Cost income ratio of Nigerian banks too high—Yomi Adeola

•Spend too much money buying all sorts of things that are not needed

Recently, Yomi Adeola, Managing Director Sterling Bank PLC had an interactive session with journalists in his office in Lagos and spoke on a wide range of issues in the banking industry in Nigeria.
Excerpts

Is Sterling Bank coming to raise more funds from the capital market, how much are you targeting and when should we expect this to happen?

We are looking at the September/October timing for going to the market. On the issue of how much capital we need, I am not a believer in too much capital, I imagine we would go for between N50 and N75 billion in capital for the kind of bank we want to run, I do not need N250 billion in capital, I do not need N300 billion in capital. Experience has also shown that those people who have raised huge capital have been unable to deliver the return on the capital. I will not mention names but we know banks that have raised N300 billion in capital and all they made today in profit before tax is N30 billion, that’s 10 per cent return, it’s not good, it’s not exciting. So why beat the drum and deceive the whole public to come and invest and at the end of the day, the return on equity is nothing to write home about? I know another one with about N180-200 billion capital, same thing.

If Sterling Bank at N25 billion capital is able to deliver between 30 and 40 per cent return, that’s better for investors than the one that is raising N300 billion and delivering 10 per cent. So you see, there’s this bandwagon effect in Nigeria and I think it’s madness, so if Bank A has raised N200 billion, I must go for N250 billion, Bank B has raised N50 billion, let me go for N300 billion; they are not looking at ratios anymore. This is capital in absolute terms or just air capital, capital is just in the air, it’s not working for you. Of what use is that kind of capital? So, by the time I am raising N50 to N75 billion, I should be able to predict the kind of return I can give on that capital and it will not be far away from the kind of return I am giving on the capital that I have today so that doing 20-25 per cent profit on my N25 billion, by the time I get to N100 billion, let it not be less than the same 20-25 per cent, otherwise I’m not being fair to my investors and I won’t be fair to the people I have taken money from. That’s my attitude to the issue of capital; it won’t be too high, raise what you truly need and also when you have too much capital, the tendency is for you to see waste. Look at the cost income ratio of Nigerian banks today, it’s just too high - they spend too much money buying all sorts of things that are not needed, I won’t name them, you know some of the things they buy. I don’t think I want to run that kind of bank.
Going to the market can’t just be for fun, what would you do with this capital you intend to raise?

First and foremost, we would like to get our technology right or should I say, improve on our technology; that is key. We want to do consumer banking big time. We really want to reach out to the consumers, the masses, the middle income earners. The way to do consumer banking is to deploy technology appropriately so we would be spending a lot on technology. Number two is to expand our branch network. Today, we have 100 branches, the level of sophistication in Nigeria is such that you still need brick and mortar, you still need to put branches all over. You don’t need to build branches that are too elaborate but you must have the branches so we would build the branches.

Don’t forget we have a major shareholder and this happens to be the largest bank in India-, the State Bank of India (SBI), we would partner with them, identify other locations outside Nigeria where we believe between Asia and Nigeria, we would be able to derive some synergy in partnering with SBI and having pockets of locations outside Nigeria so this is also a game plan and above all, our single obligor limit will go up because this is usually the percentage of your shareholders’ fund so these are the key areas we would be focusing on. We have about six subsidiaries that are profitable, doing good business; we would capitalise some of these subsidiaries that can do more. We have the Sterling Asset Management, they need more capital and we’ll give them more capital. We have Sterling Capital, we have a few subsidiaries that require more capital. We would also set up some additional subsidiaries for specialisation and we would also use part of this new capital for some of these initiatives.

With the mutual agreement between Sterling and ECOBANK to discontinue the merger, a lot of investors particularly people that bought your shares as well as your shareholders, would be worried that there were no indications in terms of the direction the bank is headed. Could you throw more light on this?

If a merger does not work or does not go through, it’s not because management does not want it, it’s because shareholders don’t believe they are getting value. At a time a merger is called off, shareholders don’t believe they are getting value. And that is what happened in this case. For the shareholders - what was on the table was not giving them enough value and they called it off, not management. Now, when you are calling off a merger, it means you are looking at the opportunity cost of moving on as Sterling than pursuing a merger. There must be something positive they see in Sterling moving on for them to have called the merger off. And for me, that thing is very clear, they see a bank with great potential; they see a bank that is beginning to put legacy issues behind and is beginning to do well.

They see the numbers, at least the quarterly numbers improving and they are telling themselves, ‘why should we go and play second fiddle? Why should we be bought cheap when the bank is doing well?’ So in terms of direction, there’s no other pointer to a positive direction than the numbers. Immediately the merger was called off, we published our half year results, much better than the half year result of the prior year. Management believes the third quarter result will further confirm and corroborate this. And by the time we get to the year end, we’ll be posting the kind of return on equity that would be among the top three in the banking industry. What other direction could be better than that?

