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Ladi Balogun, CEO, First City Monument Financial institution

Ladi Balogun, CEO of First City Monument Bank, talks about banking in Nigeria, competition with overseas banks, and the forex enterprise.

semi-tubular reactorBanking in Nigeria
Emmanuel Daniel (ED): How is banking in Nigeria like, and could you please provides us some background on your financial institution and the place it stands within the hierarchy of the banking system in Nigeria.
Ladi Balogun (LB): The Nigerian banking industry could be very dynamic. We at present have 25 business banks operating in Nigeria, an industry measurement of about 20 trillion Naira ($134 billion), which would be at an trade rate of 160 to 1. First Metropolis Monument Financial institution (FCMB) have about 4.7% market share, near 5%, and are the eighth largest financial institution in Nigeria. We began as an investment financial institution in 1983, identified then as a merchant financial institution centered on corporate finance, treasury activities and trade finance, wholesale funding.
My father founded the financial institution, he’s now retired – he was an ex-investment banker who helped the Nigerian government’s preeminent growth bank set up a joint venture investment bank with varied international companions,and thereafter set up his own inventory broking enterprise Metropolis Securities Limited (CSL).
CSL was arrange in 1977 and dealt with many of the listings of multinationals onto the Nigerian stock change once they began listing here between 1978 and 1982. It was from the success of that listings and brokerage business that we then arrange the service provider bank. Service provider banking then was an easier enterprise to get into since you didn’t want as a lot capital and was rather more carefully related to the securities enterprise that we had been doing. CSL continues to be in existence as we speak in Nigeria and is the most important domestic inventory broker within the country and a subsidiary of our holding firm FCMB Group.
We ran with the service provider banking mannequin from 1983 until 2001 after which we modified into what we name a common financial institution in 2001. We ran as a universal financial institution from 2001 until 2012 once we created a bunch structure where we’ve got a holding company, which is FCMB group PLC at the highest, which is listed in Nigeria. Then FCMB the financial institution, which is a industrial and retail financial institution, a subsidiary of the group, plus we now have CSL, which is a inventory broking business, another subsidiary.
ED: So the evolution of your family’s business mirrored the evolution of financial services in Nigeria.
LB: Completely.
ED: From the times of the securities trade and getting the capital market up and operating, Nigeria today is far more broad spectrum monetary providers infrastructures in place, proper
LB: Sure.
ED: In terms of banking, how has that evolved I assume transferring from common banking to a group structure is something that you wanted to do to rationalize what you had but you also had plenty of mergers so as to develop, right So there was an inorganic portion of development. When did that begin
LB: That began in 2005. It came about as a result of in 2004, we had a very activist regulator in Nigeria, at all times attempting to rework the trade structure for the better of the financial system. In 2004, the then Central Financial institution Governor led to a new coverage, which required every bank, whether or not they be service provider bank or business bank, to have a minimum capital base of what was then 25 billion Naira ($155 million). We had been then sitting on a capital base of about two billion Naira ($12.Four million) so clearly, there was a wide gap between where we were and what was required.
So we did a personal placement amongst most of the present shareholders adopted by a public provide. We had been in a position to get ourselves about 70% of the way in which required to satisfy minimum capital requirement by doing a non-public placement followed a number of months later by an initial public offer. To cowl the rest of the hole, we have been required to make some acquisitions. Now, fortuitously, these acquisitions additionally enabled us to improve our distribution for what was then a industrial financial institution.
We were not into retail on the time, and focused largely on company and larger SMEs so we acquired four pretty small banks to give us regional coverage in each of the important thing regions. That introduced in a further 5 billion Naira ($62 million) or so of capital.
