Lagos (INVESTADVOCATE)-Peter OBIORA, Online Editor at InvestAdvocate in his usual manner on May 22, 2014 captured a Question and Answer Session with the management of Skye Bank Plc at its pre-annual general meeting media chat with business editors and other financial journalists. Below are excerpts of the Q & A with session

On your tier II capital raising exercise what direction are you looking at, is it Eurobond?

Tier II capital is a loan to the bank that has maturity of not less than seven (7) years, while Eurobond is typically about five (5) years. So, in most cases, the Eurobond doesn’t qualify as tier II. What we are doing is that we are sourcing tier II from development finance institutions based in Europe and the direction is that as at today, we have concluded about $150 million of that; about one-third of that should come in before June and the balance should come in before the end of June. So, tier II is semi-equity by the central bank of Nigeria (CBN), while Eurobond gives you medium term funding for your normal operations. So, in summary tier II capital raising is going as planned and it should be available for us to use in the second half of this year.

What would you say is specifically the strength of this bank and where do you rank other banks in the industry?

Skye Bank is known for its leadership in e-channels, e-business, we demonstrated these over the years, we have one of the best and efficient ATM network in this country, our internet banking is of superior ranking in the industry and these facts are not things that we conjured by ourselves, these are facts that are backed by data from Interswitch and the Nigerian interbank settlement system (NIBSS). So, that on the one hand as it relates to day-to-day transactions, but the area of specialisation, we also distinguished ourselves in the area of real estate development and oil and gas. In the country today, we are number one in real estate development financing. And in the oil and gas; especially in the upstream, we ranked as one of the best in the system.

If you are looking for specialists skill in real estate planning, oil and gas sector, the operators in those industries knows Skye Bank. But beyond that, we are known for good relationship management, we partner with our customers, we go the extra mile to understand their business and we give them the financial advisory services that they may require. In the area of SMEs, we have partnered with companies to grow them from almost micro stage in their lives to becoming a big commercial institution for example like Tantalizer, we took the company from day one of their operation to the point where we took them to the stock exchange to become listed. We have the Multi Trex Food and Beverages along Ibadan Expressway, we have a Cocoa industry based in Ile-Oluji, also we have been very prominent in the financing of schools right from primary to secondary schools. We have financed most schools in this country than any other bank.

These are the areas that merely come to my mind when you want to talk about core competencies of Skye Bank. The second part of the question is how you rank others; well it’s difficult to rank others, other than what the central bank ranked them. All I will say is that we have been ranked seventh in the industry, across some indices, in terms of total assets, shareholders fund and profitability. So, we remain in the position of seven or eight and that’s coming from a position of about 13^th few years back, we have made modest achievements over the time.

Give us a projection on your OPEX for this year

I think last year we closed at a cost to income ratio of about 67 percent, the focus this year is that in spite of inflation, we should be aiming at about 60 percent. And this is because we have introduced new focused management processes in the system, we have commenced the process of cutting out a lot of middle sources of providers of services, we deal directly with major providers of services and will be using our size to leverage on the negotiation to get reduced rates at which we are being charged for most of our services. Also, we are looking at alternative sources of power, we all know in our individual homes what we spend on generators and diesel, at the end of the day, you don’t get the right quality of diesel that you have paid for. So, we are introducing a lot of measures and we should bring down our cost to income ratio. The cost to income ratio I think you mentioned something like whether it’s coming from staff cost. If you need to have good quality staff, you don’t start taking away from their salaries.

Giving the operating environment the banking industry is facing and now that a new CBN Governor is going to resume next month, what will your advice to him?

What I would advise him to do is that he should take a good look at what his predecessor in office has done and take the good ones. What I will say about the outgoing governor is that has introduced sound risk management practices in the system, I think he has brought in some sense of discipline in the system; before his time, we use to have a lot of cowboy banking practices in the system. So, my advise to the new one is that he should reinforce that, we have seen what happened in between 2007 and 2008 because of the lax risk management environment that we operated, the outgoing governor came in and instilled some discipline in that aspect. My advice to the new governor is that he should stick to that and bring some sense of stability to the system. We have seen a lot of policy somersaults under the outgoing governor, maybe he should try to make things stabilise a bit before introducing changes.

