What is the best way to clean up the books of a bank-the short-cut to wean your bank off toxic assets? Give wide berth to the margin magicians, says Mr Henry Semenitari, the Managing Director of Unity Bank Plc.
The bank chief, who seems to sympathise with genuine borrowers because of the high interest rates that he attributed to ‘abnormal pricing of money’, may have learnt this hard lesson from the margin loan saga at the capital market when many banks got their fingers burnt with the global financial meltdown, saying “if a snake bites you once, next time you see a wall gecko, you will reach for a gun”.
At a media parley in Lagos, Semenitari, however, blames defaults on the high cost of pricing money, adding that 80 per cent of defaults are from the fact that the cost of borrowing is abnormal. He also explains, among other issues, how SMEs can serve as springboard on which the nation’s GDP will leap.
We came into being on January 26,2006 as a result of merger of nine financial institutions with competences in investment banking, corporate and retail market. We came across as one of the most amorphous mergers in the industry, post-consolidation. But it is not pretty big in terms of size. But in terms of numbers, yes. We have the Bank of the North (BON); we have Centrepoint Bank, Intercity Bank, Pacific, Societe Bancaire, New African Merchant Bank, Tropical Commercial Bank, First Interstate and New Nigerian Bank (NNB).These were what metamorphosed into what we call Unity Bank today. The greatest strength among all, in terms of retail, is BON and NNB.As you know, these originally were regional banks with very strong presence across the divides of the entire country. The rest were investment banks strong in their own right as well. We are one of Nigeria’s retail banks in the country with 240 business offices across the country. And to date, as you know, it is Nigeria’s 7th largest bank. We plan to increase the numbers in the nearest future. Beyond being the 7th, we are also 7th today in terms of shareholders’ funds.We have over N51billion.
As for our focuses , we have a three-pronged focus in terms of strategic intent. Our business drivers are SMEs; agriculture and rural economy. Of course, we all know, the import of SMEs in any emerging economy.We also know the strength of SMEs in terms of growing GDP; the major stimulant; the major catalyst for GDP growth anywhere in the world. The family-owned businesses, unstructured trades, start ups; semi-start ups; huge start ups. For instance, Aliko (Dangote) was an SME. So if you look at the South Eas t Asia, eight out of 10 people that graduated from college don’t do paid employment for more than three years and everybody ventured into a start up. It may be in the media, industry or commerce. And it is pretty critical if we have to grow our GDP and actualize our dreams as an emerging economy. So it is a major business driver for us in terms of focus.
We have Agriculture. I am glad to mention that we are the only bank in Nigeria today that is well located across the entire agrarian belt of the country. You know the origin of BON? It started as cooperative society before metamorphosing into a bank. And the strength of cooperative is in cluster trade and cluster business management where like minds come together to go into common trade. And we do know the strength of agriculture prior to when oil was found in 1952 in Oloibiri. Agriculture held sway and sustained the country comfortably until oil came into being. Thank God, we are back to that root which is also a major focal point for the government as well.
Then rural economy; we will leverage on our historical origin, coming from two banks with very strong regional franchises. You know the history of New Nigerian Bank in the 70s in the old Mid-Western State, founded to hedge against rural-urban drift, which is very important if you have to take the economy to the peak. That is why, if you go to some countries, you will find out that there are no rura l areas any longer. What you call rural is urban. Infrastructure and everything is complete. I always use (towns in) Imo State as an example while in the old East Central State. In those days, you could live in Afikpo, you would get everything; you could do international deals; you could live in Owerri, you didn’t have to live in Enugu to have life. You could live in Aba; you could live in Ohafia; you could live in Umuahia.You could count almost 14 cities where you could live without going to Enugu. You didn’t even need to know where Enugu was and you would get every access to infrastructure, every access to medical care and every access to urban development. And in the old Mid-Western region, way back in Afuze, Oleh, Sabongida Ora, Iroha, Auchi and Ekpoma, these were cities in their own right. They had the missionaries; they had the traders. The bank was all located in those areas and it is something we hold dear in our history. You cannot drive agriculture without rural economy. That is the first level you can start from. You can’t drive SMEs without rural economy. So clearly, they are intertwined and they are derivatives of one another. That is why I said our history cuts across these three focal points.
The most important parameter for us, in terms of looking at our business fabric, and which will remain our watchword as a bank is to sustain the Weighted Average Cost of Funds (WACF), The truth is that if you sustain the Weighted Average Cost of Funds, your profit is going to rise, no matter the business you run. The Weighted Average Cost of Funds is so critical for the life of a retail enterprise. We have come from a long range to five per cent as against 6.8 per cen t of 2013. The industry average is 5.5 per cent. In the best practice environment, the ability to price money is very critical. What do you do as a bank? We don’t print money, we don’t own money. It is the money that a depositor gives to me that I give out to a borrower at a margin. If I take money at a wrong cost, I give it out at a wrong price. And that is where default starts. Eighty per cent of those defaults are from the fact that the cost of borrowing is abnormal. Most times, it comes from the cost at which I will price money. Indeed for us, going by the tempo we are going by 2017, our WACF will be about two per cent. It is achievable if we continue to drive low cost. That is where we are. It is a very important index. The next is cost to income ratio, which has a relationship with contribution as well; a relationship to work done as a function of what are you gaining from work.What have we done here? We have gone to 60.03 per cent, industry average is 71.5 per cent.