ED: What was the dynamics of M&A at the moment in Nigeria Who was giving in and who was rising Who were the winners and who were the losers
LB: To begin with, the organizations that had a clear imaginative and prescient the place they needed to get to were those who select whom to acquire it, so it wasn’t necessarily those that had the most important capital base. I feel additionally, those that had some kind of corporate finance or investment banking understanding, so they knew how to boost money, had been also at a bonus. These with the corporate finance angle understood the dynamics of M&A and, due to this fact, knew who to target, who to go into negotiations with because at the time there were 89 banks in Nigeria, and quite a lot of negotiations broke down.
We intentionally selected establishments that didn’t see themselves as being impartial at the top of the day, and we presented ourselves as being a benign acquirer that was prepared to offer each employee a good likelihood. That really helped a number of organizations and often, given the dynamics with M&A in Nigeria, management is as necessary because the shareholder.
If the individuals within the organization feel that they’re going to get a nasty deal, typically occasions, they’d be capable to sabotage the deal going forward, which is sort of completely different in the west the place you’d find that sometimes shareholders just about dictate what happens.
Unions should not very robust. Any kind of restructuring or rationalization that we needed to do was carried out, and it was finished in a fair method. The regulator also ensured that employees have been treated pretty, however that led to a significant rationalization in the trade only within the brief term because thereafter, with all of the banks having way more capital than they needed, there was huge enlargement of the banking industry, significant roll out of branches by most banks. With that degree of capital, you needed to enter retail. tianjin ruiling petroleum equipment co op We concluded that consolidation exercise in 2005.
We had just 25 branches. If you quick ahead to 2013, we had moved to about 270 branches.
ED: What have been the most important challenges in the method Did you simply take on every employee that came with it, or was there rationalization What number of employees do you’ve gotten now
LB: As we speak, we now have 3,000 full time workers, and about another 2,000 gross sales agents who help in buying accounts and also distributing personal loans. I was very a lot involved at the time we had been doing the capital elevating and the acquisitions. I used to be then head of technique and enterprise development. I was additionally the one who had type of championed the idea of going more into the retail business, even before the consolidation thing came alongside. It was new to us at the time.
The first set of acquisitions that we did, the first 4 banks that we acquired, we have been fortunate that they have been small. In three of the four banks we had only a few people points. One of the banks, we had vital folks points because it was a state-owned bank. There was really no performance culture there in any respect so that they could not understand why we would have to let individuals go. The method that we took was very a lot performance driven. We have been in growth mode. We moved many of the employees into sales.
These that could perform nicely in gross sales were retained. Those that weren’t capable of carry out were let go. However in most situations we also set up entrepreneurship applications where we gave them seed cash to have the ability to set up small businesses if they chose or, alternatively, a reasonable severance package deal.
ED: How many people took on the severance bundle
LB: To begin with, it was voluntary as a result of we made it quite generous, and we factored that into the price of the acquisitions. Most people took it voluntarily because they didn’t see a lot career upside. I might say probably about forty% of the acquired banks’ employees ended up taking up these packages. At that time, every of the banks had an average of about 200 to 250 staff.
If you’re taking a look at give or take 1,000 employees, maybe about four hundred individuals.
ED: What were you buying these banks at, value to e-book
LB: We paid a slight premium to e-book, however not more than about 20%. About 1.2 occasions book. The explanation we had to pay a premium to ebook at that time was that if we hadn’t have bought those establishments, we’d have needed to go and elevate extra equity, which would have created most likely rather more aggressive dilution of the present shareholders to have ample equity to satisfy the minimum capital requirement.
ED: Was that a golden interval for acquisitions that doesn’t exist at this time
LB: Golden interval in the sense that there have been many transactions taking place. But when it comes to the dimensions of the transactions, in addition to the quality of the transactions, I’d say that there was nonetheless quite a lot of room for enchancment. We saw that as a result of there was a second spherical of consolidation that started round 2010 in the wake of the financial disaster.
ED: That was when the regulator closed quite a few banks.
LB: Exactly. They intervened. They really didn’t close any bank, however they intervened and insisted that the administration and the boards resign. They arrange an asset management firm that, in effect, acquired the toxic belongings of these banks, mainly recapitalizing the banks or promoting the ones that couldn’t be recapitalized.
