‘Recession raised banks’ Non-Performing Loans’

Deputy Managing Director, Wema Bank Plc, Mr. Ademola Adebise, in this interview with Chris Ugwu, speaks on the Nigerian economy, the banking industry and other issues relating to the turnaround project of Wema Bank.

Generally, I would say that the Nigerian economy has been experiencing some recovery signals since the beginning of the year. Specifically, we have seen relative calm in the Niger Delta area and this has resulted in higher crude oil production compared to 2016 production levels.

Higher crude oil production has direct strong positive impact on our foreign exchange earnings. This is evident in the steady growth in foreign reserves since the beginning of the year, reaching a 19-month high of $30.8 billion as at April 26, 2017.

Also, the monetary authority has been responding pragmatically to the challenge of constrained foreign exchange availability since the beginning of the year. As such, we have seen steady appreciation of the naira in the parallel market from a high of N520/$ to below N400/$.

This has significantly reduced input costs for most small and medium scale businesses that rely on the parallel market for accessing foreign exchange. Government is also deliberately seeking to align fiscal and monetary policy actions.

This will, potentially, provide the required enablement for gradual economic recovery and growth. Given the impact of the three factors above, we are beginning to see a gradual downward trend in inflation rate and increase in gross domestic product (GDP) since the beginning of the year.

What about the investment landscape in the country?

The investment landscape in Nigerian was significantly challenged in 2016 as a result of fiscal and monetary policy impediments. From a fiscal policy standpoint, Nigeria continues to perform below par on ease of doing business ranking. The latest World Bank report, ranked Nigeria 169 out of 189 countries in the overall ease of doing business. On the monetary policy front, the multiple foreign exchange rate regime stances drove some foreign capital out of the economy – capital flight.

However, the recent deliberate moves by both the fiscal and monetary authorities have the potential of improving the overall investment attractiveness of the country. The deliberate execution of the key initiatives articulated in the Economic Recovery and Growth Plan will be critical in repositioning the Nigerian investment landscape for improved attractiveness.

Wema Bank seems to be more interested in retail depositors. What is responsible for this?
Wema had traditionally been a retail bank and we intend to remain focused on this specific segment. We are not just interested in retail deposits; our overall goal is to deliver significant value to the Nigerian retail banking customers.

The retail segment drives economic growth in advanced economies and we believe that the same can be replicated here in Nigeria. The Wema Bank retail strategy is hinged on three key propositions – convenience, reliability and simplicity. What impacts do you think the new CBN policy on FX will have on the economy and the banking sector, especially on the loan books of banks?

The central bank’s new policy on forex has tremendously increased the availability of foreign exchange to legitimate end users and eases the difficulties encountered in funding foreign exchange transactions in the economy. Over the last two months, we have seen increased supply and availability of forex in the economy. This has, to a large extent, ‘energized’ the economy as businesses are now able to source forex to fund legitimate raw materials and machinery import transactions. In the informal sector, the new forex policy has eased the demand pressure and helped to drive naira appreciation on the parallel market.

This is ultimately helping to reduce exchange rate pass-through effect on inflation as the informal sector depends heavily on the parallel market to fund import transactions. Also, the new forex allocation policy for SMEs will contribute to the reduction in prices of imported items.

With respect to the impact on the banking sector, the increased availability of forex will lead to an up-tick in forex trading and transaction income of banks. However, given the likelihood of exchange rate convergence, there is a potential for further naira depreciation on the official forex market. When this happens, there will be an increase in the balances of foreign currency denominated loans and advances in the books of banks; and there will be need to make additional general and specific provisioning by banks.

What is the effect of recessionary and inflationary environment on the state of Non-Performing Loans in the banking sector?

Recession is one of the major drivers of non-performing loans in the banking sector. In a recessionary environment, there will be a general decline in economic activities and this leads to decreased revenue and increased losses for many businesses. When businesses are not able to generate enough revenue, their ability to repay or service maturing loan obligations will be significantly hampered. With this, the banking industry will automatically witness significant increase in loan default and deterioration in the quality of risk asset portfolio. On inflationary environment and its effect on non-performing loans of the banking sector, given that inflation increases the overall cost of doing business for both banks and their customers, businesses generally struggle to achieve healthy bottom-line during inflationary period.