Here we are coming from a negative, same network, same people. It is all about how have you decided to do your work better. Net interest margin improved to 66.3 per cent. This is better than the industry average of 63.5 per cent. Again, there is a link with your WACF. That is why we have to put in order of flow. Earnings Per Share (EPS) improved by 28.76 kobo, coming from 4.40 kobo in Q3 of 2013. And the market capitalization is N58.45billion.
We have tried to increase the level of confidence with the banking public. Again, confidence is not how much you speak or how much you advertise every day. It is the quality of what you bring to bear in terms of shareholder value. And to the best of our ability, we have begun in that long distance race. It is a journey. We are not there yet. We are still far from there. But I think we have found our bearing in terms of how we are going to navigate to bring proper shareholder value. Our relationships have come through major establishments, government agencies that manage and regulate major developmental sectors, and private sector, oil & gas, ports authority, maritime and infrastructural development agencies. The Bank is rated 3rd under the CBN Commercial Agriculture Credit Scheme (CACS) with a total disbursement of N26.1billion on about 65 projects. As you can see, we are at an advanced stage in accessing the SME special intervention fund from the CBN. Disbursement is about to commence. It is being finetuned to meet the credit expectation of ordinary man in the street. We have also gone with some improvements in accessing Tier II capital by obtaining seven-year $70 million loan from AFREXIM Bank and one year $50 million loan from the same AFREXIM Bank.Again, these are attestations to an institution they think it deemed worthy to access capital. You don’t access capital if you don’t meet the Risk Assessment criteria from investment credit institutions like Afrexim Bank. We recorded a tremendous growth from a loss position of N33.64 billion as at December 2013 to a profit position of N12.02 billion before tax as at the end of third quarter in September 2014. We also recorded some basic improvements of 37.2 per cent in operational efficiency with a cost-to-income ratio reduced from 95.7 per cent as at December 2013 to 60.03 per cent currently.
Again when we begin to talk about operational efficiency, it speaks to you where our thought processes are emanating from. The bank itself was recently recognized as one of the top 100 businesses in Nigeria by the Federal Government. This recognition came from a very detailed screening, undertaken by the Financial Reporting Council(FRC), Nigerian Investment Promotion Council (NIPC) and the Federal ministry of Trade.These were the three institutions that went through the detailed review exercise at which we made the top 100 companies, precisely we are at number 60.We are very strong because only 14 banks made the list.
The bank also joined the Nigerian Stock Exchange 30 index (NSE30). Our MD/ EO also bagged the award of Banker of the year 2014 by Leadership Newspaper.
Everything we do boils down to number, which is the most critical thing in determining the life expectancy or insolvency of an institution. Our gross earnings in Q3 of 2014 rose by 6.05 per cent to N48.14billion, from N45.40billion in comparison to the third quarter of 2013; net interest income improved by 23.36 per cent, we did go from N20.83billion in Q3 of 2013 to N25.7billion. Total operating income improved by 22.86 per cent to N35.06billion, compared to N28.54billion in Q3 of 2013: Total operating expenses reduced by 22.13 per cent. It went down to N20.87billion in comparison to N26.80billion. during the corresponding period in 2013. Profit before tax improved by 897.56 per cent to N12.02billion, coming from N1.2billion in 2013. Profit after tax improved by 858.84 per cent to N11.02billion from N1.15billion.
Now one albatross that hit most institutions with legacy background like ours is non-performing loans(NPLs). We are back on aggressive recovery drive. On the recovery side, I want to thank the media for assisting us through media education; advertorials, encouraging people to realize that borrowing money is not a crime, but when you don’t repay your debt, it becomes a crime. We went on that. Our NPls have gone down from over 50 per cent, say half the entire loan book we inherited, to 20.43 per cent. The impact of the recovery drive will be felt more in the coming years which will improve our NPL ratio and our projection is that, coming December 2015, it will get to 10 per cent. I believe it is achievable.And by December 2016, we would be below five per cent, which is the regulatory standard of NPL.
