Citibank had quite solid Q1 numbers at the group level, with net income up 30 percent. What does that mean for your franchise in Africa, and Nigeria?
Citi is quite aware of its own strength both in Nigeria and in Africa. We see ourselves with a certain specific niche in the market, and our primary role is to be innovative, so you will find us being the first to market on several new products, be it electronic banking or other products, we raise the benchmark upwards constantly from a quality point of view.
The second major role we play for our clients is access to capital and as our clients become larger and larger we continue to support them. Citi has from time to time been able to bring that capability to play. When you look at the Nigerian market over the past 24 months you see who has brought the largest amount of capital to the table. You see the sovereign going first and as the sovereign goes you have the benchmark, and then you see the large corporates follow such as the banks, because they are the largest, and then naturally you will see other corporates coming as well.
Citi bank has played a key role in all of this and that is what defines us and we will continue to play that role, and a lot of that money (for the sovereign); will be used for infrastructural development. For the corporates like WEMPCOs steel mill Citi was the arranger there or the MTN transaction, or ship acquisition transaction for NLNG, so you will see us in all of these large transactions as advisers, as lead arrangers or partners.
So, what does this mean for our franchise in Africa and specifically Nigeria? This means that Citi will continue to link the environment with how we can add value and if the market moves in another direction, we would like to make sure we play in that new space as well.
Can you break down the Nigerian business a little bit more, how fast is it growing, where are you seeing more opportunity and who are your major clients?
I think there are several key segments of this industry that we play in and obviously the multinational space is a key part of Citi’s strategy globally.
If you go back 200 years, Citi started in the USA by following US corporates as they spread out globally outside the US shores.
So, for instance, if they were going to Mexico, like IBM for example, they would find a Citi there and be able to bank with us. That is the genesis of Citi and that model remains, so we are very good with making sure that we are bankers to the large corporate multinationals which is one business model that we continue to follow wherever we go.
We endeavor to give them the same quality of service and efficiency, making it as competitive as possible for them in each of the markets.
The second part of our business in Nigeria would be in the oil and gas sector. The oil and gas business covers both the multinational oil and gas companies and now more and more the local organizations and I think that would be a space that will continue to be important going forward. We are now obviously selectively engaging several of the local oil and gas companies in order to facilitate their growth.
I think, if there is anything that will keep the local companies from accessing capital, it would be governance and those companies that are able to cross the hurdle of good corporate governance, will find that they will do extremely well.
The third bit is local corporates that are up scaling; this could be in the FMCG space, manufacturing, or services. In services you could have the telecoms companies; in manufacturing you could have some of the steel and cement players for example and other manufacturers as well. In FMCG it’s a vast area because of the attractiveness of the demographics, so you could have people that manufacture juices or consumer goods, which are a big part of our business.
The banks themselves are to be considered as our clients, so you would see Citi engaging in capital raising for banks. In this area, we have played a big role and will continue to. We have done quite some work around Mergers and Acquisition (M&A), such as in the recent consolidation exercise where we were the advisor of Access bank in the acquisition of intercontinental.
Citi is also one of the banks that are advising AMCON on strategic options for the bridge banks.
The critical point is that a lot of our clients are becoming larger and the larger they get, the more access to capital they require. As they spread their wings outside of Nigeria, it is logical for them to be banking with Citi as they go into other markets such as the Middle East, Asia, Africa or the rest of the world.
You see, Africa is a big part of Citi’s focus on emerging markets and the largest two franchises in Africa would be South Africa and Nigeria. Nigeria is a very important franchise and is definitely a country that Citi has identified as one they would invest in to see further growth and we are committed to ensuring this happens both for Citi and Nigeria as a whole.
What would make the market conducive for you either to enter the retail space or to play in the capital markets space given your global expertise?
Citi started with a universal banking model in Nigeria which allowed us to do everything; however, that license no longer exists. What we have now is a commercial banking license and to conduct activities such as SEC related activity, as previously done, would mean getting a new one.
So as we strategize about Nigeria, we look at all business opportunities available. We would look at the stock market and what is happening in terms of new issuances and IPOs, then we would look at what is happening in the local bond space, and you can do the math and see which the better opportunity is.
It is not like we are saying we want to do everything tomorrow, what we are saying is we think currently we have a very good model, and were we to add to that model, that model would have to generate the kind of returns that we receive now or more.
I think as far as retail is concerned, you cannot be in Nigeria and ignore the demographic realities. There is a lot of good work taking place to make this sector more conducive, such as the development of credit bureaus and identification. We are monitoring these developments keenly.
How is the regulatory space impacting your business, first globally and then in Nigeria?
I think that the banking space has completely changed, you are going to require higher amounts of capital to do business under BASEL III requirements, and the requirement for capital goes up beyond the credit risk threshold, you have operational risk to look at and keep capital aside for that, then you have market risk to look at and keep capital aside for that, and if you are a systemically important institution you have to keep even more capital aside.
I think that the capital needed will be much higher, and therefore the return on capital will certainly be impacted.
It will be a safer banking system going forward however it may not be as high of a return on equity as it was in the past for the industry, which is a sign of the times we are in especially after the financial crises where those activities which you could do with depositor’s money had to be curtailed.