When revenues are eroded by rising overhead costs, the ability of borrowers to repay or service maturing loan obligations will be significantly hampered. Again, the contagion effect will be increased loan default and deterioration in the quality of risk asset portfolio. The above scenario is evident in the upward swing in banking sector loan loss provisioning in the 2016 financial year results.

While some banks are feeling the heat of recession, respected ratings agencies keep affirming some banks,’ including Wema Bank’s status. What has made your bank weather the storm?

This is driven largely by Wema Bank’s resilience and deliberate strategy of leveraging digital technologies to grow transaction-based income. We were cautious in risk taking, maintaining a moderate balance in risk and reward in order to maintain a healthy risk asset portfolio. We also took a strategic decision earlier on not to play in some relatively volatile sectors. Also, we were able to achieve this through the deliberate execution of the key initiatives in our 3es (expertise, excellence and efficiency) strategic themes.

With the recent reopening of Kaduna branch, how prepared is Wema Bank to scale up its operations to cover other locations where it is not visible in the country?

Wema Bank has a well-articulated and efficient expansion strategy in view of the bank’s recently acquired national banking license status. The strategy entails the deployment of a mix of smart brick and mortar branches and digital channels. Given the enormous potential of digital channels, we are making our banking products and services available to customers anywhere and anytime through our various innovative digital channels. Again, this was the strategy that gave birth to ALAT, Nigeria’s first fully digital bank.

I would say that the current situation in the Nigerian capital market was occasioned by foreign portfolio investors’ low activity in the market. This was driven by perceived volatile forex policy and increased foreign exchange risk in the Nigerian economy. A cursory review of the activities in the Nigerian Stock Exchange showed that between 2011 and 2015, foreign transactions (by foreign portfolio investors – FPIs) outperformed domestic transactions. However, in 2016, this trend was reversed as domestic transactions outperformed foreign transactions. This trend has remained the same in 2017 as the activities in January and February 2017 revealed. Between January and February 2017, domestic transactions accounted for 53.64 per cent while foreign transactions accounted for 46.36 per cent of the total transactions on the Nigerian Stock Exchange.

This can be directly attributed to the capital flight by foreign portfolio investors (FPIs). The new NAFEX window introduced by the monetary authority was specifically aimed at addressing the current situation in the capital market.

However, for this move to address the situation, the activities in the window must be seen to be market-driven to allow for market liquidity and price discovery. In the immediate term, there is likelihood that foreign portfolio investors (FPIs) will be cautious, and initially observe trading activities on the NAFEX window, assessing liquidity levels and price discovery.

What are the factors that will make investors come to the market or stay away?

For me, one major factor that will energize foreign investors’ confidence and attract them to the market is convergence of the current multiple official foreign exchange rates. This singular factor has subdued the attractiveness of the Nigerian economy/ capital market to foreign investors.

The performance of the recent Nigerian $500 million dollar Euro bond (which was oversubscribed to the tune of three billion dollar) lays strong credence to this assertion.Today in Nigeria, it is difficult for a foreign investor to unwind a local currency denominated bond transaction and repatriate his funds. To put it in a simple way, as long as our forex policy is not market-driven, foreign investors will continue to stay away from the market.

What is your take on the International Monetary Fund (IMF)’s warning that the Nigerian economy needs urgent reforms on investment sentiments towards the country?

IMF’s point of view on any e c o n o m y remains one of t h e k e y cons i d – e r – ations for any potential investor. As such, investors’ confidence and sentiment will continue to be influenced by pronouncements made by IMF, either positively or negatively. Drawing from this general perception, the IMF’s warning that the Nigerian economy needs urgent reforms will have a negative impact on the investment sentiment towards the country.

What should Nigerians expect from launch of the new digital bank tagged ALAT by Wema Bank?

ALAT, Nigeria’s first fully digital bank, is at the heart of our retail banking strategy. With ALAT, we aim to simplify retail customers’ lives and offer banking services of unprecedented convenience and value. ALAT will redefine banking convenience by delivering an end-end to digital banking experience to Nigerians. There will never be any reason to visit a bank branch. Overall, ALAT is designed to match the lifestyle of Nigerians and help them save more.