UBA, ONE OF NIGERIA’S BIG FIVE BANKS, appears to have bounced back strongly after a difficult 2011 when it reported a loss. After a rigorous cleaning up of its balance sheet and putting its house in order, it has announced record first quarter results.
African Banker spoke with the bank’s CEO, Phillips Oduoza (above, centre), on the turnaround in the bank and the outlook for the industry.
Like many of the current crop of top bankers across Africa, he started at Citibank, on their executive training programme.
Oduoza is a considered a true banker, having worked across most departments in the bank: audit, financial control, risk, treasury and also had a stint in other departments such as marketing and HR, giving him what he refers to as ‘an edge’ over others.
He is, as he himself admits, a hands-on manager who wants to be in touch with all aspects of the bank at all times and someone with a keen eye for detail. He left Citi quite early in his career to become one of the pioneer team that helped to build Diamond Bank to become one of Nigeria’s most successful franchises.
Oduoza is an engineer by education although he went straight into banking. He went on to gain an MBA and various executive qualifications. A keen traveller, Oduoza has travelled to over 200 countries. Those who know him say he is not a big risk taker, but at the same time ‘he is not risk averse’, although he does like to ‘ponder and take his time before taking a final decision on an issue’. A keen golfer he plays to a handicap of 12.
Q: How do you account for this turnaround?
A: As a fallout of the global crisis in 2008, banks in Nigeria found themselves holding a number of toxic assets following the economic slowdown, such as the decline in the price of oil and the crash in the stock market, not only in Nigeria but also globally.
Part of the Central Bank’s new policy was the formation of the Asset Management Corporation of Nigeria, AMCoN. We tried to sell a substantial proportion of our loan portfolio, non-performing loans, to AMCoN, and effectively draw a line and tidy our balance sheet, which on the whole was healthy. This would allow us to focus our assets for growth.
Also we operate in 18 African countries outside Nigeria. When we bought some of the banks, we also bought their bad loans. We decided in 2011 that we were going to write them off.
The whole idea has been to lay a very solid foundation for growth and incomes in particular, so that’s basically what we did.
The regulators were worried whether we could take on all the loss in one go but our strong capital adequacy ratio and Tier One capital allowed us to write them off once and for all.
These actions have all contributed to us focusing our energies into our core business and drive income growth as you have seen in the past quarter.
Also the past few years has seen us increase our footprint across Africa. With the exception of South Africa and Angola, we believe that we have covered all the strategic and critical markets in sub-Saharan Africa.
Today we are reaping the benefits of this. Africa contributed 19% to first quarter results and I believe that by end of this year we will be seeing Africa contributing anything between 20% and 25%.
Our non-performing loans have dropped to 3% and the cost/income ratio also has dropped; in December 2011 we closed with 78% cost income ratio; by the end of the first quarter, we have come down to 65% and our objective is to drive it down to between 60% and 65% by the end of this year.
Q: So essentially you have gone into a cost control exercise?
A: On one side, our revenues expanded and our African operations are delivering value.
On the costs side, we did quite a lot. For example, within our global share services platform, customer transactions are processed at one central location, removing duplication of our resources and thus reducing processing costs.
The second thing that we did was we shut down some of our loss-making branches and this process continues. For each branch we shut down, the operating cost, the human resource cost, the generator cost, the infrastructure cost, all this is eliminated.
We also started looking at the costs of internal operations. For example, because of power shortages, each branch needs to run a diesel generator with costs often running into the tens of thousands of dollars a year. We examined the possibility of buying diesel in bulk and supplying all our branches nationwide thus benefiting from a better standard rate.
We also started measuring efficiency and staff productivity. We put in a very strong performance management system in place and we introduced strict cost targets that management has to adhere to without, of course, impairing the quality of service.
Q: How critical is the rest of Africa to UBA’s ambitions and strategy?
A: Africa is very critical to our strategy and we believe that Africa holds a lot of potential. Right now we are not doing much lending in Africa but we are involved in a lot of trade finance.
We have also come up with remittance products that enable people to move money back home without carrying physical cash. All these produce lot of premium income to the bank in terms of fees, commission, FX and so on.
Another important part of the equation is that we are cutting out the need for a corresponding bank, which before was based outside of Africa. For instance, a trader in Nigeria importing from Ghana or Burkina Faso can now transact end to end, through the UBA network. And the bank also benefits from fees from both ends. From the customer’s perspective, the transaction turnaround time and cost is reduced so everyone benefits.
Q: So there’s not much lending and wholesale banking in the other African countries outside Nigeria?
A: No, we are lending to wholesale clients and corporate clients outside Africa. A lot of our clients nowadays operate across Africa. So if we have a corporate client that has a relationship with us in Ghana and is operating in Cameroon or Senegal, the client is more inclined to sign on with us in Nigeria.
This is increasingly becoming the case with many of our clients – both African and multinationals like Unilever, Nestlé, Olam.