Your loan to deposit ratio declined, what does it mean, are you not lending or you grew your deposit more than expected for the period?

Loan to deposit ratio came down because last year was a year of turbulence in the industry, we couldn’t achieve the loan growth that we projected for ourselves, in an era of turbulence you should try to be conservative in your loan growth approach. At the same time, we are able to gather more deposits than we expected; so that impacted on the loan to deposit ratio, its not that we didn’t grant loans, we did that but not as much as we had planned.

Status update in the acquisition of nationalised banks by Skye Bank

We are in the race for the acquisition of Enterprise Bank, we submitted a bid, we have scaled the first two stages, and we are in the last due diligence phase. We were shortlisted as one of the five remaining in the system. We will be expected to submit a final bid for the bank in about two weeks time. The program is still ongoing and we will continue to watch it and ensure that if we emerge eventual winner, it’s at the best value to the bank.

Your savings deposits accounts for 11 percent of your total deposit, I feel that your bank is not aggressive enough when it comes to mobilising deposits. How much do you intend to grow your savings deposit and what’s the strategy?

In the area of savings mobilisation, it’s an area that we are focusing on deliberately, the branches are being isolated to grow retail deposits and to promote the behaviour that we want to see and the target for this year is to grow savings to about 15 percent of the total deposits. The resources that are required to achieve that are already being put in place. So, we are very optimistic that the anticipated growth is going to be achieved. You said we are not aggressive with savings mobilisation, I think is just a perception, we are a retail bank and that’s what we do, we set up to 260 branches and what we can grow from those branches is actually retail and commercial deposits mobilisation, and savings is the heart of it. We are also involved in the central bank’s drive for financial inclusion and what you find is that a lot of the products we are putting out are products that will promote savings. We are also involved in promoting savings culture in schools and all these will contribute in growing our figures.

In your operating expenses, you have AMCON, NDIC premium, the staff and so on; I want to know if that AMCON cost is anything besides what you contribute to the sinking funds. How do you intend to achieve the reduction in cost to income ratio?

From 2011 from N39 billion DDA up to N42 billion in 2014 and now N45 billion in 2013 as at Q1, it was N46 billion and recently N47.5 billion. Like I said earlier, it even impacted positively on the interest expense on deposits. N56 billion in 2012 down to N43 billion in 2013 and as at Q1 2013, it was N14.8 billion and Q1 2014, it was N10 billion, that means the more we grow the DDA, of course we have less interest expenses. On OPEX, the NDIC and AMCON, the 0.5 percent, we thought they will apply it on 2013 accounts; but when they were debiting us last year, we were debited 5.0 percent; meanwhile all banks provide for 3.0 percent in the same 2013, banks were debited for 2010, that’s why all banks in the industry cried and these payments actually impacted negatively on the earnings of banks. Here we are this year, we have started providing for 5.0 percent of total assets hopefully when the new central bank governor comes in and if the policy changes again, we have no control over it. But the one we have control over is our other operating expense; but regulatory we don’t have control; it’s what they charge us we have to pay.

What is happening to the agric side of your business, especially in the commercial agric credit scheme that the CBN is promoting? What is the state of the shipping fund as one of the banks in that area, how is the fund being managed and what role is Skye Bank playing in all of that?

We are still in the agric and maritime, but the question I was asked earlier was our areas of strength, so we are not excluding any sector, we still have facilities, I think for agric commercial credit fund of the central bank, we would have facilitated about N15 billion for our customers. But that doesn’t mean that is the area of strength of Skye Bank. When you rank your lines of business, you know where you deliberately want to focus on. Agric is something we should all do, but we also know that it’s fraught with many dangers. There is supposed to be the Nigerian agric insurance corporation that should clear some of the risks on lending to that sector. You know the state of that bank today, it won’t be able to pay claims if there should be a need to make claim on agric loans. Today banks bear the risks, there was a CBN initiative that was supposed to provide 75 percent risk guarantee for agric lending; Nigeria incentive based risk sharing system for agricultural lending (NIRSAL), but in the process, the CBN changed its stance.

