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Nigerian Banking SectorMacro-economic play on Africas largest emerging market
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Nigerian Banking Report
Section 1
Section 2
Section 3
Section 4
Section 5
Section 6
Section 7
Executive Summary
Political and Socio-Economic Update
Elections Aftermath: Stability and Continuity 16
Continued Economic Growth 19
Key Risks: Infrastructure, Security, Corruption 20
Nigerian Banking Sector
2007: After Reforms, Growth 22
The Opportunity is Real 23
Size and Capital are becoming Key 25
Capital Markets have Helped 29
But there are Risks 31
Post-Consolidation Scenario
New Rules: Size is Imperative 34
New Entrants: Top Dollar, Tough Market 35Grand Ambitions: Expansion and Diversification 36
Bank Profile: Fifteen Banks
Operating and Valuation Statistics
Macro-economic and General Statistics 72
Financial Forecasts 74
Public Market Operating Comps, Part I 79
Public Market Operating Comps, Part II 80
Public Market Valuation Comps 81
Chart List 82
Contacts
Afrinvest (West Africa) Limited 86
Disclaimer 87
Table of Contents
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Executive SummarySection 1
5
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Independent assessment of Nigerias macro-economic performance
continues to be favourable...
...And much of the local and international financial community have become
familiar with the compelling Nigeria story.
In many ways, Nigerias story mirrors a wider African renaissance.
In December 2006, the International Monetary Fund (IMF) published its second review
of Nigeria under a two year Policy Support Instrument (PSI). IMF endorsement had
been a key part of achieving the US$31bn 2006 Paris Club debt restructuring
agreement. The IMF made the following statements on Nigerias economic
performance, following on positive commentary from its previous review:
GDP growth and per capita income have doubled in the last five years
compared with the previous two decades. Headline inflation declined to
single digits in 2006 and the parallel and official exchange rates have
converged, reflecting the unification of the foreign exchange markets.
the authorities have maintained their commitment to the reform agenda;
nevertheless, the ongoing conflict in the Niger Delta poses a policy challenge.
Growth would benefit from significant infrastructure spending. This
spending reflects the governments efforts to address pressing infrastructure
needs.
Following years of tortuous reforms, and stability ensuing from over eightuninterrupted years of democratic governance, Nigeria has begun to exhibit macro-
economic characteristics that are more in line with the worlds leading emerging
market countries. Foreign portfolio investors have been quick to take advantage of
opportunities in the market. Amid the global quest for higher yields in 2006-2007,
Nigeria witnessed significant inflows into its sovereign debt and public/private equity
markets. Afrinvest Research estimates that, the banking sector (considered by many
to be an investment proxy for the larger economy) has attracted over US$5.0bn in
new foreign debt and equity investments, excluding direct equity portfolio
investments on the Nigeria Stock Exchange (NSE). The Nigeria story is essentially one
of a larger, yet faster growing version of commodities rich Africa. Just as
importantly, significant room continues to exist for growth, with per capita GDP
barely over the US$1,000 mark despite recent advancements (See Chart 1 and 2).
Key elements of the Nigeria macro story (GDP growth, declining inflation, improved
sovereign risk ratings and increased inward flow of Foreign Direct Investments) are
very much in line with emerging trends in many countries within the sub-Saharan
African region. A continuing global commodities boom has combined with significant
amounts of international interest in (and demand for) emerging market
opportunities, to spur a renaissance in many African markets. Many of these countries
are now enjoying the longest, sustained period of uninterrupted economic growth in
their post-colonial histories.
According to data from sovereign risk specialists Standard and Poors, Africas major
markets (a sample including South Africa, Nigeria, Egypt, Morocco, Tunisia, Kenya,
Executive Summary
Nigerias national leadership
continues to demonstrate
commitment to a private
sector driven reform agenda;
and to a secure, corruption
free country.
6
Independent observers attest
to a vastly improved
Nigerian macro-economic
environment in the last 3 to
5 years.
Foreign investors have been
quick to seize opportunities,
with local capital markets
benefiting from increased
levels of awareness and
inflow.
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Senegal and Ghana) are each seeing 5-year average output growth rates in the 5%
per annum region. Each is also seeing per capita GDP exceeding or approaching theUS$1,000 mark, with South Africa (US$5,516) and the North African countries
(averaging US$2,356) being well ahead of the rest of the continent. While these
indications of prosperity appear more pronounced in these more developed African
economies (South Africa and the Northern African countries) than in Nigeria, a closer
analysis reveals that there is indeed a higher, underlying level of per capita wealth
within the Nigerian economy.
There is evidence that a small proportion (estimated at 20%) of Nigerias 140 million
people account for up to 80% of the nations wealth. With a 2006 year end GDP of
US$140bn, our analysis indicates that while Nigeria may report a national per capita
GDP of merely US$1,000, there is actually a select, underlying market of up to 28
million people in the country; boasting a per capita GDP of US$4,000 (very nearly
comparable to South Africa, and well in excess of the North African average).
We believe that this select section of the population is responsible for much of the
underlying consumer market demand that is beginning to come to light in Nigeria.
Due to very high poverty rate, much of the analysis of the market opportunity has
failed to take cognisance of this latent consumer group, itself a substantial market,
and primary targets for immediate new business opportunities.
The wealthiest 20% of Nigerias population accounts for 80% of national
output; an estimated market of 28 million people with a per capita GDP of
US$4,000 per annum.
Nigerian Banking Report
Population (millions) Per Capita GDP (US$) GDP Growth (2007E)
South Africa
Nigeria (Select)
Tunisia
Morocco
Egypt
Nigeria (Nationwide)
Chart 1: Underlying market demand in Nigeria
Source: Standard and Poors, Afrinvest Research
Executive Summary
7
47.1 5,516.0 4.58%
28.0 4,000.0 N/A
10.3 3,226.0 6.00%
33.8 2,264.0 4.31%
80.4 1,577.0 5.88%
140.0 1,000.0 7.58%
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Chart2:So
vereignRiskIndicators,NigeriaVersusAfricaI
Executive Summary
8
RSA
Morocco
Nigeria
Egyp
t
Tun
isia
K
enya
Senega
l
Ghana
2007Per
CapitaGDP,US$
5,5
16
2
,264
924
1,5
77
3,2
26
724
887
632
5-yearAv
erageGDPGrowth,
%
4.4
7
4.7
6
7.39
4.4
7
5.4
2
4.9
5
5.0
3
5.7
7
2007CPIAverage,
%
5.4
6
2.7
5
8.70
9.9
0
2.8
6
10
.00
2.6
0
9.5
0
2007Bud
getSurplus/(Deficit),
%
0.2
9
(2.4
0)
7.98
(7.4
8)
(3.4
0)
(3.9
7)
(5.5
0)
(3.9
2)
2007Gov
ernmentDebt,%
ofGDP
26
.02
42
.49
1.55
64
.72
48
.82
40
.93
29
.90
19
.99
Savings,%
ofGDP
13
.03
31
.88
30.05
21
.64
21
.23
15
.40
11
.68
24
.12
2007Inve
stment,%
ofGDP
20
.14
28
.85
23.76
19
.99
23
.12
20
.58
20
.28
27
.89
2007InvestmentGrowth,
%
9.2
7
7.0
6
11.5
7
14
.06
6.7
3
12
.83
10
.10
18
.00
2007Une
mployment,%
ofWorkforce
26
.60
10
.48
N/A
9.9
0
13
.60
N/A
N/A
11
.20
LongTermForeignCurrencyRating
BBB+
BB+
BB-
BB+
BBB
B+
B+
B+
Source:
Standardan
dPoors,
Afrinvest
Researc
h
Chart
2:
Sove
reign
RiskIndica
tors,
Nigeria
Versus
Afr
ica
I
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Democracy has come to stay in Nigeria...
and stability is spurring economic growth: a boom for banks.
Industry regulation is strong and forward-looking...
...and so the next round of consolidation has begun.
Economic growth remains robust; forecast at over 6% per annum for the
next 3 years..
The nation completed a historic political transition in May 2007, when President
Umaru Musa YarAdua was sworn into office; albeit amid widespread domestic and
international condemnation of the polls that brought him into power. Despite the
controversy, the successful transition has raised hopes that the momentum of
economic reforms of the outgoing government will be sustained. The previously
unknown and reclusive new president now seeks to step out of the shadows of
former President Obasanjo.