What typically happens in most Nigerian banks is that people make so much noise and that has permeated the system that if you are not a noise-maker, it now appears as if you don’t know what you are doing. Whereas in many economies, it is not noise-making that determines success, it is numbers, it is customer satisfaction, it is employee satisfaction, it is shareholders’ satisfaction and I don’t have a doubt that we are on course in all these three areas.

In what particular area of business do you think Sterling Bank has an edge given the fact that former NAL Bank, of the five legacy institutions used to be an authority in investment banking?

Several things are happening in Sterling Bank at any given time, let’s start with capital market. You know we set out to focus on three areas in addition to several other areas: capital market activities, consumer finance and trade finance, these are the three primary areas. We have several other areas that we would talk about. Let me start with capital market activities. Several peer reviews have been done in the market and it’s been established that Sterling Capital is one of the three leading investment banking outfits in Nigeria today. In the past fifteen months, we’ve taken more than 23 companies to the market including at least six banks out of the 17 banks that have gone to the capital market to raise capital and this hasn’t stopped. We have in the pipeline, another five or six companies we are about to take to the market. So this is one area we set out to be a leading player and we’ve established beyond doubt that we are a leading player as far as capital market activities are concerned in Nigeria.

If I go into the area of consumer finance, we are making waves quietly. We are very dominant in the acquisition and sale of most of the flats in 1004 (Housing Estate). Today, there are many projects on the Lekki-Epe axis and we are giving mortgages to deserving Nigerians thereby changing the face of this economy, allowing the middle class to evolve once more. From mortgage finance, to asset base finance, cars, refrigerator name it. We did a promo on laptops that was a huge success. We are doing one now on generators and you would not believe the number of customers we have acquired through this generator promo. On a daily basis, they troop in because they are interested in financing. You see, developed economies survive on credits and we must introduce that here and that is what we are doing.

We are very active in consumer finance, we are going to do much more but I can tell you we are happy with what we are doing. You mentioned the issue of embassy collection, it’s not just one embassy, we collect for several embassies but in the nature of the contract that we signed, this is not a business we want to make too much noise about. But all the embassies that we collect for are happy with the bank. Now, collection transcends the private sector, we also do a lot of collections for government, including Power Holding Company of Nigeria (PHCN), FIRS, Lagos Water Corporation and many more.

The AutoReg in Lagos and other states are asking us to come and replicate what we did in Lagos for them and right now, we are in about three or four states. We are doing collections. We are very active in this area and if we are to move to the third area of focus, which is trade finance - trade is the main stay of the Nigerian economy; if you look across the water, you’ll see all the goods coming in- these goods are being financed by banks. We’ve financed a lot of imports for our customers and we set out to do this, we are doing it, we are getting more and more lines from international banks on a daily basis. We started with just about two banks- State Bank of India (SBI), they are our partners and the largest shareholders in the bank and I believe CitiBank.

Today, we have trade finance lines from about seven international banks to finance imports, so we are doing very well in this area too. We have moved away from just import finance. We are beginning to carve a niche for ourselves in the area of maritime business. The number of vessels we have financed in this bank in the last 15 months cannot be less than 25. We actually opened a maritime centre in Apapa where everybody who is interested in maritime business from vessel financing, to crude boats, and we have built the expertise in this area. If you are talking about oil and gas, there is a local content support fund. A few banks have been put together to do this and we are very happy to do this in this area. So for us, business is good and we keep on seeing more and more business opportunities in Nigeria as the economy is opening up, as the GDP is growing by the day, we are seeing opportunities.

By the time we add more capital, it can only get better but I must concede we haven’t made enough noise by Nigerian standards. And I think it’s a function of two things: one, banking ordinarily is supposed to be a conservative business. It’s not a business that you do by noise-making but here if you don’t make the noise; people believe you are not doing anything. So, we may not have a choice but to make some noise, but we would make whatever noise we are making within the professional ambit so that we would not go overboard as long as noise-making is concerned. The best selling point for any company is the number.

Just put the numbers on the table and every other thing would fall in place. In terms of products, we are dishing them out everyday; in terms of acceptability by the market, by the regulation, by the competition, we are getting fully on board. In treasury, they have a peer review that they do among themselves (all the treasuries of banks in Nigeria) and they did one recently. They would rate themselves and come up with the results and Sterling came out 4th of the 24 treasuries in Nigerian banks but these are not things you put in newspapers, so the treasurers of banks know themselves; they know where the good people are.

Are you challenged by the increasing need for training and more qualified personnel in the banking industry?