ED: How would you describe Nigeria’s banking trade as we speak by way of margins, by way of the deposit enterprise, the competitors in deposit business, and the creation of credit score, the place is it going, and what section is it in
LB: It’s very aggressive, but the competitors tends to be focused more on the wholesale facet. There is still fairly a little bit of alternative on the retail facet. You’ve gotten penetration of just about 20 million financial institution accounts in a population of 170 million folks. With very little effort, you’ll be able to grow your customer base pretty rapidly within the retail house. The challenge you’ve got is profitability of those accounts because, clearly, poverty continues to be a big difficulty in a country like Nigeria. A bank like us acquires about 50,000 clients each month. So give or take that’s close to about 600,000 accounts in a year. Under regular conditions the margins are pretty healthy. Internet curiosity margins on common within the business are between six to seven p.c. Nevertheless, it has come below a bit bit of pressure because the financial authorities at the moment have a really tight coverage the place they’re taking numerous liquidity out of the system however asking banks to place a big chunk of their deposits into non-curiosity bearing central financial institution reserves. At present, you’re seeing about 27% of bank deposits in non-curiosity bearing reserves, which puts some pressure on the margins.
Last 12 months, I might say trade average margins were about 7.5%, but could come all the way down to about 5.5% this year. Still, it’s pretty profitable. I think an business common return on fairness is about 15%. Industry average price to income ratio is within the very early 60’s – not unbelievable.

Competitors with overseas banks
ED: Do properly capitalized foreign banks have a better consequence if they came in with expertise and –
LB: No, I think the overseas banks was extra successful on the wholesale aspect because most multinationals would naturally deal with them. But foreign banks all through Africa, with the exception of maybe Normal Bank, have discovered it very, difficult to construct national franchises, which ultimately is the place you have to be if you need to assemble local deposits. So most foreign banks usually would have much of their borrowings in international foreign money to corporations that had overseas foreign money revenues. So we’re export oriented, sometimes, the oil trade in the case of Nigeria.
In terms of dimension, they’re a lot smaller. The technology that you just talk about provides you much better advantage within the retail enterprise than in the company business. Because none of the foreign banks are that robust in the retail business, it hasn’t conferred any actual benefit. Along with that, the dynamics of the Nigerian banking scene, which might be comparable in some respects to Kenya, Ghana, and a number of the extra developed African markets, differ very a lot from what you discover in the West.
There’s a much larger push around cell banking and agency banking where you’ve got third occasion brokers serving to you perform very primary transactions, money transfer, cash payments in and money withdrawals, significantly in rural areas or areas the place it wouldn’t be profitable to set up a branch, and similarly with mobile banking. At this time, you just about have equal access to the distributors of these technologies in Nigeria and other African international locations as you do in the West.
ED: What about in commerce finance, transaction banking
LB: No.
ED: How are the small businesses in Nigeria rising, given the fact that you simply had a strong IPO enterprise This onboarding of small enterprise to turn into center market and company, how is that evolving in Nigeria
LB: It’s only a really small percentage of SME’s that may migrate to grow to be corporates. So while that’s the speculation that you’d help these firms develop to that state, we discovered that you really must create a very distinct SME business. Transaction banking is equally related for us in the company space as well as in the SME house, although we find the wants are very completely different in some respects. Corporates prefer to do all the things online. If they’re multinational they have an inclination to want techniques that may by some means integrate with their global treasuries, subsequently, it’s very much about online corporate banking.
With the SME’s, the most important challenge they’ve is money collection, so you’ve obtained to present them options to be able to collect their money and financial institution their money. A whole lot of the SME’s are quite completely satisfied using cellular banking quite than web banking. So we provide business accounts that, regardless that they’re business accounts, key offices can have cellular entry to them. The straightforward purpose is that almost all SME’s in a market like Nigeria would be owner managed companies. Folks could, for example, must have access to their accounts when they’re in China buying supplies.
