News Column

Hafeez - Regulation Is Needed to Sustain Banking Sector Growth

May 21, 2014

The Managing Director/Chief Executive Officer, Citibank Nigeria Limited, Mr. Omar Hafeez believes that appropriate regulation is what is required to sustain growth in the banking industry. He spoke to Obinna Chima

Having seen the 2013 full year financial results of Nigerian banks, what is your opinion about the overall performance by the industry?

I think what is going to dominate the market is regulation. I think it is clear that banks need to continue to strengthen their capital. With Basel II implementation as well, it is very important that adequate capital is maintained. So, I think that is the most important part of what is going to happen as a consequence of the results we have seen.

Clearly, post-Asset Management Corporation of Nigeria's (AMCON's) action, we would expected the balance sheets to look the way they are - lots of liquidity, good capital adequacy ratio and very low non-performing loans (NPLs).

Now, the maintenance of this over the medium term requires very strong governance. In terms of governance, the central bank has been very focused in making sure that all the committees of boards are appropriate, the quality of people are appropriate and also that all the rules in terms of competence in the banking industry, how long chief executive officers and directors can stay on their job and so on.

All of that is part of strengthening governance standards and I think that combined with adequate capital, means that the current good condition of banks would be sustainable over a period of time. So, I think my initial reaction is that we are behind our issues, but going forward we would have to be sure of two things: Firstly, is that we have the right amount of capital and secondly that the strategy for each bank would have to be different.

We can't have all the banks doing the same thing. Focus should be on individual core competence and strength and how they are going to take their banks forward. Also, they need to look at where profitability is going to come from, especially with potentially larger capital base. If you look at return on capital, remember capital is getting bigger to make banks stronger; the revenue line has to grow in order to maintain that relationship.

I think it is going to be hard to maintain the kind of return on equity that traditionally that banks have, not just in Nigeria, but globally. So, that is how I see the industry. I see it as a strong industry. However, we have to ensure that the current state is maintained for as long as possible. Of course, there is increased regulation and this impacts different banks in different ways. You would have seen the action around the cash reserve requirement (CRR), especially on public sector funds. So, models need to be adjusted because you can't just have the same model and have it run forever.

Every change in regulation means you have to be smart and nimble and change your model in order to continue to make money. So, if you were basing your model on public sector deposit, you can't do that anymore, so you just have to alter it. So, good position, but it would be interesting to see how we move on, given the set of environmental issues we have.

What would be the effect of the implementation of the Basel accords by banks globally on international trade?

If you look at the Basel accords, the whole objective standards are to make banks safer. In the olden days, we used to keep capital aside for credit risk. Now, we are required to keep capital aside for several risks such as market risk, operational risk and you know operational risk includes the risk of fraud, losses in transactions and others.

So, I think what would happen is two things: One, in order to maintain appropriate capital; you only have two numbers to look at. You either increase your capital or you reduce your risk assets. So in an environment where capital is not easy to get, in order to maintain your ratio, you have to drop your risk asset side.

When you start dropping your risk, then you will see a diversion to lending, booking assets include trade. Trade is also an asset. So, while it is an interesting dynamic as it is going to make banks stronger, does it have the potential of impacting credit expansion? Yes, it can. But let's wait and see what happens.

I think our banks are appropriately capitalised. Remember that post the crisis, people shied away from risk assets. So, we are already looking at a market where loans to deposits are generally low. Also, there is a lot of liquidity and a lot of the assets are in liquid assets. There is a lot of liquidity in the system, there are strong balance sheets.

So, if we try and understand the whole environment around the Basel accords, technically it would have an impact on risk assets, especially if capital cannot be increased at the right speed. Of course, no industry can operate without people. So, the quality of the people at the central bank has been very focused in ensuring that the competency framework is followed.

What do you suggest banks should do to be dominant in the retail segment of the market?

I think it is about liabilities and generating deposits for the simple purpose of the balance sheet. What are the sources of liabilities? You can get deposits from large corporates, government and individuals. I think the whole public sector deposit space has been impacted.

