‘Investing in FBN Holdings is like a fixed income security with an equity upside’

Oyewale Ariyibi is the head of finance, FBN Holdings (FBNH), Nigeria’s largest bank by assets. He spoke with a select group of financial journalists, including BusinessDay’s PATRICK ATUANYA, in this wide-ranging interview about market perception of FBNH stock, potential impact of oil price slide on the bank, and impact of regulatory actions on FBNH profitability in 2015, among others. Excerpts:

First Bank is the largest bank in Nigeria today; but considering the market capitalisation figures, do you think, First Bank is still the leading Nigerian bank
First Bank of Nigeria Limited today is the largest subsidiary of FBN Holdings. Recall that in 2012, the FBN Group re-structured its businesses to adopt the financial holding company structure. So, the quoted company today which listed on the Nigerian Stock Exchange is FBN Holdings.
The group’s financial results as of Q3 September 2014, showed total assets of 4.19trillion, deposit liabilities of 2.91 trillion, net loans and advances to customers of 2.03 trillion. With this, FBN Holdings. is the largest financial institution in Nigeria and the 13th largest in the whole of Africa by total assets. Considering the size of this institution, number of branches, number of customer accounts, and the employees, FBN Holdings is still the largest financial institution in Nigeria.
Also, in terms of our contribution to economic development; you will observe that the bank supports the highest number of productive sectors in terms of loans and advances.

How do you view the current challenges with capital adequacy ratio
The regulatory authority in the Nigeria banking industry is the Central Bank of Nigeria. The CBN has come up with operational guidelines and categorisation for banks in Nigeria. Large commercial banks (mostly Tier 1 banks) with international operations are required to have a minimum CAR of 15 percent, while banks classified as systemically important banks (SIBs) are required to have an additional 100bps i.e. 16 percent CAR with effect from April 2015. It is also pertinent to note that the Nigerian banking industry has adopted Basle II Capital Accord with effect from October 2015. The adoption of Basle II essentially means additional Capital Charge for market and operational risks. For us at FBNH, First Bank is the subsidiary under the present CAR requirements and we are pleased with the efforts and actions put in place by the management of the bank to remain compliant both with the current regulation and the SIB requirement taking effect from April 2015.
These are very interesting times in the banking industry, crude oil prices are down, there are concerns that the oil and gas sector, which is the largest contributor to the economy, will be affected, and a number of banks are heavily exposed to the oil and gas sectors. Also, further tightening of monetary policy by the CBN, increase in CRR and MPR pose a challenge. Presently, it is difficult for banks to access discounts through CBN with analysts speculating that this trend will have adverse effects on the profitability of banks. What effects do you think these will have on the profitability of the entire banking industry as well as the profitability of FBN Holdings vis-à-vis First Bank?
I believe that one of the key objectives of the regulator is to engender financial stability in the system by ensuring that banks are adequately capitalised and well-resourced for the businesses that they undertake. From April 2013, and up till now, there have been a number of pronouncements that have impacted income generation capacity of banks. Some of these policies amongst others are increase in Cash Reserve Requirement (CRR) for both public and private sector deposits; mandatory payment of a minimum 30 percent MPR rate on savings deposits; attaching a risk weight of 125 percent to oil and gas exposure of banks with 20 percent or more of its portfolio in oil and gas; progressive reduction in Commission on Turnover (COT) from 5/mille to 3/mille in 2013, 2/mille in 2014 1/mille in 2015, and zero in 2016.
No doubt, these pronouncements have impacted earnings of banks including First Bank and ultimately the holding company. Let me illustrate the impact with just the CRR at 75 percent for public sector deposits and 20 percent for private sector deposits, First Bank, currently has about N560 billion sterilised with the central bank yielding no interest or return whatsoever. Hitherto, such funds would have been invested at an average interest rate of 12 percent per annum, thus the opportunity cost is an annual lost income of N67 billion. The bank has complied with all these regulations and re-arranged its operating structure and created more efficient internal processes to ensure quality service delivery and minimize the impact of the regulatory pronouncements on earnings and the bottom line.
Our financial results for the nine months ending September 30, 2014 showed that the group has made significant progress with a profit of N74 billion compared with N70 billion for the equivalent period of prior year.