A combination of robust economic growth, an ambitious government initiative toposition Nigeria as a regional financial hub, and fierce competition among the
surviving 25 players has underpinned the rapid growth of the Nigerian banking sector.
Total assets have grown by 39% over the last year, an indication of the strength of
the underlying market. Banks continue to be successful in financing these assets from
various domestic and international sources. Retail deposit generation has been a
major imperative for the larger banks as they seek lower cost financing. Capital
raising was a major theme of 2007, following on the rounds of mergers and
acquisitions in 2005-2006. 2007 saw local and/or international capital market
transactions by at least 15 banks, with over US$15bn in new capital expected to have
been raised by the end of Q1 2008.
The central bank has stepped up surveillance of the industry, unveiling an ambitious
plan for an integrated transformation of the financial services landscape (the FSS
2020 plan). This integrated plan envisions a Nigeria that becomes one of the largest
economies in the world by the year 2020, propelled to those heights in large part by
its indigenous financial institutions.
A second round of consolidation has begun to gather momentum as the local players
compete to remain among the critical top 10 (out of 24). The strategic priorities for
the major banks include regional expansion, expanded retail banking, real estate
finance, project and infrastructure finance, mortgage banking, expanded consumer
lending, and corporate finance.
.
The Nigerian economy is experiencing its longest growth streak in over two decades.
High oil prices, combined with effective fiscal and monetary guidance by the Central
Bank of Nigeria (CBN) contributed to the 6% average annual GDP growth recorded
by the country since 2006. Non-oil GDP growth continues to outpace oil related
growth, as robust expansion in the agriculture, trading, building and construction,and services sectors compensate for the decline in the oil sector, where growth has
largely been stifled by disruption in production by local militants.
Executive Summary
After several decades of
successive military
governments, democracy
appears to have finally taken
root in Nigeria, albeit with
severe teething problems.
With political stability has
come macro-economic
growth, and Nigerias banks
appear to have been given a
new lease of life, achieving
significant expansion on the
back of a growing economy.
Active regulation, and a
forward looking national
financial services strategy is
helping banks become larger
and stronger, agents of
future national development.
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The international investment community has continued to endorse the emergence of
structural changes in the Nigerian economy on the back of a BB- sovereign rating,and investing billions of dollars in the debt and equity markets. In particular, the
banking, infrastructure, industrials, consumer goods and insurance sectors have
attracted significant interest from international institutional investors, including
private equity and hedge funds from as far away as Europe, Asia, and the Americas.
Several international banks have also upgraded their operations in Nigeria, seeking
investment opportunities and offering corporate finance services as they aim to lead
the search for new capital to finance the growth of the economy.
Nigerias financial markets have recorded significant positive developments over thelast 12 months. Equity returns on the NSE ranked 3rd among emerging markets in
2006, behind Zimbabwe and China. A flurry of new issues and a bull market
supported by excess local and international liquidity have led to a 74.9% appreciation
in the benchmark NSE index during 2007. In the fixed income arena, Primary Dealer
Market Makers (PDMMs) have been appointed to create a secondary market for
trading in Nigeria sovereign bonds, leading to an active market with a 10-year yield
curve. Yields on the Nigerian bonds have continued to decline, with successive issues
achieving higher levels of over subscription from both local and international
institutional investors. Newly licensed pension funds, large commercial banks and
recapitalized insurance companies provide most of the local subscription to the bond
markets.
...translating to accelerated development of the local financial markets.
Source: Financial Datanet House Limited (FDHL), Afrinvest Research
Chart 4: Sovereign Yield Curve (November 12, 2007)
5.00
6.00
7.00
8.00
9.00
10.00
11.00
1Month
3Months
6Months
1Year
2Years
3Years
5Years
7Years
10Years
Current Yield (%)
Time to Maturity
Source: Afrinvest Research
1
2
3
4
5
6
7
8
9
O
ct-02
M
ar-03
Aug
-03
Jan
-04
Jun
-04
Nov-04
M
ar-05
Aug
-05
Jan
-06
Jun
-06
Nov-06
Apr
-07
Sep
-07
0
10,000
20,000
30,000
40,000
50,000
60,000Market Capitalization Index
Chart 3: NSE Market Capitalization (Trillions, Naira), Index (100=1984)
Naira, Trillions
Executive Summary
Local equity markets have
seen substantial appreciation
in size and valuation and
improvements in trading
liquidity over the last five
years. .
A long dated (10 year) risk
free yield curve has emerged,
with active, daily trading in
domestic currency sovereign
debt.
The OTC sovereign bond
market records nearly 1000
deals each week, valued at
up to US$1.3bn.
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Nigerian Banking Report
Growth is broadly distributed across sectors, and primarily non-oil related.
National foreign exchange revenues and reserves are up; with the naira
holding up well against the U.S. dollar.
Of crucial importance, much of the stability in new growth comes from non-oil
related sectors. Agriculture, wholesale and retail trading, telecommunications and
services have been the largest contributors to growth in output over the last five
years. Crude oil related output on the other hand, has been unreliable: driven largely
by factors such as global oil prices and domestic production output. In any event, the
oil and gas sector continues to be an enclave, largely separated from the rest of the
economy, with bridgeheads only resulting from federal government revenue inflows
via petroleum taxes and royalties.
Domestic production output has declined significantly in recent years, due to violent
protests, kidnappings, and other militant related production disruptions. Anglo-
Dutch giant, Shell, Nigerias largest oil corporation, has been forced to shut down
almost 50% of its production capacity in the on-shore Niger Delta region, with largely
offshore based ExxonMobil recently assuming the top spot in Nigerias production
rankings. Total national output has thus dropped by almost 0.5m barrels per day to
about 2.2m barrels per day.
Regardless of recent developments in the oil and gas sector (Nigerias major source of
foreign exchange income), the countrys currency has proven resilient against major
international currencies, particularly the U.S. dollar. We have seen essentially a
relatively stable naira/dollar regime over the last eight years, and a steady
appreciation of the naira during the last three of those years (2004 to 2007). Over the
same period, foreign reserves have soared, largely on the back of disciplined fiscal
planning by a more accountable democratic government. Now at over US$50bn, with
external debt almost wiped out, Nigeria has one of the lowest national debt andhighest national reserves to GDP ratios among emerging market countries.
Chart 5: Stable Non-Oil Related Growth, Volatile Oil-based Growth
- -
-10%
-5%
0%
5%
10%
15%20%
25%
30%
2000
2001
2002
2003
2004
2005
2006
(e)
2007
(f)
2008
(f)
Source: Afrinvest Research
Crude Oil Related GDP Growth
Non-Oil based Growth
Executive Summary
Non-oil GDP growth has
been steady, and is projected
to accelerate to 15% per
annum in the coming years.
11
Strong global oil prices
continue to help support
government foreign
exchange income, and
provide an anchor for
currency stability.
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This recent appreciation in naira valuations (in part on account of the general slide in
the value of the dollar across global markets) has supported inward flows of foreign
investments into the local fixed income and equity markets. The impact of this has
been quick to emerge: declining yields across sovereign bond maturities, a demand
driven stock market, and new private equity inflows across sectors. While some of this
demand can be attributed to the emergence of local institutional investors (pension
funds) and an influx of domestic retail investors; these favourable conditions for
foreign inflows has provided a further source of supporting liquidity to the local
markets.
Fresh from an enforced round of consolidation in 2005/2006, Nigerias lenders are
rapidly growing into the macro opportunities in the market. There are now 11
Nigerian banks in the ranks of the top 1000 in the world (according to The Bankermagazine, measured by Tier 1 Capital), up from only 7 in 2006. Nigerias banks are
achieving greater scale and profitability from lending to large corporates and
institutions, as well as a fast growing consumer market. Total banking sector deposits
have doubled during 2007, with credit to private sector growing at an annualized
rate of 72% (to Q1 2007). By year end 2007, up to 7 Nigerian banks had more than
US$1bn in capital; and more than 10 banks had a total market value in excess of
US$2bn each. Credit to retail consumers is becoming increasingly available, with most
banks reporting the fastest loan book growth rates in their consumer loan portfolios.
