He rarely grant interview, so this is a priced possession, it’s a readers’ delight. Aside his mind on new CBN Gov, and about Online banking, the Group Managing Director of UBA Plc, Mr. Phillips Oduoza, 40 per cent of transactions in the bank are now done online and 60 per cent done offline, unlike in the past, when about 17 per cent were done online and 83 per cent done offline. Oduoza in this interview, explains that electronic payment generates revenue for the bank and reduces operating costs.
But this is not without its challenge as he states that online fraud is a very big challenge for the industry as a whole. He speaks on the joint efforts of the banks in tackling the problem and other burning issues in the banking sector.
We are very strong in retail banking. UBA has over seven million customers. We have the branch network and scale. We are able to reach quite a lot of customers and we also have the channels. UBA has a very substantial number of ATMs in the market and by the time the pronouncement on the cash reserve ration was made by CBN, we had already diversified our deposit base. And today, we have a very strong mix. In fact, the public sector constitutes just at paltry 10 percent of our total deposits. One of the things we did under project Alpha, is to drive the non-public sector deposits and that is basically where our focus has been. If you look at our deposit mix, you will find out that a substantial part is coming from the retail and corporate with a very small position coming from public sector.
We will want to provide more consumer loans but there are existing challenges in Nigeria at this time. One is identity verification. It is a very big problem. The identity issue is being addressed with the biometrics that we are rolling out in the banking industry as a whole.
The credit bureaus will also help consumer lending in Nigeria. They are still populating their database and we believe once this is done, it is going to improve the situation. UBA has also come up with some products that will drive financial inclusion. For example, we have a modified freedom savings account that requires little or no documentation to open. We also have the pre-paid debit cards that require you not to have any account to own and use. We also have U-mobile, which is the mobile banking platform. So these are some of the new products that we have launched in the market and they are gaining a lot of momentum.
Central Bank of Nigeria (CBN) regulation
Year 2013 was very challenging for financial service institutions in Nigeria with the resultant effects of regulatory induced reduction in income lines and increase in funding costs. Commission on Transactions (COT), which used to be at N5 per million maximum, but reduced to a maximum of N3 per million. As you know, COT is a major component of the income lines of banks. There was also the removal of the N100 that was charged by banks for ATM usage. In addition, there was an increase in savings interest rates leading to costs for banks because significant portion of our deposits, comes from savings deposits, especially for banks like us that have been around for a very long time.
Whilst these happened in the second quarter of last year, another major one was thrown in by the third quarter. The cash reserve ratio for public sector deposits, was increased from 12 percent to 50 percent, meaning that for every N100 that you generate from public sector you must sterilise 50 percent of the amount or keep N50 at zero yield. How did we deal with this? This was where our African operations came into play. All these initiatives basically affected the Nigerian market but did not apply to the various African countries where we operate. UBA operates in 18 African countries outside Nigeria, so we intensified our activities in these countries. The income losses that we suffered in Nigeria, we tried to make from our 18 African countries where our subsidiaries operate.
So, the first strategy was to increase revenue from the various African countries. Luckily for us, we had finished the first phase of our African expansion by last year and had entered the consolidation phase. Therefore, we deployed more resources; we made some changes at senior levels in the various African countries. We intensified activities in the area of remittances and intra-African trade and the non-interest income arising from these activities were very substantial though not enough to completely cushion the impact of all these changes in general.
The second thing we did was to start ramping up on our electronic banking services. Electronic payment generates revenue for us arising from the card usage (point of sale usage) and other income associated with e-banking. Card usage also reduced our costs, as customers migrate their transaction from the banking halls to the electronic space. Serving customers through electronic banking, is just a fraction of what it actually cost you to serve the customers through the banking hall. So, increased electronic banking did two things for us, significant reduction in our operating cost and an increase in the income level.
Our third strategy was a shift from investment in government securities, in treasury bills, and related instruments, into quality asset creation. Our risk asset portfolio last year increased significantly. We are focusing basically on emerging sectors, like telecommunications, power sector oil and gas upstream, agriculture, power thereby optimizing the balance sheet of the group. UBA is probably the biggest lender in the power sector under the new power sector reform and we are going to do more this year. Agriculture remains a very big area for UBA. Today, it actually contributes about 7 percent of our lending portfolio compared to the industry average of 4 percent. These are some of the strategies we have adopted to cushion the impact of the crunch that we experienced last year.
Operation outside Nigeria
It is a different ball game. It is quite profitable but I will not say that it is more profitable than in Nigeria. Nigeria is still a very dominant market in sub-Saharan Africa. The Nigerian market is very huge, when compared to other markets in sub-Sahara Africa. Our Nigerian operation commands about 75 percent of our group revenue with other Africa countries, contributing about 25 percent. But going into the future other African countries will continue to increase the proportion of their contributions and the ultimate objective is to achieve a 50-50 between Nigeria and the various African countries in the medium term.
