Hafeez: Eurobond Market Now Lucrative for Nigerian Banks

Omar Hafeez

The Managing Director/Chief Executive Officer, Citibank Nigeria Limited, Mr. Omar Hafeez, has revealed that the growing demand for long-term funds by a lot of corporate organisations in the country is a major factor that had led to the rising appetite for the issuance of Eurobonds by Nigerian banks. He also told Obinna Chima and Nume Horsfall that there are several opportunities for banks to lend long-term funds in the Nigerian economy. Excerpts:

You sit at the top of a subsidiary of an international bank; from your vantage position, can you say the global financial crisis has been resolved?

I think that we are still in the realm of recovery phase. I don’t think one can say everything is behind us. I would say that the United States is further up the chart in terms of recovery and therefore the statements on the quantitative easing that came out recently. I think that the US is further up the curve. I think Europe is still catching up. So I wouldn’t say it is behind us; I would say we are still in the recovery phase.

For, Nigeria, I think the issue was tackled quickly through the creation of the Asset Management Corporation of Nigeria (AMCON) and the actions of the Central Bank of Nigeria (CBN), which took the problems out of the financial sector and has therefore primed the financial sector to facilitate the growth of the economy.

So, I think our issues were boxed in much more neatly than others and if you look at the financial statements of the banking sector, now would have seen the amount of recovery that had taken place and profitability. But more importantly you would see the low non-performing loans which are pretty below five per cent across the industry and you would see profitability that is coming up and good capital adequacy levels. So I think I would say that we are in a much better position.

 

Earlier, you talked about the central bank and AMCON’s efforts in resolving the banking crisis. But since the crisis was resolved, there has been the insinuation that the Nigerian banking industry is over-regulated, compared to its peers on the continent. Do you support such a view?

 

I don’t know about over-regulated, would you say that the US is being over regulated? Would you say that Europe is over-regulated? I think when you come out of a crisis; it is a normal reaction that you start seeing a bit more regulations. So I would actually compliment the authorities on appropriateness of regulation. Now there is a different regulation in Business as Usual (BaU) times and there is a different regulation in terms of crisis and this was one of the worse crises globally.

So I would not expect everybody to sit back and do nothing about it. I think that the actions were fairly justified. Now would this stay forever? We would have to watch and see. Now if you look at the nature of the regulation that is happening, it is all around, making banks safer and also it is around making sure that what banks can do with depositors money is limited to safer activities; meaning that you can’t do some of the stuffs that got us into trouble within a commercial bank, you therefore need different licence – a merchant banking licence.

The universal banking model is no longer there. I would focus on what is trying to be achieved and I don’t think you can do it without regulation and also there is a learning curve so as you go through the learning curve you come out much stronger, better regulated and better governed then maybe some of the regulations, which are not totally essential, may fall on the way. But I think the core change that has happened is that banks need to be safer and stronger and what they can do with depositors’ money had to be limited in order not to compromise that money.

So I think that is where regulations are headed. Then there is the Basel 111, Basel 11. The more capital that are required for the activities you do as a bank would have two consequences on the bank. Firstly, to make banks safer and the return on equities would go down because there is no way under the new world where equity levels would be this high that you would be able to have the same returns on equity that you used to do when equity levels were low and you could do so many things to generate revenues. So I think that balance is going to change as we go forward and that is the new reality shareholders need to know as well; because return on equities may be different as we go forward.

 

Your bank was one of the financial advisers to AMCON on what to do with the three banks (Enterprise Bank, Keystone Bank and Mainstreet Bank) that are wholly owned by the corporation. What were the findings and how did you arrive at the decision to sell the three banks?

Such advice is limited to the two parties and one is not expected to disclose advice given to a client, so that is confidential.

 

As a small bank in Nigeria, don’t you think acquiring any of the three banks will help scale up your operations?

 

We don’t have ambitions and size is not what we are after. We are after quality and we are already a bank that is focused on certain areas and a niche in the market and we want to focus on those areas.

What are those areas?

 

Corporate investment banking is our primary strength. I think we are the leading bank in terms of raising capital for Nigeria or the corporate world, whether it is the government itself, large banks or a large client. So all the finance that is being used for the infrastructure development in the country, you would find that Citi is very much there in either arranging it or lending it. So that is our core strength. We want to keep adding value in terms of innovation.

If you look at electronic banking which is now the norm, you would recall that Citi was a pioneer when it was launched through our product called Citi Direct. So that would continue to be our core focus. That doesn’t mean we don’t want to look at new areas in the country and I think that there are several areas that are relevant especially the demographic realities and the fact that there are so many young people, over 180 million. We need to keep looking at the opportunity space which is around retail and when the market is conducive for that opportunity, but those would be organic.

So it is likely that we would create our own space as opposed to buying. But having said that, as you know we were advisers to AMCON in the first leg which was the valuation and exit options for the three banks and now AMCON is in the market to hire advisers for the sale side process. They are yet to announce who it would be and we are waiting to hear what happens. So we need to play to our strengths and if growth is to be considered, we would prefer to go the organic route.

 

What are the strengths of Citibank Nigeria?
We are a very efficient bank and very focused on making sure that our efficiency ratio is the best in the market and I am happy to say that they are. Also that our return on equity is very high and we make sure our shareholders are happy. As you know we have local shareholders as well as international shareholders. We are focused on several segments in the market and I think when I look at it from a client point of view, we have one part of the bank that is focused purely on the multinationals.

