Managing Director, Skye Bank Plc Mr. Kehinde Durosinmi-Etti expects the federal government to take advantage of the early passage of the 2013 budget by the National Assembly and begin immediate implementation of the fiscal policies. Festus Akanbi and Obinna Chima were part of a select group of financial journalists who fielded questions with him
With just a few weeks into the new year, how will you assess economic performance in 2012?
2012 was an interesting year both for the country and for the economy. For the country we had the present administration of the federal government settling down to work and to do the business of the day. Key areas of focus such as power, agriculture, manufacturing, infrastructure were addressed and at the end of the year, privatisation took place in the power sector and the process is ongoing and we feel that with a lot of investment in power, production will go up in 2013. For agriculture, the central bank had gotten involved in this a few years ago and the minister of agriculture has stepped up and done a nearly miraculous work. Bank lending to agriculture has increased from one to three per cent and the target for 2013 is 10 per cent of aggregrate lending. We are involved in new initiatives in lending to agriculture. We are trying to make it more bankable.
You would see that agricultural production had gone up in 2012 and there should be continued efforts in 2013. Specific focus areas in 2012 where banks got involved, apart from the general areas from cropping to animal husbandry and processing, were direct initiatives in the area of fertiliser and seeds financing. So, what you have is fertilisers getting to the end users much more and also better quality seed is being distributed at affordable prices to farmers. So, that has helped production a lot and we should see that improve in 2013. On infrastructure, we have seen the airport and we have seen a lot of road contract taking place. State and federal governments are doing a lot on infrastructure and much more deep-rooted things planned for 2013.
But security is still of concern, but it is fairly under control. A lot more still has to be done. I believe that the assistance of the international community where you could get better technological assistance would be of great help in resolving a lot in the area of security. In the banking industry, I think 2012 was a year of realisation of the efforts of the industry, the central bank's work, AMCON and the economy as a whole for the industry to report ground-breaking profits as an industry. The banks are relatively sound and are all behaving responsibly and ready to support the growth of the economy. There are good signs for the banking industry today as competition is back. We have seen relatively stable interest rates with inflation at 12 per cent, still high, but stable. Interest rates are still a bit high, but that was necessitated by the fact that government's borrowing is still high and also due to the need to stabilise exchange rates. So, the tightening of money supply pushes the rates up. But we feel that 2013, interest rates should slide a bit. Some of the things that are still holding interest rates where they are include the need to maintain exchange rate. So, the tightening would continue and the central bank would continue to maintain that stance as long as there are signs that the exchange rate may go out of control. So, that stability has enabled banks to plan, has also enabled companies to plan and has created a platform for us to work and realise our goals, so it was a fairly good year.
What are your projections for the exchange rate, interest rate and government revenue this year, given the fact that the crude oil benchmark has been revised downward?
As a country, the estimation I have is that we would earn more from crude oil sales. If prices remain within the budgeted range or the $100 mark, the revenues would be more than last year. So, if that is the case, it would enable planning and macroeconomic stability, both in terms of interest and exchange rates. It means that we would have the dollars to fund growing opportunities.
The other thing there is that, the budget was passed by the National Assembly early, so the federal government should hit the ground running since they are determined to move faster this year, than last year. So, we should see a lot of federal government programmes kicking off early this year. Implementation of budget should be faster and what that means is that it would drive the economy better. Agriculture should do better this year and we hope that we don't have another disaster, so that would help in terms of growth. In terms of whether some states would have reduced allocations, yes it would affect their ability to continue to maintain the rate of growth and development that they have, but there are ways of mitigating that. If your income drops, you can borrow more if you have to do that and meet up on your programmes, you can try to raise more taxes. So, states have to get more ingenious and also they have to be a bit more introspective in terms of looking at what their programmes are and focus more on the ones they have to do. So, that means rationalising some of the things they do and reducing the waste level and that way they are still able to work with lower budget. Really, I feel that 2013 would be better than 2012.
