Nigeria is at a crucial point and regulators in different sectors have recently come up with policies aimed at revitalizing the economy. In this interview, BusinessDay journalist, Bala Augie, speaks with Abiodun Sanusi, Head of Investment Banking division, Coronation Merchant Bank, on the possible impact of these policies, exploring growth options for Africa’s biggest economy
Nigeria’s second-quarter GDP data published by the National Bureau of Statistic surprised to the downside, what is your take on the country’s performance in the period?
As we are all aware the elections took place in the first quarter while the president was sworn on May 29.
In an election year, economic activities are usually slow because politicians busy themselves with campaigns to get elected into offices. So, it is not surprising GDP numbers was below failed to impress.
Generally, the economy has not grown the way a lot of people expected, especially since we exited the recession in 2016.
The population growth is about 3 percent per annum and at the minimum, we need to grow at that rate so that we record growth at a per capita income basis.
Although we are growing, we are not growing as fast as our population growth and that is what we have witnessed in the last two years. What that means is government policies are not impacting on the economy, but we have seen a lot of progress being made.
Now that this government has settled down, ministers have been assigned portfolios, and the budget about to be approved by the Senate, we should see some growth in the economy by 2020.
However, this can only happen if the government implements structural reforms that will help propel economic growth.
Agriculture, services and manufacturing were the major drags to activity in the non-oil economy, how can policymakers invigorate these industries?
If you take a cursory examination of the Gross Domestic Product (GDP) figures, you will find that the Agriculture sector contributed 21.10 percent to the economy, oil and gas, 22.70 percent; and Information and Communication, 63.20 percent.
I think that some private sector friendly policies have to be undertaken, especially in the area of infrastructure. The Federal Government should invest more in the power sector because it is the catalyst for industrialization.
The power sector hasn’t lived up to expectation after its privatization in 2014 that gave birth to the distribution and generating companies. Power generation has to improve so that manufacturers can produce more at a cost.
The issue of cost-reflective tariffs should be resolved to help attract foreign investors. Once there is a remarkable improvement in electricity supply, then there will be acceleration economic growth.
The protracted insecurities across the country have to be addressed, especially the herders- farmers clash. These bedlams are undermining food production and have remained a drag on the economy.
We need to see the kind of revolution that took place in the telecommunications industry has to happen in the power sector.
The Central Bank of Nigeria (CBN) has mandated that Deposit Money Banks (DMB) to maintain a minimum Loan to Deposit Ratio (LDR) of 60 percent, do you see the new rules spur lending to the economy?
The high-interest rate regime has prevented banks from lending to the real sector. Lenders prefer to pack their money in risk-free investment instead of extending credit to the real sector.
The impact of the new rule is already being felt as banks now want to give out loans, but they have to take a stance.
If l am falling short of loans to deposit ratio (as we can see with most Tier 1 banks), then I have two options.
First, l will increase my loans by converting fixed income securities and treasury bills. What that means is that you start investing in higher-yielding risk assets. Consequently, we could see a higher cost of risks and rising Non-performing Loans (NPLs) on the back of the new measure amid a tighter framework from the banks.
The other strategy is to shade deposit. Some of the banks have started shading deposit by reducing the deposit rates that they give to institutional investors like pension funds and corporates.
Because banks want to start lending, they have started restructuring some corporate loans rather than writing them off. And this is good for the economy.
As we all know, during the recession, manufacturers groaned under high-interest rates that hindered them from paying back money borrowed from financial institutions. And that affected their profitability.
Do you think foreign investors will react to the recapitalization amid a bearish market?
I see a situation where insurance companies will have to raise capital through rights issue or private placement. They may also consider mergers and acquisitions (M&A).
Our take is that M&A will dominant more than capital raising and we see insurance players reduce to 25 from 59.
If M&A dominates the space, then we will see more Initial Public Offering (IPO) and follow up options in the capital markets as we saw during the banking sector consolidation.
Insurance consolidation is going to have a positive impact on the capital market. Once stronger players with solid working capital and capital base emerge from the exercise, then the industry will be attractive to investors.
How is Coronation Merchant Bank strategizing so that to take advantage of the opportunities that will come out of the recapitalization?
Coronation Merchant Bank (CMB) is a full-fledged investment bank. We offer both capital raising, private placement, and M&A service.
The insurance recapitalisation gives us immense opportunities to invigorate an industry that has been operating below the curve over the years. That is one of the major themes of the insurance sector report titled “from lagoon to the ocean”
The recapitalisation exercise as an opportunity for us to advise a lot of insurers on issues relating to business combinations, either through mergers, acquisitions, private placements, or a reverse takeover.
We have started working with some companies with regards to the aforementioned strategies. So that by the time consolidation starts, we will be well-positioned to be preferred investment bank to offer advisory service that will raise the desired equity capital that will enable them to meet their investment needs and scale up operations.
A lot of our team members were in the middle of the banking sector consolidation. That means we are going to bring the experience and knowledge we learned during the banking consolidation to bear to ensure that the insurance industry consolidation is a success.
What is your take on government ban on forex for the importation of food?
For me, there are many ways to achieve a policy objective but what matters most is the implementation of those policies. For example, import substitution through investment underpinned backward integration strategy in the cement industry.
The government worked with key industry players and offered a lot of palliatives, and a lot of investment support: tax waivers were given to increase investment in that sector. The policy yielded fruit as Nigeria is now a net exporter of cement.
The federal government ban on forex for food importation has to be supported with investment as well; 0therwise it could lead to short term scarcity and that may worsen the situation.
I think providing investment palliative for the food and Agriculture industry as we did for cement will unlock the potentials in the economy and make Nigeria self-sufficient in food.
Your bank grew earnings amid a low yield environment and difficult business landscape; can you share with us some of the strategies that helped underpin earnings?
We were able to deepen our coverage, and we have been able to bring attract more clientele. The growth in earnings has been largely driven by volumes, as we signed in more alpha corporates.
We have started extending our coverage in many to the Agricultural, manufacturing, and industrial space. We have banked a lot of customers in these sectors. We have also increased our fee-based income in terms of increasing our scope in supporting clients in the Information and Technology space.
Can you share with your risk management strategy?
Over the last four year, we still have zero Non-Performing Loans (NPLs). The reason is that as a merchant bank it became crystal clears to us that we do not have the latitude to create NPLs like the big tier 1 banks.
Also, it is a function of our net interest margin; our net interest margin is not as high as the big banks’. We are only allowed by regulations to deal with HNI and corporates.
For us to continuously be seen and be relevant to our counterparties, risk management is at the top of our list. So, l will say that risk management focuses on moderate in the sense that we spend moderate time in accessing our risk before extending our loans. There is a lot of in-depth analysis that is done to ensure all the risk is fully mitigated.
Because of our good asset quality, Augustus and Co assigned us A+ credit ratings. And that is very critical for our survival and existence.
We are a specialized investment bank; we cannot be a bank to everybody. We are bank to a few selected people. Those selected clients and those few selected counterparties consider risk rating. We provide specialized service and that is why we have been able to merge core investment banking to corporate coverage.