Due to this fact, having a mobile banking platform – slightly than an web banking one that they’d should open up their laptop computer for – they find that rather more handy. Commerce finance is definitely very large in Nigeria. Currently, we’re about the fifth largest financial institution by way of trade finance in the market. That largely comes from the company sector. In fairness, I might say that probably about 40% of our trade finance enterprise is in oil, and the remaining is in largely imports of consumer items and industrial uncooked materials.

The foreign trade business
ED: So how does a bank like yours acquire foreign trade Is that a powerful part of your small business, and how do you play that
LB: It’s a very important a part of our business. We rely very much on flow enterprise of overseas change somewhat than position taking in foreign trade. The explanation that we don’t take larger positions in international alternate is in Nigeria, the utmost open place limit that you could carry is one percent of your shareholders’ funds. So that you can’t take big positions. You’ve bought to square your books at the top of on daily basis so you need to be sturdy on the export aspect. Now, the important thing sources of international alternate in Nigeria are inward remittances and crude oil exports.
On the company side, we are a very sturdy financier of many of the oil producers within the country. Not like quite a few different African countries, there’s an rising number of indigenous oil producing companies which were shopping for belongings in marginal fields from the standard international oil corporations.
ED: So it’s becoming more numerous and in itself a creator of small businesses.
LB: Sure, it’s. The indigenous gamers could be very a lot corporate at this stage. They’ve diversified shareholding because if you happen to need $500 million or one billion to buy a producing asset from a Shell or a Chevron, you just about should be a company to be able to entry that degree of capital. Gradually, you’re starting to see oil service firms come through as nicely which are actually in the SME house, but they haven’t matured so much. On the FX facet, if you may seize a great chunk of remittances in addition to export dollars from oil corporations that you may match with, you’d are inclined to have fairly wholesome FX flows.
You may at all times buy from the Central Financial institution – they regularly promote to any financial institution that wants it, or any authorized vendor.
ED: What’s the central bank’s bias in phrases of business banks Did you would like that you just had an excellent trading book Are you thinking of building an active treasury side of your small business, and is the central financial institution supportive of shifting in that direction
LB: Because we have been a merchant bank, we were very active within the treasury space. The truth is, in our service provider banking days, FX trading was where we made most of our earnings because the lending enterprise, the margins had been razor skinny along with your excessive value of funds that are related to wholesale banks typically. The regulator, I would say, is not very supportive of markets business. They respect the markets. They see them as a way of creating efficiency. However they don’t encourage extreme position taking.
Due to this fact sometimes, most banks, while they’d make revenue from overseas alternate buying and selling and so on, in case you take a look at – in our case, I think about forty% of our net revenues are noninterest net revenues. Of that forty%, I’d say another 60% could be charges and commissions. So 40% would really be trading income. In impact, as of right now, we’re most likely making around 15% of our web revenues in buying and selling earnings.
ED: What’s the strain being placed on you by regulator for capital, and what do you have to do on your capital entrance to make sure that you continue to scale Is there sort of a diversification to boost capital by means of a bond problem
LB: We’re very well capitalized. We have a Tier-1 capital adequacy ratio of 19%. We have no Tier 2 capital for the second as a result of we don’t want it as of now, so we’re not below any stress on the capital side. The regulators themselves are very targeted on danger primarily based supervision and need to ensure that the banks are adequately capitalized, with common stress testing of balances. It’s necessary, especially in an business the place you will note non performing loan ratios typically hover around 5 – 6 %. It’s vital that the banks do stay pretty effectively capitalized.
For us, the main target right now could be on leveraging the balances some more because we do quite a lot of foreign currency lending.