We have just met with a major commodity trader operating across different African countries and are looking at ways of partnering with them so that we can utilise the synergy between our various entities. UBA is present in 18 African countries outside Nigeria.
We are also working together to see how we can leverage on our presence so that we can offer our clients a seamless experience and work with them across the value chain.
We are not lending much to the middle market, the SMEs, because we know that the risk profile is very high at the moment, especially with a fragile global economy, but with time we will pursue that path.
Q: Was last year’s loss all Nigeria related or was it also from other African subsidiaries?
A: It went across both Nigeria and African subsidiaries. Don’t forget that a lot of our subsidiaries in other African countries are relatively new. For instance the Democratic Republic of Congo, Congo Brazzaville, Mozambique are all new operations. The crisis in the Côte d’Ivoire last year of course resulted in a loss. In Burkina Faso I talked about writing off the government loans. So the loss is cumulative of all these other countries and Nigeria.
Q: Amongst the various projects the Nigeria Central Bank is trying to implement is to move to a cashless society. How is this coming along?
A: First, regarding mobile money, UBA has the licence and we have already commenced offering this service. In fact we are the first bank to launch mobile money in Nigeria under a separate brand called AfriPay. The subscriber take-up has been good and the volume of activity has been increasing with time.
Mobile money is working, and it’s something that we are committed to. Strategically, we want to use it to keep visits to branches to a minimum. The implication is that we will be able to consolidate branches in Nigeria, thereby reducing that expense line.
Secondly, the issue of cashless society is also very much alive. As part of this initiative we have rolled out nearly 5,000 point of sale terminals with the objective of penetrating every shop that can accept it.
The country as a whole at present has registered about 110,000 merchants between January and April this year with about 60,000 point of sale terminals already deployed in the market. Between January and April this year we have turned 4bn naira ($25m) in transactions. The uptake is increasing on a daily basis and again the advantage for the banks is that a cashless initiative will ultimately result in drastic reduction in cash processing costs. It’s definitely the right way to go.
Q: What do you see as the greatest opportunity for UBA?
A: The greatest opportunity I see is the business in Nigeria which is expanding rapidly. Across the spectrum, from infrastructure to agriculture, there are boundless opportunities.
I also see our African expansion as a great opportunity, I see it as a very, very great opportunity. We are going to see some significant return from our African operations. This is something that is very unique to UBA, there’s no Nigerian bank that has this kind of strategy and I see it as a very major opportunity for us.
Q: How do you see the shape of the banking sector in Nigeria today?
A: The industry has been derisked to a very large extent, all the banks have been fully recapitalised and the industry is strong.
We are looking at lending to the risk sector as the next thing because banks are seeking other opportunities for income.
I believe that the banks can actually fund the power sector once the ongoing reform enters the implementation stage.
I think that the banks are stronger now than they used to be. With a lot of the banks selling off their toxic assets to AMCoN, I believe that Nigerian banks have probably some of the strongest balance sheets that you can think of.
Nigerian banks also have a lot of capital adequacy compared with other parts of the world. The average capital adequacy for Nigerian banks is probably in the 20% whereas the regulatory minimum is 10%, so the banks are well positioned to handle the challenges that we are likely to see in the future.
Q: Agriculture has often been seen as a risky sector to lend to. Yet the Central Bank has recently encouraged banks to lend to this sector in particular; how is that going?
A: It’s working! Today UBA remains a leader in the agric segment and our total portfolio in the agric sector is about 7% of our portfolio. The industry average is below 2%, so UBA is one of the bigger lenders to this segment and in fact most of the large-scale agric players are also customers of UBA – from rice millers to juice producers to starch millers.
We all have them in our books and we are lending to them and their loans have been performing very well. These are fairly long-term loans and the interest rate is in single digit because of the government intervention, so it’s absolutely suitable for the agric operators.
Q: Finally, how would you describe UBA’s strategy?
A: We have a three-tier strategy: one is to be a clear and dominant financial services institution in Nigeria; The second is to be a leading financial services institution in Africa and then to have footprints in key financial centres in other parts of the world.
We are among the Tier One banks in Nigeria. In terms of certain parameters, we are leading, in others we are either second or third. We are gradually building the business in such a way that we have attained our first objective in Nigeria. In our African presence we are very well positioned. That’s why we are now concentrating on consolidation because all we need to do is to sweat out the investments that we have made in Africa and it’s going to happen shortly from now. The third one is the key financial centres: we have an office in London, we have a rep office in Paris and we have an office in New York. Now the objective is also to make these offices functional and integrated; for instance, the Paris office to integrate properly with our French-speaking African countries where we are present. London is a trading partner now for Nigeria and Africa.
So I see UBA as a franchise that is going to redefine the way business is done in Africa. I see it as a franchise that is going to bring about a lot of economic development amongst the various African countries and I believe that we can also partner with the governments of various African countries to assist them in their development. So I see UBA as an African franchise.