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Banking: 2015 is a year of two halves > Ladi Balogun >April, 2015.

Ladi Balogun, Group Managing Director, First City Monument Bank, FCMB and scion of the doyen of merchant banking in Nigeria, Otunba Olasubomi Balogun, speaks with Business Eye at our CEO column. He says the FCMB Group will remain a major conduit of portfolio investment into the stock market.

lad balogun
Last year, many predicted that banks’ profits will decline, yet we saw the opposite. 2015 will be a tough year, but we can be cautiously optimistic while building buffers for negative outcomes. The successful presidential elections eliminated one of the dark clouds over the country. I am more confident now that we have the ability to navigate the troubled waters successfully as a nation. As an industry, I believe earnings will be up, compared to 2014. First quarter 2015 was tough, mainly due to the electoral jitters.

We will see things begin to pick up in subsequent quarters, especially if as anticipated, oil prices firm up. In the short term however, cost management and risk management will be essential for growth in profitability within the financial sector.  This is also where you will find most banks focusing on. In the second half of the year, as the new government settles in, I expect revenue and earnings to begin to improve.

Naira decline effects on banks’ Forex liabilities

Nigerian banks that took foreign loans and Eurobonds largely used these funds to finance companies that generate foreign currency revenue or who took foreign currency denominated loans, hence, we do not see an imminent currency risk from these activities. Foreign currency loans are critical at this time that we have pressure on our reserves, which I believe we will overcome. These Forex loans curtail naira liquidity to fight inflation and provided a good hedge for bank shareholders against the risk of devaluation on their investments. What to do is avoid a mismatch of lending dollars to those who have naira revenues.

Retail Dutch Auction System, RDAS, closure and naira stability
The closure of the RDAS was the right move by the regulators. We need to harmonize our different Forex markets into one, to avoid round tripping and to boost liquidity. Multiple markets are less liquid than a single consolidated market. Liquidity is necessary for us in the various bond indexes that attract foreign portfolio investment; it is also good for us to attract foreign investors into our equity markets.

The Central Bank did a good job in stabilizing the naira at the official market. We have seen appreciation, post-election, at the parallel market. As the uncertainty disappears and investor’s estimation of the naira’s fair value moves closer to its actual value, we will see portfolio investors flood in. This is because the fundamentals of the country remain strong despite the drop in oil prices.



Banks’ exposure to oil and gas risks

FCMB has about 20% of its loan book in oil and gas of these, 40% in the downstream marketing of refined products and remaining 60% in upstream. Downstream actually fares better when oil prices fall, a significant portion of our upstream portfolio is hedged internationally, so it is not affected by oil price shocks. The portion that is not, which account for less than 8% of our loan book is performing well as the borrowers have significant equity in their transactions. Our philosophy is to hedge against oil prices, where we cannot, we ask for significant equity cushion. Hence, we do not anticipate deterioration in our oil and gas loan portfolio.

FCMB's 2014 performance

Two fundamental factors at play; first is continued growth of our retail business. We are the prolific relations lenders in the country and have been able to sustain this with low levels of loan losses. This has given us some of the healthiest margins in the industry. The second was our dollar loan book, which accounted for 40% of total loans and rose in value as the naira devalued. In 2015, we expect retail loans and dollar lending will remain key drivers. In addition, our cards and electronic banking activities are gaining momentum and will help drive strong annuity fee income to build our current account balances. Our business is a diversified one and this is serving us well in the tough times.

FCMB loan portfolio

Yes, in 2014 we gave out over 250,000 loans. This was done within tolerable risk limits. Most of our non-performing loans came from names in the larger commercial space. Accordingly, inclusive lending has proved to be a value creator for us. In 2015, we will continue with this momentum and we will be expanding our activities in agriculture and other niches that are currently under banked, so, we expect more borrowers to benefit from FCMB’s supportive strategy.  

FCMB 25k dividend

Our 25 kobo dividend was fairly conservative as we only paid out about 30% of our profits for the year. We also have a strong capital adequacy ratio in excess of 20% at the group level. Accordingly, we have the capacity not only to pay this dividend but also support our growth in what might be perceived a riskier operating environment.

2015 Projections

2015 will be a year of two halves. The first half will be tough. We may be flat or even slightly down compared to last year. This is because of the challenges experienced in the foreign exchange markets in the first quarter and the uncertainty around the presidential elections, which have now passed. We expect as the second quarter comes to an end, that economic activities will recover and liquidity will return to the foreign exchange markets. Should this happen, the second half of the year could be very strong and thereby leading to an overall better year in 2015. This is because the fundamentals underpinned by a profitable and rapidly growing retail business remain strong irrespective of the challenging macroeconomic environment. 

Investor exit and decline in bank share values

We are seeing renewed interest in bank stocks. FCMB share value has risen by more than 30% this year as that of many banks. However, until foreign portfolio investors return on significant volume, the performance of bank stocks and, in fact that of all stocks will be a bit subdued. I believe as the macro environment becomes more stable, Nigeria will resume its position as the most compelling stock market opportunity in sub Saharan Africa. FCMB Group will remain a major conduit of portfolio investment into the stock market. We also will continue to represent one of the more differentiated and high potential investment opportunities in the financial service sector.



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