If you want to finance agric, you can’t be looking for security; because they don’t do agric in Victoria Island or Lekki phase I where you can have choice properties to back up your lending, your fate is in the farm, if the farm fails, the two of you fails. Today we are talking about AMCON levy, you will be talking about loan loss provision and you will be asked to explain it. So, we are in agric; but in very cautious cases. The central bank and clearly all the banks have come together and there is a clear understanding amongst every one of us that agric is a very key area and if we do not develop it, we would not feed the generation coming.

So, it’s important to us as well and on the guarantees that we have provided, the decision was taken jointly between the central bank and the banks that the kind of guarantees that would be provided going forward is the type that would ensure responsible lending and borrowing practices. We don’t want a situation guarantees are there and people just go and take money and it becomes the national cake. The banks, central bank and NIRSAL are working together to ensure that we de-risk the various value chains and that is an ongoing process. It will be made in order to ensure that lending in this area can be save and also borrowing for agric purposes can also be done in a way and manner that it will not just be cost effective; but people do not loss simply because infrastructure and value chain has not been fixed. So, I think that gradually lending to the agric sector will be ranked top and very clearly, Skye Bank intends to play its own usual very prominent role in promoting important sectors of the economy; but of cause this will be done in a very responsible way and to promote sound financial and lending practices.

In the area of maritime, Skye Bank is one of the four banks called primarily lending agents. So, we have a sizeable portfolio of maritime assets; we have applications that have been outstanding with NIMASA for close to 24 months and they have passed through all the stages of approval and today it’s hanging with the minister of transport, tomorrow they say it’s with the presidency. Funds have not been disbursed to help our customers. The little we have been able to do was funded from Skye Bank funds and at the same time, we are being compelled to lend at single digit rate. You want us to promote national assets, but the funds that have been put together is not been released to the system. It’s not peculiar to Skye bank, but we are doing the bit that we can in that space.

What to expect in the new Skye Bank in the next couple of years?

What we want to do going forward, we have grown our size to where we are today, focusing on the corporate and quiet commercial businesses, but we think we can come down a bit to the commercial and retail banking space so that we can finance the real sector of the economy. And that’s what we are doing and focusing going forward. We have done our branch categorisation exercise, about 52 branches have been designated retail branches that will service SMEs customers, but we would also relate to individuals on very generous terms, we would be lending to SMEs in that space. Our focus is on the commercial banking space, I think we have done enough as much as we will like to do in the high corporate, we need to come down to the lower end of the segment which is commercial and mostly SMEs and individual businesses. That’s what we want to do going forward and we have spent some time putting the necessary risk management framework behind it. In terms of expectations as regards to what you will want to see, what will be our ROE at the end of it? As at today we are at ROE of 17 percent, we think that we will go high up to about 20 percent in the immediate term and reach up to about 22 percent ROE in the next three years.

On the cost of the sinking funds, you have the Banker’s committee that meet regularly and let us know how some of these costing arrangements are made

It’s a collective decision, it was agreed between the banks and the central bank; but the area of contention is when should be the effective date. The effective date is suppose to be 2014; but CBN in its own wisdom decided to apply it 2013. It’s not that banks are disagreeing, we have agreed that we are going to bear this levy; but it should take effect from 2014. For instance, this year, we have started making provisions of 5.0 percent, so it’s not going to come as a surprise when the debit comes; we have factored it into the cost of operations.

How are your subsidiary banks in Guinea, Gambia and Sierra Leone performing?

Our international subsidiaries in Guinea, Gambia and Sierra Leone presently consists a very small portion of our business, but they are earning profit, none of them is a loss making venture, we are watching whether they need further injection of capital or not. But, at the same time, we have a policy not to own 100 percent stake. So, we will be opening up ownership of the subsidiaries to citizens of those nations, but they don’t constitute a lot to our businesses at the moment.

What opportunity do you see on the policy of the federal government to start selling made in Nigerian cars?

As a bank the opportunity is for us to finance the assembling plant; but for a nation, is the opportunity to generate more employment for Nigerians. Instead of bringing in fully made up vehicles, if we have the assembling plant, we would probably have employed more workers in the factory and that should also go into revenue generation for the country in terms of taxes and development levies and so on for the government. Those are the opportunities I see.

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