But if there are shocks in the price of crude oil, that would be bad for us. It would be bad for us as a country because it would affect the amount of revenue that comes in and I am not sure we would be able to absorb that shock on a sustainable basis. If the shock is temporary, then no problem, but if it is sustained, as a country, we are going to have problem because our reserves cannot carry us for long. We rely a lot on import; we do not export a lot other than crude.
Presently, the power sector privatisation is on and we understand that some of the preferred bidders are already negotiating with the banks. Do you think that Nigerian banks have the muscle to finance the acquisition of the power assets?
Definitely, banks have the capacity and capability to fund the projects. Already banks are funding multi-billion dollar projects either through syndications or club deals. Both local and international banks are already doing that in other sectors. So, the power sector is going to get a lot of investments from banks and other investors that are non-banks would put money in equity and others, but the banks in Nigeria have the capacity to fund the power sector adequately.
So how many of the firms is Skye Bank negotiating with presently?
Well, we are talking to two of the winners. So, we would participate in the programme, we are leading a syndicate and other banks have shown interest also because there is a lot of value adding there.
What is the market share of Skye Bank, how does the bank intend to grow. It is believed that Skye Bank is public sector biased, is that true?
Yes, the market share of Skye Bank is about 4.5 per cent of the industry and we have about 270 offices all over the country. We believe that we have a decent market share as we are a mid-sized bank. We believe that we have the ability to compete with all the banks and we do compete with all the banks in all lines of business. In terms of growth, our strategy is to grow organically and in growing organically, we shall do so in consistent with the growth in the industry.
But we would also look at opportunities to acquire or merge with other banks as the opportunities arise. You know, in this environment, mergers and acquisition is not a common thing like abroad where you can approach a bank and you guys would just marry each other. So, when the opportunity arises, we would look at the situation and see what is possible to decide on what to do.
Really, mergers and acquisitions are not the answer because it is not the size of the bank that is critical, but the level of efficiency, the strength of the capital, and the quality of its loan which all translates to efficiency. We believe that you must be sizeable and we believe that Skye Bank is sizeable as we are a N1.3 trillion balance sheet and we feel that at that size, we can take up 80-90 per cent of the transactions in the industry by ourselves and we can syndicate or arrange funding where necessary. We have taken up many sizeable projects and we have seen a lot of leadership, innovation and have carried out landmark transactions in the economy. So, we believe that we also want to do the right things at the right time. We believe that as an institution, using the tradition of prudence, probity and the core values that we have in the way we do our business, we would be a bank that would sustain growth over time. The bank plays in all sectors, we do not discriminate and public sector is the largest spender in Nigeria. So, we have to focus public sector and we add a lot of value to public sector. But likewise, we do more business with SMEs and other areas of the economy such as manufacturing, oil and gas. On the single obligor limit, I think it is okay. It cannot be reviewed upward; at best it can be reviewed downwards because as banks grow in size, the obligor limit can only go one way-downward. But I think for now, it is okay.
Talking about growth and opportunities, the process for the sale of the three banks wholly owned by AMCON will commence this year. Which of them will Skye Bank be considering for possible acquisition?
That would be pre-mature. But we would look at them, we cannot say which one, we would go for, because we do not know what is in there. But we would look at all of them when the time comes.
The CBN recently announced the extension of the implementation of the cashless policy in other states and one of the reasons given was that some banks are not making enough investments in Point of Sale (PoS) terminals and other alternative channels. With that, do you see the policy as a failure?
I think the cashless policy is laudable. This is something the Bankers' Committee of which I am a member supported. We discuss this at the Bankers' Committee. If you look at the time the PoS started, they were probably less than 10,000 PoS machines, but as at October, we had over 200,000 machines. That is a phenomenal growth.