As the largest bank in terms of assets, how do you intend to drive down cost and increase bottomline and profit in 2015, in view of changing regulatory headwindsand 

We appreciate the strength in financial size and the size of the institution has been a major asset to us. Presently we have about 800 branches and service points across the enterprise, and there are attendant operational costs associated with this size. For example, for each branch, you need to have a transformer and a generator with the attendant costs of maintenance. With the benefit of experience, the bank can safely estimate how much it will cost per annum to operate different types of branches and quick service points.
Hence, a template can be developed and deployed as benchmark across different branches and quick service points.
In addition, with current advances in technology and the deployment of online banking, mobile banking, over 2,200 ATMs and other platforms, the customers can transact their businesses from the comfort of their homes and offices without necessarily going to the physical bank locations. With this, we can begin to record savings in this area going forward. The group’s target is that by the end of 2016 which is the end of the current three year strategic planning cycle, we would have shaved off about 500bps in cost-income ratio compared with year 2013. This is a stress target and all hands are on deck towards achieving this.

FBNH is still interested in acquisition, and recently acquired Kakawa Discount House Limited. Have you identified institutions across Africa, and what is your acquisition appetite for institutions in Nigeria
The acquisitions that you have seen are in line with the group’s strategic plan for growth and earnings diversification. If I can take you back a little bit, you will recall that one of the key reasons for adopting the financial holding company structure is to extract synergies and optimise cross selling opportunities across our subsidiaries, hence the inherent value in the group will be harnessed with the financial holding company structure such that the holding company will focus on co-ordination and consolidation and allow each operating company i.e. subsidiary business to focus on the strategic core of its mandate.
The group is structured along four strategic businesses namely: Commercial Banking Group, Investment Banking and Asset Management (IBAM), Insurance and other Financial Services. The commercial banking is focused strictly on commercial banking and related businesses, Investment Banking and Asset management focuses on asset management, corporate finance, and Capital market operations including issuing house and security dealing, advisory services etc., while the insurance group focuses on risk underwriting.
Prior to this time, the group held 46 percent of the shares of Kakawa Discount House Limited and was an associated business. Kakawa offers a unique proposition to the group. It comes with a rich and unique blend of a fixed income origination and distribution capacity which can be integrated into our IBAM group and with this, we are not only reaching out to places we have not reached before but we are also able to deepen existing relationship, improve and increase the type of product offerings available to our customers. This makes Kakawa a perfect fit in the FBN Holdings structure. In view of this, the group decided to acquire the 54 percent shares hitherto held by non-members of FBN Group, thus FBN Holdings has become the beneficial owner of 100 percent shares of Kakawa Discount House Limited.
Previously, the commercial banking group through First Bank had completed the acquisition of ICB West Africa operations in Ghana, Gambia, Guinea, Sierra Leone and Senegal. Additionally, FBN Insurance Limited acquired Oasis Insurance Plc. thereby affording the company the opportunity to underwrite general insurance business in addition to its Life business license. FBN Holdings Plc. has not raised fresh equity in recent time, and the acquisitions were through internally generated funds. We monitor the group performance periodically and regularly with the objective of ensuring that we sweat the equity for efficiency.
With this diversified business and revenue base, we are confident that we have laid strong foundation for the future towards improving the well-being of our stakeholders. For now we do not have any immediate plans of further acquisitions, but to focus on integration and getting the benefit before the investments.

Given your size and position in the industry, do you think that there is disconnect between returns and investors valuation of FBN financial performance
First, the market is currently bearish. Secondly, Pension Fund Administrators (PFAs), which constitute large institutional investors in Nigeria, were barred from further investing in the shares of financial holding companies (HoldCos). This is because, HoldCos were categorised as new companies in line with Section 73 of the Pension Reform Act of 2004.
This section of the old law debars PFAs from investing in new companies that has not made profit or declared dividend in the last five years. Whereas, FBN Holdings (in substance over the form), is essentially a continuation of FBN.