Power sector reforms
For us, the power reform is going to be a revolution just as we have experienced in the telecommunications industry. The overall impact on the economy is going to be very significant with a multiplier effect on the economy. It is going to impact hugely on the operations of SME’s. The country is going to reap the full benefits of the privatization of power sector across all sectors of the economy for us, as a bank, our support to the power sector is long term financing that will provide a steady cash flow and income for the period of that funding. Some of those funding are for seven years, others are for five years or there about.
So, over that period the bank will continue to enjoy that revenue stream. In summary, we believe the power sector reforms, just like that of the telecoms sector will have significant and far-reaching positive impact on the economy and the livelihood of Nigerians.
Secondly, we believe in the power reforms because of the derived value that will come from banking and the value chain of the power sector. The balance sheet of the bank is very robust. UBA still remains one of the banks that has significant room to create risk assets. In 2014, we look forward to more quality asset creation in the power sector. The non-performing loans for UBA remains one of the lowest in Nigeria, it was under one percent and for the group as a whole it was within 3 percent and this is within the Central Bank limit of 5 percent NPLs. If you recall, sometime in 2011, we cleaned up our balance sheet, realigned our position and this has resulted in one of the cleanest bank balance sheets.
Safeguarding online banking
Online banking is actually the new direction for banking. Today we have seen 40 percent of transactions done online and 60 percent done offline. Some years back, we had just about 17 percent online and 83 percent done offline. Online fraud is a very big concern for the industry as a whole. It is unlike cheque fraud for instance which may involve customer confirmation and therefore can easily be stopped at the stage of confirmation. For online fraud, once the fraudster presses a key and the transaction is completed, the money is gone.
The industry is tackling the challenge jointly. As an industry, we have decided that ATMs in Nigeria, must have anti-scheming devices, so that it becomes difficult for fraudsters to steal customers’ information from ATMs. That was one of the decisions we took at the Bankers Committee Retreat which took place in Calabar in December last year. Every bank must have anti-scheming device all the ATMs. We recently launched a Security Operations Center, the first of its kind in Nigeria to monitor every single transaction against potential fraud. We partnered one of the best and security companies in the world. It is a battle in which we have to remain ahead of the fraudsters because they come up with various attempts every day. The bank’s robust IT infrastructure and world class security system is being constantly upgraded to ensure that we continue to effectively tackle e-banking fraud.
For UBA, you are right that the price to book is low compared with other banks and believe the situation is going to change in 2014 when we cleaned up our books. We declared to loss which was very strange in this environment, we had to meet all stakeholders at the stock market; stockbrokers, financial journalists and other players in the market and addressed them on why we decided to clean up our books. What we did was new in this environment but very common amongst major global financial institutions. Given that we operate in major financial centers with regulators in 21 jurisdictions, it was expedient for us to do the right thing and it is in line with global best practice.
As you know we operate in London where we are regulated by the Financial Regulatory Services Authority (FSA) and New York where we are regulated by the Office of the Comptroller of Currencies (OCC). In addition to that, we operate in 19 other jurisdictions in Africa, which makes us not a typical Nigerian bank. So, we wrote and sold others to Asset Management Corporation of Nigeria (AMCON) while taking the corresponding haircut.
Let me emphasize that when we presented this plan, people asked us, why do you want to do this? They told us we could write it off over a period of time but we said no. We insisted, we had to do that. We believed that once we clean our books, we would now start the path of renewal. Stakeholders on the Nigerian Stock Exchange (NSE) were initially alarmed. So, some people started selling their shares and UBA shares dropped to a low of N1.65. But some analysts saw the wisdom in our decision and they started buying gradually and the share price of UBA started to move back upwards. In the subsequent first quarter of 2012, UBA made a profit, second quarter, we made a profit and everybody started picking their shares. In 2012, UBA had the most appreciation in its share price in the stock market among financial services institutions and we closed 2012 with a return to profit.
In 2013, the share price sustained its upward momentum and by December of last year, UBA had also seen a significant appreciation in the stock market. I believe the same thing will repeat itself in 2014. I also believe analysts will see UBA from a new perspective in 2014. Analysts will recognize that the bank’s growth has been a sustained growth. If anything at all, the balance sheet is very strong and robust. So, I believe that an upward review of the bank’s rating is going to take place. Our current pricing is based on people’s memory not on our performance and prospects.
Investors also lost a lot of money during the financial crisis, so a lot of them have not come back to the market and may not come back to the market for some time. There is definitely going to be an upward movement in our share price because our current performance shows that we are a bank to invest in.