Of crucial significance, growth has not occurred at the expense of credit quality, with
total bad loans (Non-Performing Loans, NPL) as a share of total loans declining to an
average of less than 8% for the entire industry (down from over 20% prior to
commencement of sector consolidation).
Nigerias newly capitalized commercial banks, are tapping into emerging
opportunities.
0
10
20
30
40
50
60
70
2000
2001
2002
2003
2004
2005
2006
2007(e)
2008(f) 0
20
40
60
80
100
120
140
160
Foreign Reserves (US$bn) Annual Average Interbank FX Rate N/$
Chart 6: Growing Reserves, Stable Currency
Nigeria Foreign Reserves, US$ bn
Naira-USD Exchange, Naira = 1USD
Source: Afrinvest Research
Executive Summary
12
Positive domestic andinternational views of the
long term prospects for the
naira has become a key driver
of continued inward flows of
investment into Nigeria.
Government fiscal disciplineat a time of high oil prices is
leading to a rapid build-up in
dollar reserves.
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Nigerian Banking Report
Commercial realities appear to be driving a new round of capital raising.
While M&A speculation continues to be rife.
Capital raising was the dominant theme for 2007. Nigerias banks, immediate
beneficiaries of macro-economic growth are seeing various new opportunities for
deploying capital to capture market share. However, specific market opportunities
aside, some of the banks appear to be raising capital merely to stay abreast with the
competition and to tap into auspicious equity market conditions. In 2007 alone, up to
15 of the 24 surviving banks in Nigeria made arrangements to raise new money, with
average deal sizes within the US$250m to US$300m range, and a number of banksdoing deals in the US$750m to US$1bn range. Capital raising is expected to continue
well into Q1 2008. Afrinvest Research estimates that about US$15.1bn would have
been raised in new debt/equity by a total of 19 banks by early 2008 (based on
announced and completed deals since Q3 2006).
Aggressive capital raising aside, 2007 was also a year of intense speculation and
several failures as far as mergers and acquisitions are concerned. There have however
been a number of successes, notably the landmark Standard Bank merger of its
Nigeria operations into IBTC Chartered; and simultaneous Tender Offer to acquire
shares leading to a 50.1% stake in the new entity. More recently, we have seen boardlevel announcements of on-going discussions towards a merger between Sterling
Bank and Ecobank. There is also news that one of the countrys largest banks may be
successfully closing on a deal to acquire the last remaining privately owned bank.
Aside from the one successfully completed transaction therefore, 2007 has been
notable for unconsummated deals. Among others, we saw intense public speculation
regarding a potential First Bank-ETI combination; indiscreet moves by an aggressive
mid-tier bank to acquire one of Nigerias oldest banks; as well as speculation
regarding a tie-up between two banks, both of whom have since gone their separate
ways to seek new capital from the equity market. We expect that 2008 will see a
number of M&A deals that commenced in 2007 reaching closure. Following on those
closures, we anticipate that talks will continue between the ownership and
management of various banks during 2008 and profile in this report the nature oftransactions that we think could feasibly occur, and their potential impact on industry
structure.
0
2,000
4,000
6,000
8,000
10,000
2002 2003 2004 2005 2006 2007
Chart 7: Total Banking Sector Assets, 2002-2007 (Naira, bn)
Source: Afrinvest Research
Chart 8: Total Banking Sector Loans, 2002 - 2007 (Naira, bn)
0
500
1,000
1,500
2,000
2,500
2002 2003 2004 2005 2006 2007
Source: Afrinvest Research
Naira, Billions
Naira, Billions
Executive Summary
13
2007 has seen intense
speculation regarding
potential mergers between
several Nigerian banks. Only
one deal was completedduring the year: IBTC/Stanbic
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Afrinvest banking universe
For the purposes of our analysis, we have relied on operating and valuation statistics
for publicly traded banks in Nigeria. Our calculations are based on operating
performance, current market valuation, and forecast financial performance for these
banks. Our data is based on most recently published financial statements for the
banks, and in some cases, Afrinvest estimates. Financial forecasts for the banks are
based on management discussions and our view of the banks most recent
performance and future outlook. Share price information is as at 5th December 2007.
Afrinvest Research segregates between top and middle-tier banks using three criteria:
Shareholders Funds, Total Assets and After Tax Profits. The banks in our top-tier
comparables universe are currently the largest by two or more of these criteria. The
rest of the banks in the industry make up the middle-tier universe of comparables. At
present, our top tier comparables universe includes: First Bank, GTBank, Interconti-
nental, Oceanic Bank, UBA, Union Bank, and Zenith Bank. Our middle-tier peer group
includes: Access, Afribank, Diamond, Ecobank, FCMB, Fidelity Bank, IBTC (pre-merger),
Bank PHB, Skye and Sterling Bank.
Chart 9: Top Tier1 vs Mid Tier Banks 2 vs. NSE (Rebased)
1Mid Tier Banks: Access, Afribank, Diamond, FCMB, Fidelity, Bank PHB, Skye Bank, IBTC, Sterling, Ecobank
2Top Tier Banks: First, GTBank, Intercontinental, Oceanic, UBA, Union, Zenith Bank
-50%
0%
50%
100%
150%
200%
250%
300%
350%
Oct-06 Dec-06 Jan-07 Mar-07 May-07 Jun-07 Jul-07 Sep-07 Oct-07
NSE Top Tier Mid-Tier31 October 2006 = 0
Source: Afrinvest Research
Executive Summary
14
Afrinvest Research actively
covers a group of 15 publicly
traded commercial banks,
segregated into top-tier and
mid-tier banks by
shareholders funds, total
assets and profits.
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Political and Socio-Economic Update
2007 Elections: More of the Same
Stable Politics, Better Economics
Key Risks: Infrastructure, Security, Corruption
Section 2
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Political and Socio-Economic Update
2007 Elections: More of the same (ruling PDP still in charge).
An independent President?
There have been early challenges for the new President
Incessant crises in the Niger Delta region
As widely anticipated, local, federal and state elections held in early 2007 produced
overwhelming victories for the ruling Peoples Democratic Party (PDP) in both the
executive and legislative arms of government, amid near universal condemnation of
the conduct of the elections. Former Katsina State Governor Umar YarAdua, strongly
backed by former President Olusegun Obasanjo emerged as the winner of the
elections, capturing 70% of total votes cast in a race that included former Vice
President, Atiku Abubakar and Muhammadu Buhari, a former military ruler.
Consensus opinion from local and international observers was that the elections wereseverely flawed and witnessed sufficiently widespread and flagrant irregularities as to
question the validity of the results. Notwithstanding this criticism, a new leadership
has emerged at all levels of government in the country. However, supreme court and
state election tribunal rulings have led to the overturn of elections in as many as five
of Nigerias thirty-six states, with five PDP Governors losing their seats over the last six
months. While there continues to be speculation that the presidential election
tribunal could overturn the national elections, it is thought that this will not be the
case and even then, that YarAdua would win any election re-runs, reinforcing the
view that the current administration will govern the country for the next 4 years.
Early criticism of the new leadership has centred on the view that the new
government may not be independent of the powerful former President, now firmly
established as leader of the ruling PDP. Consensus opinion is that President Umaru
Musa YarAdua, former governor of the Muslim northern state of Katsina, was
handpicked by former President Olusegun Obasanjo. YarAdua has struggled to
establish his independence from the powerful former leader, with much of the
country scrutinizing his every pronouncement for evidence of bias in favour of
Obasanjo. In addition, there is a widely held view that the new President commands
neither the respect that Obasanjo (a former military ruler between 1979 and 1983)
exuded nor sufficient will to stamp his authority and push through reforms. In his
first few months in office, President YarAdua has seized and missed several
opportunities to establish his authority and independence, thus, giving voice to criticsof his ability to run Nigeria.
Among other early challenges, YarAdua has had to face a stand-off with organized
Labour over tax and fuel price increases instituted by for President Obasanjo. The
increases were rescinded after three days of nationwide industrial action that
threatened to bring the economy to its knees. President YarAdua was widely
criticized for his handling of the grievances of Labour.