 

So all of the global players that operate in Nigeria, it is logical for a bank as ourselves to be banking them in the country. I think it is a model we follow globally as you know Citi is in over 100 countries. So it is our desire to make sure that we provide the same quality of service to the multinationals wherever they go in the world. So that is an area of expertise that we focus on. I think other than that we are very focused on the oil and gas industry for obvious reasons and we not only work with multinationals, we also work with several indigenous players and I think the way the industry is going, the indigenous players would become more and more relevant.

I think it is important to state that corporate governance would be the differentiator between those people that succeed and those that don’t. So it is very important that as access to capital, when you want access to capital globally, that you meet all the governance issues and that is why there is a lot of focus on corporate governance. So we look out for that as well and we make sure that the government standards are acceptable levels and that is core strength for indigenous players that want to go down that path.

 

So oil and gas is big and we do a lot of that. A lot of the financial institutions that are supposed to be on competition, we consider them as clients. We do a lot of capital raising as well as advisory work for the banks, we consider them as our big partners and clients. You will notice that a lot of the offshore debts that are being raised through Eurobond, and Citi is pretty much doing all of those. We took Access Bank to the market; a couple of months ago we took Fidelity bank to the market and also around the advisory side what we did for AMCON and we also were advisers to Access Bank on the acquisition of the Intercontinental Bank.

So banks are a big part of what we do and outside this arena I think when you look at the local corporates in Nigeria, whether it is manufacturing or trading businesses, when they want to finance their expansion, I think Citi is very relevant, not only in naira financing but also dollar financing. Recently, Etisalat raised $1.2billion and you would have noticed Citi was the adviser to Etisalat including FBN Capital. So that is the nature of our kind of work which is advisory. If I want to box it in, it would be the provision of value added products.

So we want to be at the innovative end of the market, we want to stay at that innovative end and while we stay there, we want to make sure we look at other options as they come and as they come up and the market is conducive we would like to be there. So that is our module, very automated and very much focused on efficiency and very much playing to our strength not going places because it is fashionable to do so, but because they are places where we can add value.

 

Talking about Eurobonds, lately we have seen a lot of Nigerian banks issuing dollar-denominated debts, what do you think that portends for the Nigerian market?

 

I think that as Nigerian corporates become larger, they want larger amounts of money. I think we see this in all developing markets. After a certain phase, you want to venture outside your boundary to go and see what else is available and largest pools of capital are in the capital markets and the global capital markets and basically tapping into all the big pension funds, all the big hedge funds money, all asset managers who have excess capital and want to place it.

Now in order to tap into that, large Nigerian firms are now finding that it would be a lucrative way to raise capital and now we have seen several of the banks go that way and I think it is very logical because when you look at Nigeria, you see several opportunities to lend long term money, whether it is upstream oil and gas or you look at the power industry privatisation that is taking place and all of these require that you lend money for five years, six years, eight years and longer tenor. If banks are to do that, they need to have sufficient long term deposits or access to that liquidity.

You don’t want to take savers money, which are savings account and short term money to lend into long term projects, which would be a massive mismatch. All banks run mismatches, but within a certain standard. So I think the need that I am seeing today in the banking sector to go raise long term deposit money through bonds is to fund some of the projects that they want to lend this money to. So I think that is one category and there would be another category is to raise money as Tier 2 capital which would be for capitalisation reasons and to enhance their capital base.

That would need to be Tier 2 capital because there are certain dynamics around Tier 2 capital. It needs to be longer tenor and it needs to be subordinated. So those are the two drivers for raising capital in the market. It is either for leverage, which is to lend on or for capital reasons. So that is the attraction for Eurobonds. Also remember that it has been a historical low interest rate environment around the world because of the quantitative easing, so it has actually been a fantastic time to raise money because of the historical lows of accessing capital.

Having said that, the market is very volatile since the news from the US so let’s see how it settles, but having said that, rates have been very low as a consequence of demand in the local market, and it has been a good time to raise money from the international market.

 

What is your forecast for the Nigerian banking industry for the second half of the year and considering that we expect to see a change at the leadership of the central bank next year, what are the qualities you will want the next governor to possess?

 

I think as the banks have come out of the crisis, they are definitely stronger, both from a capitalisation point of view and also from a standpoint of governance. So I think there has been a big strength in terms of corporate governance that has trickled down every part of the industry, which means risk management policy; compliant standards have all been strengthened. So I think it bodes well for the banking sector.

However I think that there is definitely a categorisation between the very large banks in Nigeria and the relatively small banks in Nigeria. I think banks would have to ensure they have a niche that they play. I don’t think banks would have and can be everything to everybody because the big banks would dominate as they have the brick and mortar presence which makes them very well placed to take advantage of opportunities. Each bank needs to identify what it wants to be and to play to those strengths and I think as long as they do so, that would be good for them.

The competitive landscape would change, not only because of the three banks that would be back in the market, but also others that are now looking for entries to Nigeria which goes back to my first point that you better know who you want to be and what you want to play at, otherwise you would get marginalised. If your focus is purely on the top tier it would get over banked. So you must identify your niche and play to your strength. Generally, the banks are in good position to take advantages of the opportunities that would come up.

As far as the central bank is concerned, I believe it has played a huge role in the banking sector and what it is today and I think anybody that comes at the leadership of the central bank, one would expect that the policies are so well ingrained into the policy framework of the Bank so that it becomes part of their fabric and therefore it should be sustainable. I would say that sustainability of policies is what we expect to see. One should not be focused on individuals, but the institutionalisation of the policies that have already been put in place and I think that is what one would hope to see as we go forward into 2014.

 

Source: ThisDayLive