If we go back memory lane, the telecoms started with investments briefings by MTN, Econet to the Nigerian partners. General Obasanjo brought them. That is how you transfer technology all over the world. Now MTN came with its muscle and had some Nigerians to partner with in terms of local content. Airtel, with all its change of names-it has answered five names now, but just because of expertise in muscle, the change of names and ownership has not affected its performance. It came with requisite skills. Today, it is with one of the biggest names and brands called Airtel. A successful brand manned by Nigerians. It is doing well. Etisalat! Well, we don’t need to speak more about the Arab world. It is also doing well. The only one that was delayed, that was local, is the one struggling more.We know all this story. There are certain things you must be prepared for. If you are not prepared, learn from those who have got it right. That is why it is called technology transfer. It is a process and choice.Now when power came, it was the reverse (case). For us, we took a cursory look: ex-this, ex-that was buying power plants. Power is even more technical, more demanding than telecoms. If you go to the telecoms, you see Hitachi, Sony; just name it. You go and buy power plant, you say I am Iheanyi, a Nigerian; a former bank MD, a former this, a former that. You now go to G8, they would just google you. That is all you are. Why would they listen to transfer their technology to you? But if you open it up to investment great companies, they would come to Nigeria. If you recall the indigenization decree by the military, it just created certain percentage of wealth for our people. It is still there in Ghana. It is what has metamorphosed today into the local content. If you have asked those investment great companies to come in, then you say 30 per cent of it must be owned by Nigerians, they would always understand. So part of the gap, with due respect, for us, we did not see diligence in terms of those who were coming to play in that game. If you check, Kano Disco, under (the defunct) Power Holding Company of Nigeria (PHCN), with even the so-called bad workers used to do N3billion in collections of bill. Today it is under N1billion. So when government owns something, it would be doing well. But when it becomes (private property under the) so-called quasi-privatization, the sale drops. Something must be wrong somewhere. I don’t know the answer.
And knowing where we are coming from, as rightly said by someone on the NPLs, we will not, in fact, we will show unintelligence to rush into a ticket where we cannot see (diligence). A supervisor of mine in the 90s would say ‘any credit you cannot see from A to Z, stay away. If you are not making money, don’t lose money’. And so, we did something predictably.That is why you didn’t see it (power) discussed in any acquisition.We partially supported one, not fully, based on other relationship we have in that company. It is a big oil & gas, doing well in infrastructure construction. So if you have a customer who is about your top five in other chosen areas , and he is investing something in an area, it is ok. Fine, let him come so that it does not look as if we have forgotten him, having benefited from him in other side. And that is by way of guarantee.That is why in all those power assets, we escaped it. For us, our strategy is simple: Where everybody is going, we don’t go; where people are not going, that is where we go.That is why we are not caught in that power assets web. We are not blaming those who are caught, but it is the question of doing your homework well. When it is properly legislated, we will come in. It is an important sector for this economy. Don’t forget, loan is shareholders’ money. The write-down we took was what took us to negative.That was why we went to raise capital.
On capital raising, we embarked on desired capital raising exercise. It was inevitable after such write-downs to N33billion loss. There is no way you could tell anybody that your capital is inadequate. Again, I did say, with goodwill, part of building back the franchise is to ensure that you gain confidence in the Nigerian public and the existing shareholders. There were two options: do we go by way of rights or public offer? Offer by rights would be shorter since we have existing shareholders across the country. And successfully, we got N40 billion; N20billion (from private) placement and N20billion (from) rights. We got over-subscription of N950million, which we have to return. Because it is rights and not public offer, we will have to go through processes to list it again. And by 2015, our capital will be within regulatory indices. After that write-down, we had a deficit in capital honestly speaking. But today we are no more in negative, which is the most important thing. We are clearly above board and we will be in surplus. Our rights will raise for us a balance sheet fabric to protect the institution. We inherited very good technology and we are not going to spend a dime (on technology again). It (the money raised) will remain there as a killer to support the balance sheet. For us, it is a balance sheet savings. We will go for more in 2015 by way of Tier two. We will come for something that will protect the institution further. We will work harder to get retained earnings. As part of our plan, this year, we are not paying dividend. Conservatively, our profit will go into retained earnings to improve our capital.
Oil & gas
In the oil market space, again we did sit down and took a cursory look at the downstream business that was booming at the time. It was a big boom backed by subsidy. And wherever you hear ‘subsidy’, it is not a substitution. Any prudent finance guy would wonder how subsidy is forming a major source of loan repayment. There is nowhere in the world where you are looking at subsidy instead of cash flow as a means of loan repayment. You even begin to look at the people: young school leavers, they were all carrying DN notes; they were all at the PPPRA (Petroleum Products Pricing Regulatory Agency). It was everybody’s journey. You also have to know, there are three Cs in credit. It is character, character, character. There is nothing else. You evaluate the human beings before the money. With all due respect, subsidy-related deals have never been our attraction as an institution. We are not in any; we never went into any of those deals, again, as a result of our credit discipline. There is an adage that says when a snake bites you, next time you see a wall gecko, you will reach for a gun. We were terribly bitten over the years. So we will never do well for shareholders if we begin to run a rat race on the loan side. In banking industry, there is nowhere in the world where your strength is competing on loan book. The truth is that we couldn’t dimension the risk as an institution. So we became shy because of poor predictability around the downstream magic. We have few in our book if you see their business, they have come of age: from one filling station to five, to 10. By the time they went into downstream. Even when it was truly independent, they were with us. They are still there and we support them. All the margin magicians you know of, we never knew them, we couldn’t dimension whom they were. We asked questions what were you doing before? Nothing! All they said was that I knew somebody in NNPC; I knew somebody in DPR; I knew somebody in PPPRA! Everybody knows somebody. Is that why you will give billions of Naira to somebody because I know somebody; I know somebody. Will the man be there for life? So we couldnt go into I know somebody credit.(DAILY SUN)