YarAdua has also had to contend with the continuing crisis, in the oil-rich Niger-
Delta region. With continued unrest, incessant kidnappings, violence and disruptions
to oil output, putting a definitive end to the Niger-Delta crisis will be a major issue
Political and Socio-Economic Update
16
Nigerias ruling Peoples
Democratic Party remains
controversially in charge of
national affairs, continuing a
winning streak that has
lasted since the return to
democracy in 1999.
Incoming President Musa
YarAdua has been criticized
for being dependent on
former President Olusegun
Obasanjo for his position and
influence, and is only
beginning to assert his
independence of thought and
action.
Early challenges for YarAdua
has included a stand-off with
organized labour, violent
crises in the Niger-Delta, and
corruption scandals involving
senior party and legislative
officers.
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for the new President. YarAdua has not heeded to calls to declare a state of
emergency in Port Harcourt, the largest city in the region (where the safety offoreign nationals remains a concern). This has been in spite of an almost 25% loss in
daily crude oil output (2007 output forecast to drop to 2.2mbpd), and an escalation in
militant insurgency from violent political agitation to armed, organized crime.
YarAdua has also had to deal with internal wrangling within the PDP over selection
of ministers and key advisers. The President ended the speculation on these key
appointments with the announcement of a full list of ministers and advisers on July
26th, two months after assuming office on the 29th of May. In what appeared to be a
strong statement of his independence, the list did not include any member of the
Obasanjo cabinet.
A recent mis-understanding with the reform minded Central Bank Governor,
Professor Chukwuma Soludo over a proposed currency redenomination policy has
provided further opportunity for the President to demonstrate independence of
action. However, the Governor and President appear to have since closed ranks on
matters of monetary and fiscal policy, with several other CBN initiatives receiving
Presidential support and approval.
In the aftermath of the controversial elections of 2007, it is expected that President
YarAdua will make significant efforts to win the confidence of a deeply skeptical
populace by making political and economic decisions that demonstrate his stated
desire to be a unifying servant leader. Already, the President has shown
commitment to this course of action on a number of occasions. He has set-up a high
powered committee of well respected, bipartisan citizens to undertake a review of
the nations electoral system.
The President continues to express a strong distaste for corruption and to lead by
example, recently making a public declaration of his total net worth upon assuming
office, an unprecedented move in the nations history. Recent happenings in the
political terrain have also confirmed there will be no sacred cows. President YarAdua
remained pointedly uninvolved in a recent scandal in the nations lower legislative
house. More recently, the President has cancelled a large foreign telecoms equipment
supply contract, dubiously awarded after alleged bribes to senior government
officials.
On 30th October 2007 deposed Speaker of the House of Representatives, PatriciaEtteh and her deputy, Babangida Nguroje, were finally forced out of office over a
corruption scandal that had run for months. An investigation in August found that
the Speaker and her deputy had breached House rules in awarding contracts worth
Squabbles over key appointments and positions
Friction over macro-economic and monetary policy
YarAdua is making the effort to live up to expectations...
Espousing a policy of zero tolerance for corruption...
Despite early legislative turmoil...
Political and Socio-Economic Update
17
More recently, the new
President has had to make
strong decisions regarding
monetary policy reforms,
briefly appearing to be at
odds with his internationallyrespected reformist Central
Bank Governor.
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US$5 million for the renovation of their official homes and the purchase of ten cars.
Ettehs refusal to step down had prevented the legislature from debating any billssince it was inaugurated in June, including the presentation by the President of the
federal budget for 2008, and caused brawls on the floor of the house between her
opponents and supporters. A new speaker, Oladimeji Bankole, was elected on 1st of
November by 304 votes against 20 to the candidate backed by the PDP party
leadership. The choice of Bankole has been interpreted as a signal that the PDP
dominated House of Representatives wants to assert its independence from the party
hierarchy.
YarAdua has also demonstrated a keenness to observe court injunctions and adhere
to judicial rulings, keeping to an early Supreme Court ruling directing the re-
instatement of an opposition party Governor in the contentious south eastern state
of Anambra, as well as a number of more recent rulings by electoral panels, reversing
election results in some states of the country.
The new President received mixed reactions to his conciliatory offer to form a
government of national unity encompassing the major opposition parties from the
2007 elections. The plans were rejected by several leading opposition figures, many
of whom commenced legal action challenging the results of the election.
Long sought after constitutional reform appears to be a front burner issue for the
new leader. Current expectations are for a process leading to the emergence of a new
constitution by as early as 2008. One key change expected to be captured in the new
constitution will be an amendment of the controversial Land Use Act, which vests
ownership of all land title in the state governments and thus constitutes a major
impediment to private land ownership. The new constitution may also provide for
greater autonomy for the national electoral body and may also contain resource
control provisions to assuage much of the ill will that has been generated in the
Niger Delta region.
In the financial services sector, many of the benefits of the growing economy are
beginning to emerge. Government reform policies in the banking, insurance, pension
and fixed income areas are combining to create real opportunities in the market.
Banking and insurance companies are already some of the largest drivers of equity
market appreciation. In the fixed income market, sovereign issuance by the Federal
Government continues to be the major driver of activity.
Despite the emergence of a long tenored (10 year) benchmark yield curve against
which corporate issuances may be priced, there is yet to be any significant offering in
the corporate bond market. There is however a CBN supported plan in the offing for
Upholding the rule of law
YarAdua has made efforts to reconcile rival political groups...
Sorely needed constitutional reforms now possible...
Financial services reforms continue...
Prospects for financial market growth still exist
Political and Socio-Economic Update
18
YarAdua continues to display
a conciliatory approach to
governance, seeking to
bridge political gaps and
engage opposition leaders inhis government.
This new approach to
governance is in sharp
contrast to the single-minded
determination of his
predecessor, and leads many
to believe that there may
finally be hope for long
awaited constitutional
reforms in the country.
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long term bond issuances by Nigerian commercial banks. It is expected that
constitutional reform of the Land Use Act, together with the passage of a new
securitization law will eliminate some of the key obstacles to mortgage origination
and the emergence of a Mortgage Backed Securities (MBS) market, estimated to have
a potential size of up to N1 trillion (US$8 billion).
Under Governor Soludos management, the Nigerian economy has achieved
significant growth in recent years. Real GDP growth has averaged 6.0% p.a since 2004,
up from 3.8% in 2002, to N18.2 trillion (US$148 billion) as at Q3 2006. Over the same
period, headline Consumer Price Inflation (CPI) has declined to single digit levels
(8.5% in 2006 according to the CBN). Not surprisingly, much of the recent growth inoutput has occurred in the non-oil sectors of the economy (according to the CBN,
8.9% in 2006 versus oil sector decline of 4.7%). However, oil continues to play a major
part in the politics and economics of Nigeria (90% of government revenue is from oil
exports). A positive external balance of payments, caused in part by globally high oil
prices, has helped maintain a relatively stable exchange rate, with the naira
appreciating against the greenback for much of the last two years; though
performing less favourably against the euro and the sterling over the same period.
Nigerias external debt repayment continues to be a primary factor driving
international interest in the local markets. With just under US$6bn in external debt in2007, down from over US$30bn in 2006, and with about US$50bn in external reserves,
Nigeria has moved rapidly from being a highly indebted poor country to a new
emerging market opportunity. Coupled with a rapidly growing middle class
population, government commitment to continued spending on security and
infrastructure, and real sector production directed at over 140 million people; there
appears to be significant room for further economic growth in a stable Nigeria.
Sustained macro-economic growth...
Buoyed by lower debt and improved sovereign risk ratings.
0
20
40
60
80
100
120
140
160
2000
2001
2002
2003
2004
2005
2006
2007
(f)
2008
(f)
0
10
20
30
40
50
60
70
0
10
20
30
40
50
60
70
80
90
2000
2001
2002
2003
2004
2005
2006
2007
(f)
2008
(f)
Nominal GDP, in US$ (bn) Oil Prices, in US$Chart 10: High Oil Prices, Growing National Output
External Debt
Debt and Reserves, in US$ (bn) Chart 11: Erasing External Debt, Building Foreign Reserves
Source: Afrinvest Research Source: Afrinvest Research
Political and Socio-Economic Update
19
Ext
naRes
erl
erve
s
In financial services, thegovernment has expressed a
strong commitment to
transforming Nigeria into a
hub for sub-regional
transactions.
