By Kingsely Okwu

NIGERIA is not alone as it faces up to the challenges of the global economic crisis. We have already seen a multitude of different approaches to resolving the financial crisis as governments around the globe look to come to terms with the unprecedented financial conditions that have beset their nation.

Regulators have been challenged, reforms undertaken, options explored and measures introduced as governments seek to create more effective frameworks in which trust and confidence in each country’s respective banking sector can be restored.

The financial turbulence experienced globally between 2008 and 2009 required the intervention of central banks in several countries.  Nigeria was no exception and the Central Bank of Nigeria (CBN) took action to try and protect the financial stability of its economy.

As the CBN exercised a wide range of regulatory and supervisory powers in its armoury, it set about restoring stability to the Nigerian economy, maintaining the depositor’s confidence in the safety of the retail banking system and renewing investor confidence in the Nigerian capital market.

Globally, governments and their central banks scrutinised the regulatory landscape in which their banking systems operated questioning whether the checks and rules in place were sufficient.  In Nigeria as elsewhere, such analysis revealed a banking sector that contained the good, the bad and the ugly.  The CBN, working in conjunction with other regulatory and government agencies, has purposely intervened to steer the sector out of dangerous water to safe harbour.

But let us examine the state of the Banking sector when the CBN stepped in, where eight of the banks operating in the country were found to be affected and in grave condition, in order to avoid any larger systemic contagion, the CBN guaranteed the affected banks and commenced the process of seeking for new investors, who would steer them to safe harbour.

Around the globe, this is exactly what was done that has seen Santander acquire Bradford & Bingley and Alliance & Leicester, Lloyd’s-HBOS in the UK and the mergers of Bank of America- Merrill Lynch, Wells Fargo- Wachovia, JP Morgan Chase – Washington Mutual, Capital One – ING Direct USA, M&T Bank acquiring four banks (Partners Trust Financial Group, Provident Bank of Maryland, Bradford Bank & Wilmington Trust) and dozens of other mergers in the U.S.

The Central Bank of Nigeria has not strayed far from the international solution for the reintroduction of order and stability into the banking system with government intervention, wider reform and a more robust corporate governance policy being just some of the measures undertaken to restore confidence and health to the sector.

While undoubtedly each government around the world has its own unique set of challenges, the need for change, regulation and accountability has become a uniting outcome of the recent financial crisis.

The 2009 banking crises resulted in a re-positioning of industry forces. It affected three of the six largest banks in Nigeria – Intercontinental, UBN and Oceanic. Some banks have benefited significantly from the “flight to quality” and the recently published June 30, 2011 figures show that the big banks are getting bigger!

The industry is expected to undergo further transformation over the next few years with the sector likely to be defined by a few large scale banks and a number of smaller niche players i.e. the sector will evolve towards a banking structure as found in the UK, Australia or South Africa where four-five scale banks dominate market shares.

This sector transformation will be further facilitated by the CBN’s repeal of the Universal Banking licence, which will require banking groups that want to offer their customers more than core banking services to adopt a holding company structure and obtain operating licences for each of these businesses and achieve the requisite levels of capitalisation.

The larger scale banks in Nigeria are already benefiting from the economies of scale and scope in a consolidating banking sector. Enhanced market shares, coupled with large distribution networks and access to low cost deposits will allow these banks to maintain strong levels of profitability and returns, despite being required to hold higher levels of capital by the CBN. The inflated levels of operating expenses that currently underscore the Nigerian banking sector will be manageable for the scale banks given improved revenue expectations.

The legitimacy of the CBN in exercising its powers is consistent with its role as a regulator. The CBN’s careful consolidation of the Nigerian banking sector has already proven itself to be essential to the future stability and growth of the Nigerian economy.  The consolidation activity that the CBN has encouraged and regulated to date is intended to safeguard capacity within the Nigerian banking sector – capacity that would otherwise have been lost if the intervened banks were not rescued and regulated in accordance with best practice.

There is no doubt that the “intervened” banks are in difficult circumstances and can only be rescued by “White Knights”.

Critically, the CBN is helping to provide a safe harbour for the depositors of the failed institutions and the seamless continuation of banking services to Nigeria’s growing banking customer base.  Furthermore, one cannot help but think that the collapse of a systemically important bank would be a calamity for the economic and social construct of the nation.

Furthermore, it would symbolise regression, counteracting the many strides that have actually been made in the Nigerian banking sector to deliver high quality products and services to its people. A loss of faith in the system is both unnecessary and, most critically, detrimental to financial stability and national harmony.

Industry Analysts estimate that N3.5 trillion of Nigerian banking industry deposits, are held by the eight “intervened” banks, with the largest portions in Intercontinental, Union and Oceanic. According to Mr. Moghalu, deputy gov., Financial System Surveillance, CBN, with the signing of TIA by these three banks and FinBank, 80 per cent of deposits in affected banks have found a safe harbour.

