allAfrica.com: Nigeria: Cost Income Ratio of Country's Banks Too High

Recently, Yomi Adeola, Managing Director Sterling Bank PLC had an interactive session with journalists in his office in Lagos and spoke on a wide range of issues in the banking industry in Nigeria.

Excerpts

Is Sterling Bank coming to raise more funds from the capital market, how much are you targeting and when should we expect this to happen?

We are looking at the September/October timing for going to the market. On the issue of how much capital we need, I am not a believer in too much capital, I imagine we would go for between N50 and N75 billion in capital for the kind of bank we want to run, I do not need N250 billion in capital, I do not need N300 billion in capital. Experience has also shown that those people who have raised huge capital have been unable to deliver the return on the capital. I will not mention names but we know banks that have raised N300 billion in capital and all they made today in profit before tax is N30 billion, that's 10 per cent return, it's not good, it's not exciting. So why beat the drum and deceive the whole public to come and invest and at the end of the day, the return on equity is nothing to write home about? I know another one with about N180-200 billion capital, same thing.

If Sterling Bank at N25 billion capital is able to deliver between 30 and 40 per cent return, that's better for investors than the one that is raising N300 billion and delivering 10 per cent. So you see, there's this bandwagon effect in Nigeria and I think it's madness, so if Bank A has raised N200 billion, I must go for N250 billion, Bank B has raised N50 billion, let me go for N300 billion; they are not looking at ratios anymore. This is capital in absolute terms or just air capital, capital is just in the air, it's not working for you. Of what use is that kind of capital? So, by the time I am raising N50 to N75 billion, I should be able to predict the kind of return I can give on that capital and it will not be far away from the kind of return I am giving on the capital that I have today so that doing 20-25 per cent profit on my N25 billion, by the time I get to N100 billion, let it not be less than the same 20-25 per cent, otherwise I'm not being fair to my investors and I won't be fair to the people I have taken money from. That's my attitude to the issue of capital; it won't be too high, raise what you truly need and also when you have too much capital, the tendency is for you to see waste. Look at the cost income ratio of Nigerian banks today, it's just too high - they spend too much money buying all sorts of things that are not needed, I won't name them, you know some of the things they buy. I don't think I want to run that kind of bank.

Going to the market can't just be for fun, what would you do with this capital you intend to raise?

First and foremost, we would like to get our technology right or should I say, improve on our technology; that is key. We want to do consumer banking big time. We really want to reach out to the consumers, the masses, the middle income earners. The way to do consumer banking is to deploy technology appropriately so we would be spending a lot on technology. Number two is to expand our branch network. Today, we have 100 branches, the level of sophistication in Nigeria is such that you still need brick and mortar, you still need to put branches all over. You don't need to build branches that are too elaborate but you must have the branches so we would build the branches.

Don't forget we have a major shareholder and this happens to be the largest bank in India-, the State Bank of India (SBI), we would partner with them, identify other locations outside Nigeria where we believe between Asia and Nigeria, we would be able to derive some synergy in partnering with SBI and having pockets of locations outside Nigeria so this is also a game plan and above all, our single obligor limit will go up because this is usually the percentage of your shareholders' fund so these are the key areas we would be focusing on. We have about six subsidiaries that are profitable, doing good business; we would capitalise some of these subsidiaries that can do more. We have the Sterling Asset Management, they need more capital and we'll give them more capital. We have Sterling Capital, we have a few subsidiaries that require more capital. We would also set up some additional subsidiaries for specialisation and we would also use part of this new capital for some of these initiatives.

With the mutual agreement between Sterling and ECOBANK to discontinue the merger, a lot of investors particularly people that bought your shares as well as your shareholders, would be worried that there were no indications in terms of the direction the bank is headed. Could you throw more light on this?

If a merger does not work or does not go through, it's not because management does not want it, it's because shareholders don't believe they are getting value. At a time a merger is called off, shareholders don't believe they are getting value. And that is what happened in this case. For the shareholders - what was on the table was not giving them enough value and they called it off, not management. Now, when you are calling off a merger, it means you are looking at the opportunity cost of moving on as Sterling than pursuing a merger. There must be something positive they see in Sterling moving on for them to have called the merger off. And for me, that thing is very clear, they see a bank with great potential; they see a bank that is beginning to put legacy issues behind and is beginning to do well.

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