Therefore high-risk activities had to be carved out of the main body, into different vehicles and those businesses have to be adequately capitalised.
I think Nigeria is a good case in point, we have already seen the amalgamation that has taken place, where you have fewer but larger banks, I see them getting stronger, they are already well capitalised, but I continue to see that capital needs getting higher and higher as the lending activities pick up again.
So you may see in the first round, tier two capital being raised and then pure equity coming up after that.
Nigeria should mimic, what should happen in the global environment, however opportunity in Nigeria abounds because it is a growth market.
We have sufficient capital in the country to do our activities, we also have greater freedom to retain greater amounts of capital if we need to, and if you look at our capital adequacy ratios they are very strong.
Globally Citi is possibly the strongest financial institution in the USA, based on a capitalisation measure; we are about 9.2 percent from a tier one capital basis under BASEL III, which is very strong and well sufficient.
Banks are seeing big opportunities in Nigeria’s syndicated loan market with more than $10 billion of deals already signed this year, can you give some insight into why this is happening and what is driving the demand?
I think clearly oil and gas is a relatively big part of this, and again the indigenous oil and gas players, so you will see three or four themes in Oil and gas.
One is the multinational, which have joint ventures (JV) with the Government. I think if the PIB gets passed you will see that area explode. They are all sitting and waiting for the fiscal and other issues to be clearer.
The second theme of activity is within the NNPC itself, and some of it has to do with financing that they are raising for their own operational activities.
The third theme is around the indigenous players that are buying out the assets that the multinationals like Shell and ConocoPhillips are selling.
You also have to remember that people that buy those normally do so with bridge facilities which then have to be refinanced into longer tenor facilities, which would result in capital market activities as well longer term syndicated transactions.
A fourth theme maybe would be looking at gas purely and NLNG and other LNG such as brass. NLNG has just financed the acquisition of 6 ships, in which we were a major lender ,so there is quite a bit happening in that arena.
I think the second big thing is that Nigerian Banks are now tapping the capital markets regularly.
GTB went, Access bank went, Fidelity just did their capital raising last week, and then other than just the fact that they are raising long term capital through international bonds, they are also looking at shorter syndicated transactions to leverage up their balance sheet in order to fund lending.
The third general theme is if you look at manufacturing, you will see infrastructure related activity, anything to do with house building or construction generally, so that’s the WEMPCOs of the world.
There is also telecoms. I think these are the areas where you would have seen a lot of capital raising activity.
What about the Power sector reforms and the potential in that sector?
The power industry is what to look for in the future, we follow that very closely and we are advising several of our clients in that space.
Clearly as that industry goes through its documentation phase, which is what it is currently going through, and power purchase agreements PPA’s are signed, which are backed up by the partial risk guaranty from the World Bank, and the contracts become water tight I would then expect that this area with 17 new units plus the transmission, will attract a lot of financing.
It will also impact the capital markets because these companies will get listed on the local bourse, so I think that is an interesting area to look at.
I think the documentation phase is very important up to the point where the assets are handed over to the new owners, and it is all connected, because without adequate PPAs the role of the bulk trader, how it buys power, and then what happens to the MYTO, how is that backstopped, because you don’t want that being reversed, so I think power will be a big chunk of activity over the next few years.
Do you have any reference point for what we are trying to do in the power sector, was Citi involved in say Pakistan or Indonesia during the privatisation of their electricity assets?
We have participated in the privatization process in several markets across the globe. We are advisors in Nigeria as well to some clients that were looking to buy either the GENCOs or DISCOs.
So we are very actively involved in Nigeria, but we also have a lot of other countries were we have been involved.
I think the model is a very standard unbundling model as they call it, in which the main asset is broken up into several components of distribution, transmission and generation companies and sold off.
And then the gas is connected to the Gencos, and that agreement is backstopped, so the gas producers get paid.
I think really the viability of the whole model, depends on the end user that pays the bill at the disco level, in essence you and I, really need to finance the whole chain, it cannot be that the guarantees that have been backstopped to make it bankable are then called upon constantly.
The backstop has to be rarely used else the whole thing itself is not bankable.
That seems really to be the end game, making the whole chain all commercially viable from the Disco up to the gas exploration.
Do the banks including Citi think it is viable and bankable or are they adopting a wait and see approach for now?
I think the documentation phase is very critical. Right now we are only financing the acquisition aspect of it, which is being financed with recourse to the balance sheets of the buyers as opposed to the assets that are being purchased, which means you are relying on existing businesses.
It is really when you get into a project finance basis, on a ring fenced basis where you only lend to a DISCO against its own assets, against its own recoveries and cash flows then you know if the projects are bankable, we have not gotten there yet.
Once you get the documentation done, then you know what the commercial reality is, how much you need to invest in order to fix or upgrade the assets, and how quickly you can recover money from the end user with prepaid meters and so on which are expected to kick in at that point.
That is the model we are trying to get to and see.
To be honest 3,500 megawatts for a large country like Nigeria, is not enough and any additional generation and distribution capacity which is financed would generate multiple of returns.
I am optimistic subject to making sure that all details are thoroughly thought through and documented.
PATRICK ATUANYA interviewed Omar Hafeez, the Managing Director/CEO for Citibank Nigeria,