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But there are risks to the macro-economic upside...
Governments response has been painfully slow
The economy continues to suffer from various structural deficiencies including acute
infrastructural inadequacy and lapses in security of lives and property. These
inadequacies constitute both a drag on growth and a source of potential opportunity.
The large and difficult to quantify informal economy of artisans, traders and other
self employed persons are the major losers from the nations deficiencies as they are
unable to grow as fast as they would under more conducive economic circumstances.
The continued infrastructure, power and energy sector crises (bad roads, incessant
power cuts and persistent fuel shortages) inhibit growth at all levels of the economy.
They are also major contributors (together with profligate government spending) to
consumer price inflation. In the formal sectors of the economy, there is a greater
ability to withstand these deficiencies, albeit at great cost. Overall industrial output
declined by 2.6% in 2006 with other sectors driving growth, including: agriculture
(7.2%), wholesale/retail trading (13.7%), building and construction (12.1%), and
services (8.9%). Manufacturing capacity utilization increased to 53.3%, but remained
below the 2003 high of 56.5%. However, for the first time in the last five years,
Federal Government expenditure declined as a contributor to growth (10.6% of GDP
in 2006, versus 12% p.a average since 2002).
The Governments responses to these challenges have in part been encouraging.
However, aside from positive policy pronouncements, there is yet to be substantial
action towards addressing many of the problems. President YarAdua has vowed todeclare a state of emergency in the power sector and has announced an
acceleration of plans to increase electricity output to 10,000 MW by 2010. However,
the planned unbundling and privatization of the incumbent state-owned power
monopoly continues to be stalled. In sharp contrast, the government has moved
swiftly to dismantle the state oil corporation, the Nigeria National Petroleum
Corporation (NNPC) into several different agencies and companies. The NNPC
unbundling is said to be aimed at achieving greater efficiencies in the management
of the nations energy resources. This is despite a government sanctioned overturn of
the hurriedly arranged privatisation of the state-owned petroleum refineries,
achieved during the last few weeks of the Obasanjo administration. In other areas,
government maintains that its approach is to seek private sector-led solutions and to
focus on building institutions that will provide the necessary environment for reformsto thrive. As always, the devil will be in the details of implementing these much
needed changes.
Political and Socio-Economic Update
20
We see key structural risks to
the Nigeria macro story,
particularly in the areas of
infrastructure, security and
corruption. These factors,
together with any significant
downward trends in global
oil prices could very quickly
combine to halt much of the
progress that we are seeing
in the country.
Nigerias government has
thus far been slow to respond
to tackling these risks andputting in place a cohesive
strategy for the future post-
Obasanjo. It is expected that
2008 will see bolder policy
decisions, beyond the
current strategy of cautiously
building on recent successes.
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Nigerian Banking Sector
Nigerian banks have arrived
Trading Places: Old generation makes way for new
Key growth drivers
Game changed: Bigger appears to be better
Section 3
21
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Nigerian Banks have arrived on the sub-Saharan Africa scene.
Substantial scope for growth remains.
In 2006, five South African banks constituted 83.9% of the largest 15 banks in Africa
and the Top 1000 banks in the world (measured by Tier 1 capital). By 2007, 11
Nigerian banks had emerged among the ranks of the Top 1000 banks in the world, of
which 18 were African. Of this group of 18, South African institutions have shrunk to
only 72.1% of the total (from 83.9% in 2006), while Nigerias 11 leading banks now
constitute 25.4% of the group.
Growth in the underlying Nigerian market has played as much of a role as sector
consolidation in achieving this emergence. Total assets in the Nigeria banking sector
have increased by 88% from N4.2 trillion (US$34 billion) in 2006 to N7.9trillion (US$64
billion) in 2007, with shareholders funds climbing 134% to approximately N1.7 trillion
(US$13 billion). Industry total loans and advances grew 33%, to N2.0 trillion (US$16
billion), a significant improvement over the 14% increase in the previous year. Loan
growth had stalled in 2005 as most banks focused on raising capital or merging to
meet new CBN capitalization guidelines. Of great importance, this growth has not
been achieved at the expense of asset quality, with non-performing loans declining as
a proportion of total loans from 16% in 2005 to 10% during 2006, and further down
to about 8% in 2007.
Despite this remarkable growth story, banking penetration in Nigeria remains at a
very low level relative to other emerging market economies. Total loans as a share ofGDP, 10.9% in 2006 is low when compared against a global average of over 130%, as
much as 50% in countries like Ukraine and Kazakhstan, and over 75% in South Africa.
Retail loans to GDP are at an even lower level as most Nigerian banks are only now
beginning to originate (or set up systems to facilitate) consumer credits. With rising
global commodity prices; in particular, sustained high crude oil price levels, mineral
rich Nigeria offers significant potential for increased corporate and retail lending.
These credits are required to meet the demands of a fast growing population (2007:
140m people), and the expanding corporate community. Already, several of the
leading players in the sector have begun to implement plans to expand lending
aggressively, with key targets being large ticket corporate transactions,
infrastructure/project finance and consumer lending. Nigerias banking sector and its
key participants appear well poised to shape the competition for sub-Saharan Africandominance over the next decade.
Nigerian Banking Sector Overview
22
Of the 18 African institutions
profiled in the 2007 The
Banker Top 1000 banks, there
are now 7 Nigerian banks,
together constituting over
25% of the top African group.
Despite this rise to
prominence on the African
scene, Nigeria continues to be
a remarkably under-
penetrated market for
commercial banking products
and services.
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Nigerias banks have seen tremendous recent growth...
...yet penetration remains low
At just over 10% of 2006 GDP, loan penetration in Nigeria remains low relative to
other emerging market and developed countries. With credit to the private sector
showing a more than 70% increase to Q1 2007, loans to GDP, accelerating from a
31% growth in 2005, the loan penetration rate is expected to improve in the nearfuture.
Nigerian Banking Report
23
Chart 12: Nigeria Banking Sector, by Tier 1 Capital (Naira, bn)
Source: Afrinvest Research
187.2249.2 292.9
501.5
738.1
1,722.4
0
400
800
1200
1600
2000
2002 2003 2004 2005 2006 2007
Tier 1 Capital, Naira (bn)
0
40
80
120
160
UK
Germany
Sou
thAfrica
Kaza
khs
tan
Hungary
Czec
hRep
Ukra
ine
Po
lan
d
Russ
ia
Turkey
Georg
ia
Nigeria
Chart 13: Loans to GDP (2006, %)
Source: Afrinvest Research
Median = 50%
Nigerian Banking Sector Overview January 2008
Nigerian banks have grown
Tier 1 capital from N187.2
billion spread across over 80
banks in 2003, to N1.7 trillion
contributed by less than 25
banks in 2007.
Despite this rapid growth in
capital, banking penetration
remains remarkably low in
the country, as less than 10%
of total loans to GDP,
measured against a median
of 50% for a group of
emerging market and
developed economies wesurveyed.
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Nigerias banks remain significantly underleveraged...
...and the countrys consumer credit market remains in its infancy
With retail loans at about 0.1% of 2006 GDP, Nigerias lenders have not even begun
to scratch the surface of lending to the countrys estimated 140m people. Other
emerging and developed markets we have surveyed report a 19% median retail loansto GDP ratio, and up to 100% in markets like the UK, indicating the scope that exists
for growth in retail business.
Nigerian Banking Report
24
Chart 14: Deposits to GDP (2006, %)
Source: Afrinvest Research
Tier 1 Capital, Naira (bn)
0
40
80
120
160
UK
Germany
South
Africa
Kazakhstan
Hungary
CzechRep
Ukraine
Poland
Russia
Turkey
Georgia
Nigeria
Median = 49%
Chart 15: Retail Loans to GDP (2006, %)
Source: Afrinvest Research
0
20
40
60
80
100
UK
Germany
Sou
th
Africa
Kaza
khstan
Hungary
Czech
Rep
Ukra
ine
Po
lan
d
Russ
ia
Turkey
Georg
ia
Nigeria
Median = 19%
Nigerian Banking Sector Overview January 2008
Even though Nigerian banks
have achieved impressive
growth in distribution
capacity and geographic
spread over the last five years,
they continue to lag the rest
of the world in deposit
generation: just over 11% of
GDP in 2006 versus a median
of 49% for the rest of the
world.