Banks like Citibank have always focused on private sector deposits, so we haven't really felt any impact and we have well established relationship that provides us liquidity. I think that each bank as I said earlier needs to have specific strategy from the asset-liability perspective.

Repeating what everybody else is doing won't work as it always increase cost as you go wider and wider to attract customers. But I think having said that, it is interesting to note that the number of unbanked people in our market is quite large.

When you have financial inclusion targets, especially around the agency banking model, that gives you an avenue to reach out to people traditionally that were not really being banked.

A strategy that focuses on widening the net as opposed to playing in the same narrow net and trying to beat each other by offering five per cent more or one per cent more would not be proper. I think a lot of Nigerian banks have the footprint because they have several branches.

Also because of the agency banking rule of the central bank, you can even go wider to attract savers. So, again, playing to your strength is the real answer, rather than doing what every one else is doing.

I think the development of the assets side of the balance sheet from a consumer perspective, which is credit cards, car loans, which have started but at a very early stage, would really bring about a viable retail banking business. Today, it is all about getting deposits.

But really retail banking should be about the asset class. It should be about buying a house, cars, without having cash in your pocket. You should be able to leverage banks' products. So that really is the progress that needs to happen in that business to make it viable. I think that we are making progress because you have the credit bureaus that have started, we have the national identity cards, the biometrics and all these are stepping stones towards the success of retail business.

A new central bank governor would resume next month. What are your expectations from him?

Let me say that Nigeria is more than ever connected to the world than what it was before. So no action can be taken in isolation of everybody else. I think it is important that Nigeria should be looked at as a place where there is consistency of policy and I think if that can be maintained, it would be good for the market.

Traditionally, the central bank has maintained a policy of price stability and that has benefited investors tremendously because they feel safe when they come into Nigeria. I think maintaining consistency is probably the most important thing and I think immediately when the suspended governor left, the message that came out from the central bank was exactly they would continue the policies.

What is your assessment of the cashless policy?

I think that the policy has been correctly directed, which is to make sure that monies flow through banking channels as opposed to cash. As you know, cash transactions have so many other issues attached to it, especially around money laundering and compliance.

Has it been effective? I think it has been effective mostly. There are certain industries that continue to have issues because the nature of their businesses is cash intensive. For example, the retail shops, they are finding it hard than most other businesses. So, I think it is effective. It is getting wider now and I don't think there is going to be any reversal on that because Nigeria has been given a lot of credit because of the policy. So as infrastructure develops, it would be easier. The whole objective is to bank people.

What are your expectations from the industry this year?

Each bank needs to have its own strategy. So, some banks have corporate focused strategy, some have investment banking strategy, some retail strategy. Each bank will decide which space to play. I think that the issue is that the larger banks would dominate the market and therefore the room left will get tighter. I see that getting tighter and tighter.

So I think it is very important that you know where you are because when the top tier is overbanked, the tendency is going down market. When you start going down market to names that are not credit worthy, the problem is that you could have an increase in NPLs. So, as you get to the lower end of the market, from a quality stand point, the risks go up.

The top tier-banks would get overbank and they would dominate because of scale and from a bank point, they have the scale, the size, the branch network, capital and liquidity and so I expect that just by a share number of clients, they would be in a position to dominate the market.

What is your take on the increased capital raising we have seen in the industry in recent times?

I think that is an important development. It is driven by two things: the search for long-term dollars because both in the oil and gas and power industry, borrowers require long-term money. Traditionally banks have short-term deposits. So, if they want to lend long-term, if they use their current stocks of dollar, then it is a mismatch because that is short-term dollars and long-term loans.

So, they try to lengthen the amount of liquidity they have. So that is one reason. The second reason is capital. They need tier-2 capital in order to support their balance sheet. So, it is a good idea. Capital markets are the deepest source of liquidity in the world.

The other advantage of going to the capital market is that you set a benchmark for yourself both from the stand point of your rating and also from the stand point of globally allowing people to recognise who you are and to rate you on corporate governance and all that. Remember, you can't go to the international capital market without meeting very high standards of governance.

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Source: AllAfrica

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