This is indeed welcome news and the “white Knights” that have made this possible should be encouraged and supported by all stakeholders, especially the CBN and Shareholders. It is expected that the other banks yet to resolve their recapitalisation challenge would follow the example of the Big Boys. However, as they are much less relevant institutions, their systemic importance to safety of the financial system is no big deal.

As the “White Knights” steer the intervened banks towards safe harbour, it is critical that the process remains professional, consistent and in line with international best practice.   The CBN and indeed other regulators such as the SEC and NSE must ensure they focus on the four banks that have demonstrated seriousness so far and ensure necessary approvals and support needed to close the transactions is provided promptly.

“ Time is of the essence and the regulators should move fast and get the job done in the interest of the economy and the nation. As the financial crisis in the eurozone begins to move from fringe economies such as Greece and Ireland to mainstream economies like Italy and Spain, the global economy is once more coming under strain. The CBN therefore must take urgent steps to mitigate the systemic risks posed by these intervened banks and protect the economy from external shocks.”

At this point, it is important to note that the role of a “white Knight” is more than capital injection. From the results of the 2009 CBN audit, it is clear that intervened banks require more than capital. A “White Knight” therefore must be a bank with strong fundamentals, an institution the CBN and indeed Nigeria can hold accountable for safe delivery of a distressed entity. Such an institution would carry with it a strong brand, good reputation, an impressive track record of performance, effective leadership, robust risk management culture and “best practice” corporate governance. These are qualities necessary for providing safe harbour to intervened banks.

Industry watchers are of the view that the Access Bank and Intercontinental Bank combination appears to have become the reference point for efficiency and compliance in the recapitalisation process.

Under the watchful eyes of the CBN, both banks have managed the process with the highest levels of professionalism and focus. Insiders claim that the integration teams of both banks have been working together for several months under the guidance of world-class advisers. Furthermore, the management of both banks have made compliance with best practice standards their watchword, coupled with extensive engagement of all stakeholders.

In 2009, GTBank and First Bank were the early winners having energized and deployed an aggressive retail orientation, which has aided their positioning in the industry. But recently, more winners are emerging with the heightened pace of merger transactions between FCMB/FinBank, Access/ Intercontinental and ETI/Oceanic, setting the stage for fierce competition for industry leadership.

Access Bank since 2002 set ambitious growth targets towards attaining industry leadership position through scale and has positioned itself very well within the opportunities thrown up by the ongoing CBN Financial Crisis Resolution Framework to enhance its present franchise position.

In this perspective, the Access-Intercontinental Business Combination holds the potential for producing an industry giant. The synergies and complementarities of both institutions point to the emergence of a banking institution, which will be a formidable competitor in the industry.

The last decade has witnessed a huge growth in resources available to Nigerian banks, banks growing in multiple folds by capital, deposit and asset. At the same time, the traditional source of a significant portion of revenues for the leading banks – Corporate Banking, has witnessed a progressive shrinking in margins and escalating cost of risk.

To continue to thrive, banks of a necessity will have to evolve new business models to benefit from the emerging and glaring opportunities in the retail segment. With a population of 150 million, a growing middle class, a vibrant economy, young population, over 40 million unbanked yet bankable population and an evolving/modernising payments system, Retail Banking offers the viable means of gaining scale for any serious Nigerian Bank.

Despite the benefits of industry consolidation, specific challenges will arise. Key amongst these and expectedly so will be the desire of the acquiring banks to seek operational efficiencies by optimising viable areas of the recapitalised banks. This may lead to another round of staff rationalisations, but once the respective combinations begin to realise the transaction synergies, the industry will experience new areas of growth leading renewed search for talents.

Beyond man-power challenges will be critical issues of infrastructure – power, broad-band availability and network adequacy. These are all fundamental to efficient retail banking services. Similarly, issues such as appropriate risk management framework for managing retail business will constitute a major challenge to building a robust retail banking model.

Increasing customer sophistication enabled by ICT convergence and rapidly changing customer behaviour will challenge the creativity and the ingenuity of banks especially in the face of proven research evidence of customer price sensitivity, decreasing loyalty, willingness to switch banks and products and propensity to shop around.

Furthermore, an underestimation of the speed and scale of change required for channel development and integration will pose significant challenges to the ability of banks to ride the crest of opportunity the retail business presents for Nigerian banks.

The future will require superior efficiency and operational excellence from all banks, while industry leadership will be attained by those institutions most adept at harnessing product, service and process innovation to anticipate and meet customer needs. Ultimately, to deliver on these imperatives, banks will have to focus on their core strengths – those activities in which they excel – and partner with best-in-class specialists for everything else. They must optimise the potential of each customer relationship, harness the potential of each employee and recognise the pivotal role of technology.  The race for scale is on and the ultimate beneficiary is the customer, who for the first time would be truly treated as king!

•Okwu is a finance analyst based in Lagos

Source: Guardian