It is true that the cost-to income ratio is high and I will explain why it is so. The amount of money we have invested in Africa, if we were to bring that capital, into treasury bills, our performance today is going to be totally different. However, it is an investment for the future which is not being priced into our share price yet because investors are not looking long term.
Fourteen of our African subsidiaries are making profit out of 18, apart from Nigeria. When all of them start operating at full steam, starting from this year, the contribution will be totally different altogether.
At the same time, we are writing off or amortizing some of the pre-operating expenses in Africa, therefore, we are bound to experience the current seemingly high cost-to-income ration. We have recognized the expenses but the income will come in future. Already the cost-to-income ration has been coming down. Don’t forget that in 2012 we closed with cost-to-income ration of 78 percent and in the second quarter, it had come down to 62 percent and it has continued to reduce. Our ultimate objective is to come to the 50s and this will happen very soon given the revenue logs costs in the capital investments for the African countries.
We have turned around the bank from loss position, post financial crisis and have extended the profit-ability to the newly established African subsidiaries. The African countries that were just being set up have started scaling up gradually from loss positions to the profit level that we have today, with 14 of them making profit out of the 18 African subsidiaries. Both the deposit liabilities and the loan books have shown significant growth in the past three years. UBA came first and got an award from CBN as the most agric-friendly bank and the bank has been winning numerous high profile awards from Euromoney.
The share price has appreciated so much in the last two years resulting in major value creation for shareholders. The future of the bank is very bright. We have laid a very good foundation. In fact, there is no big transaction you can talk about today that UBA does not participate in. Any of the major tickets. UBA is there. So the brand remains very strong, we have also witnessed seamless board (two board chairmen and other Non-Executive Board) transitions showing the robustness of the governance structure.
We have been funding agriculture and we will continue to support other areas of the economyand that is why UBA become the biggest lender in the power sector. We are playing very big in the power sector. We are playing very big in infrastructure, and we are playing quite big in the upstream of the oil and gas industry. And these are the new areas growing the economy. Agriculture remains very important to us and most of the major names in the sector either in production or processing are in the books of UBA. I also mentioned that seven percent of our portfolio is in agriculture as against industry’s average of lower than four percent. We have the highest lending, for any bank in Nigeria, as a percentage of total loans to the agriculture sector. We remain very strong on the entire value chain. Whether they are processing starch or processing cotton or cocoa. Even to the ones that are exporting and the ones that are providing storage. UBA is always present.
New Central Bank Governor
I do not think we are going to see a reversal in the key policies. These policies are working very well. For example Nigeria is the only country among the emerging markets that have not suffered major currency depreciation for a long time. The inflation rate has been brought down to a single digit. I don’t see any easing of the monetary policy rate. The cash less policy has been very good and I believe it is something that should be embraced by all.
This year, the cashless policy is going to be rolled out in all the states of the nation. I also see some stability in interest rates. One of the reasons why I believe there won’t be any easing in the monetary policy is because we are going into the pre-election year. The pre-election spending is inflationary in nature and you will not ease the monetary policy when there is to much liquidity in the system. If anything at all, I believe we might experience some further fighting of the monetary policy. It is possible that the cash reserve ration is going to go up further, not only for the public sector deposit but for also the private sector deposits and I believe that the CBN will continue to use its reserves to defend the local currency.
Present interest rate regime
It is true we are all feeling the pain of high interest rates. I also want lower rate. But when you look at it, you find that banks are an integral part of the economy. One of the reasons interest rate is very high in Nigeria is because of infrastructure challenges. Deposit rate may not be as high as you will think but the additional costs that go towards the generation of that deposit is very high.
As we speak here in this office, UBA has about four generators that run simultaneously. Each of them is 1,500 KVA. So this office alone is generating six megawatts. It’s a mini power station. Diesel consumption alone is extremely high. Each of the branches that UBA has is using two generators. One is the main generator while the other is for standby. We have cards all over the world, we cannot afford to go down for one second and therefore build multiple redundancy. People are using our cards in Japan, South Africa and America.
Therefore that infrastructure has to be there. So all these are costs that if you have to remain in business you must bear. This is one of the reasons interest rate is very high. The cost of taking care of the cash is also very high. If you go to the banking hall, you will see how the note counting machines break down every day. So you either replace them or get the people who repair them, you have tellers lined up.
This is why we are pushing for cash less banking. As cash less banking takes firm root, you will find out that the cost of handling cash will go down significantly impacting positively on interest rates.
If you compare the financial of the Nigerian banks with those of other emerging and frontier markets, the cost to income ration of the Nigerian banks are in the 60s. Some extreme ones are in the 70s. All the other emerging markets like Turkey, Malaysia, India etc, their cost to income rations are in the 40s. So if we are able to deal with all these cost elements, I can tell you that the interest rate can come down to single digit.
•Culled from Lion King Magazine, an in-house publication of UBA Plc