ED: What’s your loan to deposit ratio
LB: Our mortgage to deposit ratio is within the early 60’s right now and we’re going to leverage that further. However increasingly we’re looking at more of our company lending tending to be foreign forex these days because there’s an enormous sort of export push. So we’re lively in the syndicated loan market where we increase cash from international banks but lend to Nigeria. It tends to be cheaper than the euro bond market. For us that could be a final resort to entry euro bonds. We do have worldwide ratings – we’re one notch down from the sovereign.
We are going to proceed to concentrate on syndicated loan markets earlier than as a result of it tends to be significantly inexpensive than the euro bond market, except you time it proper. There are particular occasions in the yr the place the euro bond market may be cheaper than it is now.
ED: Is this the point at which you make yourself engaging in order that when it comes to capital elevating, your story can be out there –
LB: You imply equity capital elevating
ED: Sure.
LB: We’re pretty well-known to lots of the worldwide investors who focus in Africa. Usually, about 50% of our shareholder base is at present worldwide portfolio investors. Our brokerage business is likely one of the main conduits of overseas portfolio investment into Nigeria. They also know us via our brokerage business and, every now and then, make inquiries in regards to the stock efficiency of the bank and the underlying fundamentals.
You are proper that it’s necessary we proceed to work on our profile internationally because the Nigerian banking industry will continue to develop at not less than about 20% or 25% year-on-year, which is what we’ve got been seeing. Whole property, not threat assets actually fueled extra by legal responsibility progress. As the business scales up, and as the economy continues to develop now being the most important economy in Africa, certainly, I see the banks continuing to need to grow their assets naturally. Eventually, we’ll need more capital.
ED: What is the composition of your lending assets
LB: We have outlined retail as purely lending tianjin ruiling petroleum equipment co op to individuals. Within the short timeframe that we’ve been in retail banking our entry technique was really to deal with the asset side and purchase customers that means. So, about 50% to 60% of our customer acquisitions are due to an asset proposition. That’s enabled us to turn into very quickly the most important client lender in Nigeria. We at present distribute about 25,000 personal loans every month, with client lending representing about 20% of our entire mortgage book. SME lending represents about another 20%. The balance is corporate and authorities.
Relative to the rest of the Nigerian banking industry, we in all probability have a median between 5 to 10 percent of their e-book being consumed. We’re a very vital player.
I do anticipate though, just the final point on that that the rate of development that we’re seeing on the private mortgage ebook is about 35% to 40% 12 months-on-12 months, so we anticipate fairly rapidly we’ll probably get to about 40% of our mortgage e book being private lending.
ED: On condition that 2010 was when plenty of Nigerian banks obtained into trouble due to company lending more than anything else, how did you keep out of that and what’s your NPL ratio now
LB: We actually weren’t immune to the issues, but the problems of lending within the Nigerian banking business actually came from three sectors. There was a variety of margin lending that was happening as a result of the inventory market had experienced previous to the increase in margin lending about four or five years of 30% or forty% yr-on-12 months growth within the index. Everyone simply felt the one manner was up for the stock market. So each bank ended up going heavily into margin lending. Once more, as a result of we had an associate company who was a leading inventory broker, we had various evaluation on all of the stocks in the market.
We had been extremely disciplined on margin lending because we understood it by way of our brokerage business, and had strict limits in place. The other set to the place you saw a little bit of a excessive stage of NPL’s at the time of the disaster was real property lending, principally to developers. Once more, we had been disciplined and weren’t too arduous hit by that. The third space was oil importers, not exporters, many of whom had been getting commerce finance to usher in petroleum merchandise, refined petroleum merchandise, and not hedging those.
So when the markets crashed, oil costs crashed, they immediately discovered that the worth of their inventory was means above where the market was. There was also devaluation within the currency, and a variety of them had been borrowing in foreign forex on the time for his or her commerce finance, despite the fact that it was short time period borrowing. We had been quite arduous hit on the oil trading side however actually nothing that threatened our capital base in any manner. It affected our earnings for a few years but not the capital in any approach.
Nigeria actually took the bull by the horns. We set up an asset administration company that purchased the toxic belongings off the books of the banks.

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