The lowest levels of
penetration are in the
consumer loan segment,
where Nigeria trails virtually
every other emerging market
country with a 0.1% retail
loans to GDP ratio. This is
clearly a sector still in infancy.
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Nigerian Banking Report
BankTotal Assets
(Naira, bn)
Total Assets
(US$, bn)
Union Bank 418.0 3.3
First Bank 364.0 2.9
Zenith Bank 215.0 1.7
UBA 212.0 1.7
Intercontinental 203.0 1.6
GTBank 185.0 1.5
Standard Trust 136.0 1.1
Afribank 86.0 0.7
Oceanic Bank 86.0 0.7
Wema Bank 71.0 0.6
Top 10 Total 1,976.0 15.6
BankTotal Assets
(Naira, bn)
Total Assets
(US$, bn)
UBA 1,191.0 9.5
Zenith Bank 972.8 7.7
First Bank 884.6 7.0
Intercontinental 704.8 5.6
Union Bank 667.8 5.3
GTBank 552.0 4.4
Bank PHB 382.0 3.0
Oceanic Bank 371.6 2.9
Access Bank 328.6 2.6
Diamond Bank 320.4 2.5
Top 10 Total 6,375.6 50.5
Chart 16: The Old. 2004 Top 10 Banks, descending order Chart 17: The New. 2007 Top 10 Banks, descending order
Source: Afrinvest Research Source: Afrinvest Research
25
Trading Places: Old generation makes way for the new
Within the sector, there has been a gradual displacement of traditional, old
generation banks (generally regarded as banks founded before the 19891990
banking sector liberalization) by the ambitious, new generation institutions.
Ranked by total assets, in 2004 Union Bank was the undisputed giant of the Nigeria
banking market, closely followed by the self re-engineering First Bank. Zenith Bank,
UBA and Intercontinental Bank made up the pack of top five banks. Wema Bank and
Afribank, veritable old institutions, were proud members of the 2004 elite class of
Top 10 banks.
Three years later, in 2007, there has been a remarkable trading of places. Afribank
and Wema are no longer in the Top 10. UBA (buoyed by its merger with StandardTrust Bank) has become the largest bank in Nigeria by total assets (and largest
company by market capitalization). Union Bank is now a lowly fifth. The re-
engineered First Bank continues to enjoy a prominent position, a testament to the
banks ability to re-invent itself and remain competitive in the new market. GTBank,
Oceanic, Access, Diamond and Bank PHB (all new generation banks) now make up
the bottom half of the Top 10, all but Oceanic being new entrants to the Top 10
category from 2004. Yet the changes appear to have only begun. With continued
growth in the market, increased interest from foreign investors, and continued
prodding by the CBN; it is expected that there will be further consolidation, leading
to potentially industry defining switches in market leadership.
Nigerias new generation
banks, mostly established
during the 1989/1990 banking
sector liberalization have
now completed the process of
usurping the industrys old
generation stalwarts.
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26
Then and Now: 2004 Versus 2007. Trading Places...
Chart 18: 2004 Market Share Rankings, by Total Assets
Source: Afrinvest Research
0
50
100
150
200
250
300
350
400
450
UnionBank
FirstBank
ZenithBank
UBA
Intercontinental
GTBank
StandardTrust
Afribank
OceanicBank
WemaBank
Median = N194bn
Old Generation New GenerationTotal Assets, Naira Billions
Source: Afrinvest Research
Nigerian Banking Sector Overview
*UBA is a mixed generation bank, following its 2005 merger with new generation Standard Trust Bank
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
UBA*
ZenithBank
FirstBank
Intercontinental
UnionBank
GTBank
BankPHB
OceanicBank
AccessBank
DiamondBank
Chart 19: 2007 Market Share Rankings, by Total Assets
Total Assets, Naira Billions New Generation Old Generation
Median = N610bn
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27
Enormous scope exists for growth in the Nigerian banking sector
Key growth drivers: infrastructure and the consumer
Banks are now redefining their business focus...
As we have seen, Nigerias financial sector remains severely under-intermediated.
Broad money supply (M2) is estimated at only 25% of 2006 GDP, versus an average of
250% of output in the developed and industrialized world. With a domestic savings
rate of 25.7% of GDP, there is significant scope for growth in provision of banking
services to the Nigerian economy. Traditionally, banks in Nigeria had focused on
capturing lucrative, low cost government deposits, and lending to low risk large
corporates. Alternatively, most banks focused on highly profitable foreign currency
arbitrage, exploiting pricing distortions between the official and parallel foreign
exchange markets. In recent times however, rapid growth in the underlying market
for credit has opened up a new vista for Nigerian commercial banks.
We see key growth drivers in the areas of infrastructure finance, corporate finance
and consumer lending. Much of the immediate new market opportunity lies in
expanding current business with large, structured corporates across various growth
sectors, and developing new products for the burgeoning retail market. Most
Nigerian banks currently have loans books dominated by corporate business, with
only a small (but fast growing) fraction taken up by retail loans. In corporate lending,
general consensus is that banks need to scale up to be able to break into the
potentially lucrative, enclave oil economy. Already, government efforts to enforce
local participation in this foreign dominated sector is underway. Various initiatives,
including mandatory local content limits and marginal field concessions to indigenousoperators are creating entry opportunities for well prepared financiers into this
lucrative market segment.
Interestingly, much of the talk among business leaders in Nigerian banking today is
about the huge, untapped retail market opportunity. Senior bankers speak about the
barely 15 million people estimated to have bank accounts in Nigeria (out of a
population of over 140 million), and the fact that only a small proportion of these
ever use those accounts. A lot of emphasis is put on the abysmally low levels of
leverage currently being taken up, even by employed professionals with steady
income streams. More recent numbers relating to mobile density and mobile phone
usage (currently almost 40 million subscribers) point to an active underlying retail
market. Finally, the recent explosion in retail demand for equity securities (1.2 millionapplications in one recent public offer, and an even larger secondary market
participation) indicate that the Nigerian consumer is now a potentially lucrative
banking customer.
With interest rates continuing their steady decline, and inflation reasonably under
control, banks have ventured boldly into the business of risk asset origination across
various sectors and tiers. Of note in this regard has been the surge in securities-
backed lending. A rising stock market has led to a surge in margin loans to stock
investors. Retail loans are also a new source of opportunity from an emerging middle
class, on the back of increased distribution capacity (in 2006-2007, bank branches
increased by 11%, from 3120 to 3460), and the development of new retail lending
products. Consumer finance for automobile and household purchases are a popular
new innovation, as are debit and credit card products. Bank distribution is further
Economic growth is opening
up new markets beyond
traditional currency arbitrage
and yield curve exploitation,
historical sources of much of
the sectors profitability.
An immediate source of
opportunity appears to be in
intermediating excess
national reserves and new
found banking capital into
financing to bridge Nigerias
huge infrastructure deficit.
Nigerias untapped retail
market is considered to be
the primary, long term
market opportunity; with
most industry players now
setting up systems to
originate higher yielding
consumer risk assets.
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28
enhanced by the creation of mini branches and the proliferation of ATMs and other
e-banking channels. At the highly competitive corporate end of the spectrum, banksare still able to generate new business: financing large ticket transactions that had
hitherto been the near exclusive province of international banks. Various large ticket
syndications in the telecoms, cement, oil and gas, industrial chemicals, maritime and
power sectors have provided opportunities for the banks to put their newly acquired
balance sheet muscle to work.
Capital raising was the dominant theme of 2007. Consensus opinion in the banking
sector is that size is imperative, and that the largest players will be the leading players.
This view has set about a scramble to raise capital, across the balance sheet(debt/equity) and from various sources (domestic/international) utilizing different
instruments (Ordinary Shares, Eurobonds, OTC and listed Global Depository Receipts,
Multi-lateral Loans, Equity linked Notes among others). This quest for capital has
coincided with the 2007 global liquidity glut, and heightened local awareness about
capital market opportunities. This fortuitous series of events has allowed virtually
every major bank in Nigeria to arrange a capital raise in 2007. At last count, 15 of the
24 banks had made arrangements to raise new money, with average deal sizes in the
US$250 million to US$300 million range, and a number of banks doing deals in the
US$750 million to US$1billion range. As at December 2007, 13 banks had raised or
were completing transactions to raise over US$12 billion from the capital markets.