Banks come here first whenever they want to raid, whenever they are looking for good people, they say go to Sterling. We’ve been able to stem the tide because our people and staff are beginning to see a very good future and they are saying why should we go? There’s hope here we would stay. If anything, we are beginning to see the reverse; more and more people from the so-called big banks wanting to come to Sterling and we’ll hire some of them, we would because we also need to inject some fresh blood into the system and this would happen within the next few months. We would hire people from some other institutions. For now, we are happy with our size and like I told you in the beginning of this interview, banking is not about size, banking is about efficiency, banking is about return on investment, banking is about employee satisfaction, customer satisfaction, shareholders’ satisfaction, which is the ultimate.

Once you have satisfied employees, they would go all out to satisfy their customers. If your customers are satisfied, they would go all out to do the bulk of their business with you and this would translate into revenue and once the revenue is there, shareholders would be satisfied. When you satisfy the shareholders, what else would you be asking for? So we would not at this stage play the size game, we don’t believe that is priority. Priority today is to play the efficiency game, it’s to play the ration game, it’s to play the return game and we are playing that in a very calculating manner.

What is the message to your numerous shareholders who have endured till this moment and what would be the keyword to them at your AGM coming in about a fortnight?

Let me start by saying that it’s been proven in the world of business that you stabilise mergers in three years, it’s usually between three to five years to have relative stability. We’ve done two and a half and we are happy to tell our shareholders that they have a stable bank. They have a bank whose capital is unimpaired by losses anymore. Once your capital is unimpaired, it means whatever profit you make you can declare a dividend. We’ve made enough profit by half year to be able to wipe off the goodwill on our books because we carry a goodwill of about N3 billion but we’ve made enough profit in half year to wipe it off. So all that is left is for the board or their board to decide on the amount on dividend they want to pay and it would be paid. There’s no reason whatsoever, why Sterling Bank would not be able to pay dividend by end of year three, which is December this year, absolutely no reason and once the dividend starts rolling in, it can’t stop, it would become a regular feature of the institution. And that is the message for shareholders. They have a stable bank, they have a stable management, they have a stable board, they have a bank whose profitability is increasing quarter by quarter and things can only get better for them. They have sacrificed enough and I believe that the returns on investment will start coming from the end of this year.

Given the fact that about 70 per cent of Nigerian households now spend more than 50 per cent of their income on food and given the high food prices and inflation, how do you operate in this kind of environment and how has this impacted on your business?

The cost of doing business in Nigeria is huge and I must tell you that it is very tough, you must be able to provide your own security, if you are in the banking industry, not only security for your branches, but as you move your cash from location to location, you must have heard what is happening in the East today, the bullion vans are being shot down using all sorts of gadgets and grenade to blow up bullion vans. You must generate your own electricity. You have ATMs and they operate on electricity so you can’t even say when you close you would shut down because customers want to use your ATM, so you generate your electricity, you know how much you pay for diesel these days.

Infrastructure remains the major problem in Nigeria and if you are talking about the cost of doing business, it is usually the cost of infrastructure. Any business for that matter would immediately transfer these costs to the consumer. So when people talk about interest rates in Nigeria, service charges, they can actually go down if the cost of doing business goes down but I don’t know when the cost of business would go down in Nigeria. So what we try to do here is to manage cost to the best of our ability. There are some that you can’t do anything about but the ones we can manage, we manage them and we also try as much as possible electronically, telephone and what have you, instead of wasting useful man-hour in traffic; diesel, there isn’t much we can do, security, there isn’t much we can do.

So when you look at top line of many banks in Nigeria, earnings are huge but by the time you look at the expense line, it’s so huge. But that is the point we are making that it affects the bottom-line and all you can do is to build efficiency into the system in every area where you can be more efficient. We have introduced electronic statements so our customers get their statements online. That reduces the cost of postage, paper and so on. We also have the SMS notification, whenever anybody does anything to your account; you are immediately advised by SMS whether it’s a debit or a credit, you’ll get that. We also have a situation where customers can access their accounts online, access their balances, do internal transfers, of course these would help in reducing the cost of telephone and making enquiries. But I think the government has a lot to do as far as infrastructure development is concerned in Nigeria and if they play their role, it’ll probably reduce the cost of doing business in Nigeria.

What is your assessment of the economy in the past one year, especially under the new administration, has anything changed at all?

Well, the economy has been doing very well at the macro level. GDP is on the increase, the amount in reserve is huge, the CBN has been able to play its role well in the area of fiscal policies; the price of crude has helped a lot even without anything. What is left is strategic direction. Strategic direction is the function of the government. Only a stable mind can give strategic direction; when you have presidency or gubernatorial elections with cases all over the place at the tribunals, when is the Supreme Court going to rule on this, there can’t be stability in terms of direction.

