vulnerability and act accordingly because of the key role they play in the stability of the economy.
Understanding what trends are taking shape and taking appropriate steps will help the Nigerian banking industry and the economy as a whole turn the crisis into a blessing.