.and battling to raise new capital: to finance growth
Already, we are seeing thatmarket conditions and
investor demands for returns
to invested capital are driving
an increasing redefinition of
banking focus to long term
risk origination versus short
term market trading.
Further, Nigerias banks are
aggressively tapping into
auspicious market conditions
to raise capital, ostensibly to
finance growth into these
market opportunities.
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29
A further US$3 billion in new capital remains to be raised from already announced
equity placements and public offerings by 3 banks. In total, the 15 banks shown in Chart
20 will have raised a total of US$15 billion in new debt/equity capital from the domestic
and international capital markets in the 16 months between December 2006 and March
2008.
Nigerian Banking Sector Overview
Chart 20: 2006/2007 Capital Raising by Nigerian Banks
Source: Afrinvest Research, based on publicly available deal data as at December 2007
Company Deal Type DateDeal Size(N, bn)
Deal Size(US$, bn)
Status
Intercontinental Public Share Offering Dec-06 95.0 0.80 Completed
GTBank Eurobond Jan-07 43.4 0.35 Completed
First Bank Eurobond Mar-07 21.7 0.18 Completed
Oceanic Public Share Offering Apr-07 175.0 1.40 Completed
UBA Public Share Offering Apr-07 92.0 0.70 Completed
Diamond Private Placement Jun-07 16.6 0.13 Completed
First Bank Public Share Offering Jun-07 470.0 3.80 Completed
GTBank Public Share Offering July-07 99.2 0.80 Completed
Access Public Share Offering Aug-07 70.0 0.60 Completed
Skye Private Debt Aug-07 12.5 0.10 Completed
Diamond Public Share Offering Nov-07 62.0 0.50 Completed
FCMB Public Share Offering Nov-07 70.0 0.60 Completed
Fidelity
Public Share Offering Nov-07 48.0 0.40 Completed
Afribank Public Share Offering Dec-07 100.0 0.80 In Process
Bank PHBPublic Share Offering
Dec-07
85.0 0.70 In Process
ZenithPublic Share Offering
Dec-07
130.0 1.00 In Process
First Inland
Public Share Offering
Jan-08
100.0 0.80 In Process
Union Private Placement TBC 180.0 1.40 In Process
Total Debt/Equity 1,870.4 15.06
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Second round consolidation off to a fine start.
Opportunities abound, but size matters...
...but challenges await the post-consolidation mega banks.
While the recent scorecard for Nigerias banks is impressive...
Future emphasis will be on increased competition, return on capital, asset
quality, earnings growth and staff quality
2007 was also notable for the completion of the first post-CBN mandated
consolidation, with the merger of Stanbic Bank Nigeria (a fully owned subsidiary of
Standard Bank of South Africa) with IBTC Chartered Bank. Standard Bank is expected
to retain at least a 50.1% stake in the resulting entity, Stanbic IBTC Plc. There are also
strong indications that two other banks (Ecobank and Sterling Bank) have reached
advanced stages in merger discussions. In addition to these, there continue to be
rumours of several other potential combinations. We predict that this second phase
of consolidation will herald a new era of competition in the sector, and may result in
no more than 15 surviving banks in Nigeria by the end of 2009.
With 75% of September 2007 market share (measured by total assets) held by the top
10 Banks in the industry, the Nigeria banking sector is becoming an increasingly
consolidated one, with size being a critical determinant of market success. Current
trends are for the largest banks to work closely together in club deals, ranging
from large ticket syndications to overnight inter-bank lending. Very often, these top
banks are able to gain access to the largest corporates and to command lowest cost
deposit liabilities. Market opinion of the top 10 is also markedly different from that
of the trailing pack, with the larger banks often receiving more favorable coverage.
When the dust settles on all the capital raising, attention will turn to the onerous
task of achieving return on capital levels that will justify the huge investor interest
that has been generated in the sector. Valuations in the sector are (in many cases) rich
and have priced in much of the expected returns in the industry. It will thus take
exceptional earnings growth to generate any price performance that compares to the
appreciation of the last two years. Already, the industry is trading at an average 2008
forward P/E multiple of 21.4x, with the mid-tier banks trading slightly higher on a
forward basis (21.6x) than the top-tier banks (21.1x).
Overall banking sector price performance has been outstanding in the last 12 months.
Rebased to zero on 31st October 2006, Nigerias banking sector stocks had
appreciated 192.1% by 31st October 2007. This price growth has been more
prominent for the mid tier group (284.9%) than for the top tier group (99.4%). For
Nigerias banks to deliver similar levels of value to shareholders over the next 12 to 24
months, significant efforts will be needed to put capital to work, capture market
share, manage emergent credit risks, and generate greater earnings.
There will be challenges to achieving these objectives. Amongst others, increasedcompetition from foreign banks, particularly in the corporate banking, project
finance and corporate finance arena will put pressure on these attractive sources of
earnings growth. Similarly, competition from other local players in the financial
With two M&A transactions
achieving some measure of
success during 2007, the
sector looks sets to shrink to
no more than 23 players in
early 2008 (from 25 in
2006/2007); with potential
for further consolidation
before the end of 2008.
The desire to remain in the
leading category of market
share owners will be a key
driver of further mergers, as
banks compete to b e in the
crucial top 10 group
Notwithstanding any revenue
gains from consolidation; or
new market access provided
by greater amounts of capital,
Nigerias banks will now be
pressed to deliver on
aggressive market
expectations of profit growth.
Nigerias banks have
performed spectacularly in
terms of operations and
valuations over the last few
years, with early investors
reaping great rewards.
Nigerian Banking Sector Overview January 2008
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services sector (insurance companies, investment banking firms and asset managers)
will restrict earnings growth for the commercial banks in these other lucrative growthareas. In more traditional areas, banks continue to face challenges with a large skills
gap for executing new product initiatives. In areas such as mortgage origination,
consumer finance products, structured finance and margin lending, banks are in
danger of putting large amounts of value at risk with insufficient knowledge to
manage these risks. In sophisticated areas such as currency and fixed income trading,
where banks have discovered new ways to generate income, there is a dearth of
skilled personnel, and attrition levels are high.
Most importantly, as banks begin to put larger amounts of capital at risk in the
origination of unfamiliar risk assets; there is insufficient experience or data with
which to effectively assess and manage these risks. In the rush to grab market share,
there is a very real risk that the industry ratio of non-performing loans to total loans
may see an upward spike. Further, with new found liquidity and access to large
amounts of capital, management of Nigerian banks will be challenged to apply
rigour and due care in capital allocation and investment decision making. To this
extent, continued regulatory vigilance will be an important element of maintaining
industry attractiveness. Already, indications are that new foreign and domestic
investors alike are paying close attention to banks performance and are likely to
react negatively to unfavourable news and/or earnings releases.
Risk management has become a crucial consideration.
However, achieving future
results of similar magnitude
will require significant more
effort and ingenuity in a
more sophisticated and
competitive market.
We see risk management as
the key new area of
competence that will define
winners and losers in this
new, complex environment.
Managing consumer credit,treasury and other emergent
risks will be a key business
imperative, now more than
ever.
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Post-consolidation Scenario
New Rules: Size is Imperative
New Entrants: Top Dollar, Tougher Market
Grand Ambitions: Expansion and Diversification
Consolidation Endgame: Our Crystal Ball
Section 4
33
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New rules: Size is imperative
Consolidation has been quick and decisive. From 89 banks in 2004, we have seen a
rapid decline in the number of banks in Nigeria to 24 as at last count. Going further,
we have also seen a consolidation in market share within the industry. Nigerias top
ten banks now control over 75% of market share (measured by total assets) leaving
barely 20% to the next group of ten banks. This consolidation in market share is the
result of an intensely competitive environment that we anticipate will continue well
into the future. Larger banks in Nigeria have inherent advantages relating to access
to the largest quality deals and clientele, lowest cost retail deposits, ability to attract
scarce management talent, public perception and access to government and
international financial groups. Larger banks are also better able to access the capital
markets, enjoy lower cost corporate financing, and participate in lucrative, exclusiveclub deals (both in the overnight trading market and in the large ticket project
finance market). Consensus opinion in the industry is that to be relevant, a bank
needs to be in, or within punching distance of the top ten.