But I think we are getting to that tail end when we would be able to say okay, no more litigations so the president is there for four years, what next? I think the president needs to independently appoint competent people to his cabinet. A political cabinet will not augur well for any country. I think the president has the discipline, the focus, the education and what it takes to take serious decisions but I think his cabinet is questionable and this is a function of how the cabinet emanated, it’s a political cabinet. You could live with that for a year, maybe maximun18 months, then you start taking decisions that it’s enough of this political game. Let’s move this nation forward because history will not forgive me with all the resources at my disposal, with all the strong economic fundamentals. If you don’t have the right people to manage the economy as well as to take charge of governance, then we’ll be drifting. I think we’ve drifted a bit but I also believe they’ve done a few good things: they’ve reversed some of the questionable policies of the previous administration but you don’t keep on reversing for ever, you must apply the grace.

How about the performance of the banking industry?

The banking industry in terms of hype, we’ve seen a lot. In terms of real contribution, we’ve also seen a lot. People are able to work with Nigerian banks now and get mortgage facilities and buy houses…three years ago, middle income earners would not dream of owning their own houses because the Nigerian banking industry has been able to build capacity and they have capital. Also, some of the loans given out to oil and gas industry, the telecoms industry three, four years ago - those loans would be coming from international banks abroad. You have a situation where three, four banks today would syndicate multi-billion dollar transactions without going out. And foreign banks that didn’t want to look at Nigeria, foreign banks that would not come near the shores of this country four years ago, are now looking for banking license. Look at the growth in the stock market, look at the growth in the telecoms market, look at the oil and gas market, look at the price of crude:

Nigeria is an economy to be reckoned with in Africa. Every telecoms company is now interested in license here. Every serious bank wants a piece of the action even as far as Russia - the Renaissance are here and they are interested in doing more. Banks are lobbying to influence the Central Bank to relax the rule on foreign ownership - it means something positive has happened and I think the Nigerian banking industry has contributed a lot to the growth of the Nigerian economy in the last two years. The bulk of the growth to the Nigerian economy in the past two years has not been from oil, it’s been from non-oil sector; it’s because of the funding and financing and the role of banks in Nigeria and it’s not about to stop as I hinted you earlier…banks are looking for opportunities and this is how economies grow all over the world.

Deposit Money Banks are showing interest in micro finance…is Sterling thinking along this line or maybe acquiring any of the existing micro finance institutions?

Let me put it differently: We used to have SMIES whereby every bank must put 10 per cent of its PBT in SMIES. Whether truly this worked or not, we leave it to the judgment of history for we no longer have SMIES for several reasons. I personally believe it didn’t work because the banks did not have the expertise to do this equity investment. Two, most of the owners of these small scale enterprises are so afraid thinking that the banks would come and hijack their projects, so it didn’t work. So we resolved at the Bankers’ Committee level that instead of doing SMIES, let us put 5 per cent of our PBT into micro finance by partnering with state governments who would also put some equity. So whether you like it or not, for as long as you are making money, you must play a role in micro finance. Now, some banks would go into this heavily, some would do it at moderate level; it’s all about your strategy. I believe that banks should focus on the top side of the economy and leave that side to others so you create more employment, you diverse ownership and you make it easy for others to function. If as a bank you want to play a top role, you also want to be the one doing micro finance, you want to be jack of all trades, at the end of the day, you may end up being master of none. But play your role, whatever the percentage of your profitability you have put in to help them grow but in terms of running it or owning it 100 per cent, I’m not sure we want to do that now. I think we should leave that to others, the more, the merrier, let more people be able to play a role in the economic development of Nigeria. That is my view on that.

What kind of management structure do you run in Sterling Bank?

We are professionals first and foremost and professionals go by ideas and it’s the superior idea more often than not that is taken. We have three executive directors and a managing director. We have an executive management team of four; we meet on a monthly basis as executive management but we also have several other meetings like the ALCO, where treasury decisions are taken, like MPR, where profitability issues are discussed, Management Credit Committee (MCC), where credits are approved, we listen to ourselves as colleagues with experience in various places, with expertise in various areas, with diverse background, international favour; we have a representative of the SBI as part of the executive management - they bring best practices from other parts of the world, we bring best practices from here; we deliberate, we discuss but we yield to superior arguments, superior ideas, something that is in the best interest of the organisation.

What would you want to be remembered for at Sterling Bank?

Very simple! Someone who inherited a mountain of problems and within the shortest possible time, was able to level all these problems, turn challenges into opportunities, create an enabling environment for employees, somebody who was able to build an institution that has become the attraction of all stakeholders in the industry - employees, shareholders, regulators, staff and customers. I want to build an institution that everybody will be proud of and then I’ll have paid my dues. I’m passionate about doing that, it’s not easy but we are determined to do it.—Vanguard