New capacity to finance big-ticket projects –

Phillips Oduoza took over the reins of United Bank for Africa (UBA) in August 2010, a turbulent time in Nigeria’s banking sector.

A year earlier, Nigeria’s central bank governor Lamido Sanusi had sacked eight bank managers for their role in the toxic-asset crisis.

“This phase is only possible now that Nigerian banks have reached a certain size”

Sanusi then created a new directive that forbade the top executive of any bank to stay more than 10 years in office, meaning that Tony Elumelu, then UBA Group managing director, had to step down.

At that time Oduoza was group deputy managing director and in charge of the southern Nigeria business unit for UBA, its largest.

“We were one of the first banks to undergo the new stress test at the time of the crisis, and we came out fine. But the levels of non-performing loans (NPLs) across the sector were very high,” recalls the soft-spoken Oduoza.

A career in banking
1987 Credit officer at International Merchant Bank
2002 Executive director of Diamond Bank
2005 Deputy managing director of UBA Nigeria South
2010 Appointed managing director of UBA Group

“We took a huge hit on the Zenon deal, a N20bn ($125m) write-off.”

The management steadied the ship at UBA. NPLs dropped to less than 5% in 2011, then 2% the year after.

During that period, from 2010 to 2012, the Nigerian money market was very attractive, with rates higher than 20% for government paper.

This meant easy and safe money for banks, which was welcome given the consolidation of balance sheets after the ruinous toxic-asset crisis of 2009.

While this was good for the banks, it meant a halt in lending to the real economy and a real throttle on corporate growth.

“But yields are now dropping,” says Oduoza. “Treasury bills are now at around 7%, while lending to certain sectors can yield up to 15%.”

Overcautious strategy?

This situation should help lead Nigerian banks into a less cautious and more entrepreneurial mode.

The problem, says Oduoza, is that banks are “all chasing after the same top-tier clients, leading to depressed interest rates in that segment”.

The bank’s share price has yet to reach pre-crisis heights but has grown more than 68% since January 2013.

UBA announced its half- year results for 2013 in July, with a 9.2% rise in profits to N33.2bn.

Oduoza says that this is due to a strategy to strengthen other revenue streams because the Central Bank of Nigeria is implementing reductions in certain bank charges.

The results included a rise of 16.7% to N125.98bn for the group’s earnings.

Nigeria’s unbanked population is slowly dropping, and UBA reported year-on-year growth in deposits of 13.5%.

That did not lead to corresponding growth in loans, as the loan-to-deposit ratio remained below 40%.

One area that suffers a lack of finance is manufacturing.

Despite governments across the region hoping to stimulate labour-intensive manufacturing to meet the growing demographic bulge, “banks don’t exist in a vacuum. With the state of our roads and power infrastructure, manufacturing is not yet viable,” according to Oduoza.

“As for SMEs [small and medium-sized enterprises], which would provide a lot of jobs too, it is a no-go area.

Credit bureaus are only now being set up properly. Identity systems are still very basic. That’s why Nigerian banks are getting together to pioneer the use of bio- metric ID systems in the country.”

Another sector which has historically lacked credit is agriculture, but things are changing.

Thanks to the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending pioneered by the central bank, UBA has thrown itself into the sector.

“We actually account for around N7bn of the total N25bn that has been made available under the scheme. And agriculture represents 7% of our total loan book, above the industry average of 4%.”


But for Oduoza, the most exciting prospect lies in the ability for UBA to get involved in the financing of big-ticket items, such as the power sector or the upstream oil and gas sectors.

The bank has one of the lowest loan-to-deposit ratios in the industry, “and this gives us the liquidity that we wanted to put into large projects,” he says.

“We are putting $700m into the acquisition phase in the Nigerian power sector, and we will also contribute more in the operational phase.

“It is an important new phase, and is only possible now that Nigerian banks have reached a certain size – this exposure is less than 10% of our loan portfolio.

“Things like the new Dangote refinery project are now doable for Nigerian banks, whereas we couldn’t get involved before.”

The power sector investment would not have been possible without the World Bank’s Multilateral Investment Guarantee Agency (MIGA), which provides safeguards in case of default from the distribution and generation companies that are spearheading Nigeria’s power revolution.

“When MIGA came, it certainly gave us comfort, and the government has also played its part,” says Oduoza.

“And the fact that we have long-term lines in place with the DFI [development finance institutions] means we are covered should we need it.”

Cool on real estate

There is perhaps scope for a similar scheme in the housing sector, which would involve the government providing guarantees to banks for mortgage lending.

But while acknowledging the huge amount of money circulating in the Nigerian property market in terms of rent paid and fast-growing property prices, Oduoza says the mortgage finance sector is hamstrung by the lack of long- term funding.

“We don’t have the ability to lend over 15-20 years and there is no secondary mortgage market, so everyone is shying away from the sector,” he explains.

That could change if Nigerian banks manage to absorb all the liquidity in the country, often still stored as cash under the mattress.

“There has been an attempt in Lagos to shift people away from cash, limiting the trans- action size that you can complete in cash,” says Oduoza.

“This will be generalised across the country, and eventually will pull the money into the banks. When we have those deposits, they will over time be considered part of the core capital of the banks, allowing us to start mortgage lending.” ●

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