How Nigerian banks can turn around unproﬁtable corporate clients

Bank proﬁtability has been significantly hit by the deteriorating macroeconomic fortunes. As the Nigerian economy plunged into recession for the first time in two and half decades because of weak oil prices and declined production volumes, the asset quality of Nigerian banks deteriorated.

Trans Forcados pipeline, a major evacuation route for onshore oil production , has been under Force Majeure since the middle of February 2016 following an attack by aggrieved Niger Delta militants. The pipeline, which links a number of oil fields and oil mining leases (OML) in the western Niger Delta with the Forcados terminal on the coats, usually transported, on average close to 250,000 barrels each day.

Nigerian banks had lent ambitiously to indigenous Nigerian oil companies to buy OMLs offered by Shell Nigeria. Lagos-based CSL Stockbrokers Limited estimates that Nigerian banks have loaned over $2 billion various indigenous companies in the upstream oil and gas sector as at May, 2017. So when oil prices and production volumes dropped, these firms were unable to service their debts to the banks, which imperilled not just their loan books, but also their earnings.

Apart from the oil and gas sector, the banks also lent to businesses in other sectors, which in many cases are the corporate organisations. In many cases, these loans became bad, often forcing some of them to reduce their branches as they shifted focus on cost savings.

Bain Brief, a publication of Bain & Company, a leading strategy consulting firm, suggested banks should know which clients are proﬁtable today, and which clients are not. The publication recommended that the lenders should figure out how to serve the non-profitable clients in a different way or move them off the books in order not to limit their upside on proﬁtable revenue growth. It offered some suggestions for banks to manage their corporate clients to improve profitability which we explore below.

Banks should know where they make money

Bain Brief says the banks should establish a system that can systematically track the value of clients and focus on the more valuable ones as small shifts in the portfolio can generate a signiﬁcant effect on overall proﬁtability.
Often, knowing that the bank tracks proﬁtability spurs a turnaround for unprofitable accounts since the client realizes that it cannot get away with cheap loans and empty promises of ancillary business for long.

IT and cultural challenges

Getting a reliable ﬁx on client proﬁtability could be daunting. For one, bank IT systems that have been assembled through years of one-off decisions and acquisitions are usually complex. Most banks can attribute revenue or credit risk to speciﬁc clients, but few have a sophisticated system that can allocate operating costs or market risk to those clients because of the myriad business units, databases and reporting elements involved.
In addition, the organizational culture of the banks, which hitherto are used to managing through revenue alone, is often a hindrance since making a shift to emphasize proﬁtable revenue entails a major cultural change.
The banks should rebalanced their scorecards away from revenue growth alone as this often motivates relationship managers to close loans at any price, and move to proﬁtable revenue, which focuses on the full potential of the relationship.

Managing through the client life cycle

The banks should begin to categorize their clients into tiers, categorising them as highly proﬁtable, moderately proﬁtable, or not proﬁtable, using criteria such as revenue, return on risk-weighted assets, and return on equity. Having done this, Bain suggests that the banks should then focus the discipline of proﬁtability on the life cycle of every corporate client, from the on-boarding stage to the client management stage.
•On-boarding. When a bank is deciding whether to bring on a potential new client, calculating expected proﬁtability should be a routine part of the decision.
•Deal pricing. When weighing a loan or other product offer, the bank should look beyond the marginal contribution for the speciﬁc transaction to whether the deal is accretive or dilutive to the relationship.
•Account planning. Most corporate banks rely on an annual account plan to inform their budgeting and capital planning cycle. But best-practice banks also collect information on historical client revenue and the proﬁtability of the relationship along with estimates of future potential.
•Client management. Not all clients will be proﬁtable every year given the nature of ancillary deals and the cyclicality of demand. So, leading banks take a two- to four-year view.
As Bain said, it may be difficult for a bank to jolt a client to proﬁtability or to jettison the client if the bank cannot serve them proﬁtably. However, having solid data to present to the client and an explicit plan to turn things around injects rigor into a historically loose and overly personal process.