To achieve this, Nigerias banks have found it imperative to further capitalize, merge,
or acquire another bank. In 2004/2005, a bank with a capital base in the region of
N25bn was generally considered safe, large and competitive. Today, with total
industry Tier 1 Capital at N1.7 trillion (US$ 14 billion), the average Nigerian bank has
over N60bn in shareholders funds. Indeed, amongst the largest seven banks are up to
three banks with total capital in excess of N125 billion (US$1 billion). This number is
expected to increase to at least five banks before the end of 2008. Clearly, the stakes
are higher, and the larger banks have every intention of dominating the market.
Post-consolidation Scenario
34
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
UBA
Zen
ithBan
k
First
Ban
k
In
tercon
tinen
tal
Un
ion
Ban
k
GTBan
k
Ban
kPHB
Ocean
icBan
k
Access
Ban
k
Diamon
dBan
k
FCMB
First
Inlan
d
Afriban
k
Skye
IBTC
Sterl
ing
Fide
lity
Wema
Spring
Eco
ban
k
Top Ten Next TenNaira, Billions
Chart 21: Nigerian Banks by Total Assets, September 2007
Median = N148.5bn
Median = N577.2bn
Source: Afrinvest Research, based on recently available audited company data
Nigerias ten largest banks
control the lion share of the
market (over 75% of total
assets), and have preferential
access to the largest
corporates and transactions.
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New entrants: top dollar, tougher market
New entrants (primarily offshore financial institutions) seeking to establish a presence
in Nigerian commercial banking will find this a challenging proposition. During
2006/2007, we saw a great deal of interest in Nigerian bank acquisitions. Emerging
market private equity investor, Actis was first of the block paying US$134 million to
acquire a 19.1% stake in Diamond Bank in a deal that was done at a healthy discount
to market (9.5x 2008E P/E and 2.3x 2007 P/BV). Standard Bank of South Africa was
also able to conclude a transaction, albeit at a higher entry price. In September 2007,
the largest bank in Africa crossed the last regulatory hurdle for its US$1.6 billion
merger and tender offer transaction involving Stanbic Bank Nigeria Limited and IBTC
Chartered Bank. The transaction was completed at steep valuation multiples (P/E of
28.6x 2008E earnings). Furthermore, the tender offer price required a 45.4% premiumto the share price of IBTC at the time of completing the transaction, a hefty sum,
even in Nigerias high growth market. In both instances (IBTC and Diamond), the
banks share prices have remained steadily above the levels at which the transactions
were completed. Afrinvest acted as financial advisers to Actis and to Standard Bank
on their respective transaction.
It is expected that any further transactions will be done at generous multiples.
Already, Union Bank has received shareholder approval to place up to 30% of its
share capital for sale to a strategic, international investor. While there are indications
that a suitor may have been pre-selected that opportunity could well turn into an
auction for one of Nigerias most underperforming banks. It is clear that bank
acquisitions will not come cheap in the Nigerian market. The CBN has indicated thatit may not be supportive of further acquisitions of Nigerian banks by international
players, a factor that could further complicate any potential deal. However, it is also
clear that organic expansion to achieve the competitive scale required to do business
in Nigeria may be an even more expensive route to establishing market presence.
Our take therefore, is that much of the M&A action we may see in the near future
will involve mergers of domestic and regional players, supported by strong capital
market conditions. Already, several domestic players, having successfully completed
capital raising in 2007, are seeking new national and regional expansion
opportunities via acquisitions. Other marginal players, having determined that it
would be best not to compete, are seeking merger opportunities, at valuation and
control thresholds that would satisfy their investors. We expect that these trends willcontinue, and in the next two years will result in a Nigerian banking sector that
consists of no more than fifteen domestically strong, regionally dominant and
globally connected institutions.
Post-consolidation Scenario
35
Despite numerous inquiries
from offshore institutional
investors, we have seen
limited success with bank
acquisitions in Nigeria, with
Actis and Standard Bank
being early winners in this
regard.
We expect that prohibitive
valuations and regulations
will pose major hurdles to
any further large scale
strategic acquisitions byinternational groups.
Further consolidation is likely
to be driven by combinations
of local players, supported by
strong capital market
conditions.
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Grand ambitions: expansion and diversification
One sour point in our assessment of Nigerian banks in 2007 is the lack of different-
iation in the banks strategies for winning in this fast growth market. As far as
understanding the market opportunity is concerned, senior bankers are almost
unanimous in their assessment of where the money is - (1) Consumer finance,
infrastructure and corporate finance; (2) oil and gas lending, project finance and real
estate; (3) mortgage finance and securitizations; (4) fixed income and equity
issuance/trading; and (5) continued growth in corporate lending.
While we share this view of the market opportunity, we observe striking similarities
in the banks approaches to tapping the market. Each claims to be working hard at
branch expansion and strategies for capturing retail market share. Each claims to beraising capital and strengthening their balance sheet to be able to take part in large
ticket financings. Further, each claims to be hiring the best people and setting up the
systems to be number one in investment banking.
Our view is that not all the banks will be able to execute on the Nigeria market
opportunity. In particular, the key requirements for success in the more specialized
emerging areas may not be accessible to all the banks. Management expertise, risk
management systems, customer knowledge and market intelligence are only a few of
the critical requirements. Talent in particular continues to be a scarce commodity in
the local market, with most banks resorting to hiring expatriates and Nigerians from
abroad. Attrition rates are high in the more specialized areas, compensation levels
are extremely competitive, and in some cases are fast approaching Wall Streetstandards.
Already, a number of banks are demonstrating competence at tackling these new
businesses. In some cases, the results are beginning to show. Earnings growth rates
remain remarkably high, with even large, established banks posting year-on-year
turnover growth of 30-50% during 2007. For the smaller, faster growing banks,
growth rates of 100% and above have not been rare and may continue for at least
the next 12 to 18 months. Loan growth is a strong driver across sectors (81.2%
growth in banking credit to the economy as at Q3 2007). Consumer loan penetration
is a primary driver on the retail side; particularly for financing automobiles and other
durable goods. Corporate lending remains a growth area in the near term, but is a
highly competitive and low margin business. Capital markets provide another area ofopportunity, with fixed income and equity trading helping drive growth. Most banks
are licensed market makers in government bonds, as well as active lenders to stock
market investors.
Post-consolidation Scenario
36
We have observed a lack of
differentiation in strategic
approaches to the Nigeria
market opportunity by most
of the banks in the country.
Despite the clear market
potential, we are convinced
that only a few will be
capable of executing on the
Nigeria market opportunity.
We see loan growth in
higher margin risk products;
and the effective
management of these risks
as the primary driver of long
term success.
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Consolidation Endgame: Our Crystal Ball.
Scenario I: Mid-tier banks consolidate to achieve top-tier status.
Scenario II: Top-tier bank acquires mid-tier target.
Scenario III: Top-tier banks combine to become undisputed leader.
Afrinvest Research believes that cost reduction and efficient resource allocation will
be key elements of any winning strategy going into the future. While much of the
talk in the industry is of increased revenue opportunities, and many of the banks are
awash with capital - and hence somewhat spendthrift, we believe that the real
winners will be banks that are best able to manage costs and resources. Already, it is
clear that significant opportunities exist for banks to more efficiently utilize resources
by deploying services on the back of common platforms. Our analysis reveals that the
single largest cost element for commercial banks in Nigeria is electric power
generation across branches. This is one cost that could very easily be reduced by
consolidating branches across merging or partnering banks. We believe that the
greater the cost synergies and the smarter the capital and resource allocation, thebetter the chances of winning in the future. We offer three M&A related scenarios to
achieving these objectives.
We see possibilities for two or more mid-tier banks to merge, with the objective of
more rapidly achieving top-tier status, while current shareholders retain a relatively
healthy balance of ownership and control in the new institution. Already, Ecobank
and Sterling Bank shareholders have elected to go this route. While this is a move
that could achieve a degree of cost/resource allocation synergies across the
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