There are challenges, the biggest of which is communication and infrastructure, just like our telephones and the central bank and the Bankers' Committee have done a lot of work in trying to overcome these challenges, but as we see, with our telephones, these challenges have been with us for a while. Like other things such as Automated Teller Machines (ATMs) and Information Technology (IT) in general, infrastructure is always a challenge, but we always invest a lot more to get out the required service delivery. Why it is much difficult here is because the service delivery is with individual merchants, not banks. ATMs are managed by banks, so you can make sure that the installation works. But if a PoS, which is with the merchant doesn't work, it doesn't work and it's discouraging. Some banks have embraced it. If you are bank that is focused on retail, if you are a large money-centered bank, you focus on it, if you are niche bank that has a few branches and is not focused on retail; you are not focused on PoS. So, some banks have so many PoS while others have very few. But it is out of choice. That is competition and nobody is forced to do it. Really, it is down to your appetite and interest.
Still on the cashless policy, do you foresee the possibility of the scheme assuming a national spread this year?
The plan was to do Lagos and then roll out to five major cities across the country and based on how those perform, will now determine how many more or roll out to the remaining part of Nigeria. The limited success and the issues that were encountered have called for more introspection and more review of what we have done so far, and that has slowed down the pace rollout. Twice we wanted to move ahead to new cities, but we felt that we should take a look again. So, there are learning points and we are looking at how best to approach other cities that we want to go into. So, the central bank, along with the banks is looking at these things. I am sure that in due course, we would determine what to do. Whether we would be able to take on the whole of Nigeria in 2013, I am not sure if we would achieve that with the level of caution that is being employed now. But I feel that we would take on quite a few more cities and locations in 2013.
Given the number of banks that we have presently; will you say the country is under banked or over banked?
Well, it is not the number of banks that determine whether you are under banked or over banked; it is the level of penetration that determines that. The kind of environment also, can determine the number of banks you can have. Like in the United States, we have over 10,000 banks, in some countries you have about four banks and in others, a few hundred. I think that our culture, our diversity, our varied interests determine the number of banks that we have. At one point, we had almost 130 banks and today we have about 24 plus another two coming up, and over the next few years, maybe more would come. Some people say it is not sustainable, but what I say is that it is really the penetration that matters.
Banks are all able to create a niche, there is a lot of money in Nigeria, there is a lot of interest, Nigeria is diverse and there are lots of interests. So, banks can create niches for themselves and are able to play as niche players. You can't have so many big banks. I think that is where the confusion is, because every bank is looked at to attain a big size. So, really, it is more of the penetration because if you look at it, in urban areas, they say we have as much as 80 per cent penetration within the adults and in rural areas, only about 30 per cent. Really, we are still very far from what we can attain. Also, the government is the biggest player in business and if a lot of the government businesses are privatised, what that does is that it grows the wallet of the banks. Also, if a lot of the accounts that are being lodged with the central bank are taken out of the central bank's domain that would increase the wallet for banks. Then, there is so much cash outside the banks. So, really, what would determine a lot of all these factors is the size of the market and how the players would play. I believe that our level of diversity and the depth of the economy can sustain the number of banks we have.
Accusing fingers are being pointed at the banks and bureaux de change, over the rising cases of cash trafficking these days. What is your take on that?
Well, the bureaux de change has done nothing wrong. If you want to take money out of the country, you declare it. And dollar is not under cashless, so you can go and buy dollar from the banks or the bureau de change in any quantity you like. There is nothing wrong, but if you want to take dollars out of the country, you declare it. That is all. So, there is no law that has been violated in the ordinary way.
The House of Representatives said it intends to push for a legislation that would strip the central bank of its banking supervisory role and create an independent body to regulate the bank. Do you support the idea?
I read it in the newspaper and was surprised. You know it is difficult to have an opinion. But what I can refer to is that in the United Kingdom, years ago, they took out the supervisory arm from the central bank and created the Financial Services Authority (FSA). After the crisis, they said the FSA did not do a good job and so they want to return that function to the central bank. But we are thinking the opposite. So, there is no one that is right and there is no one that is wrong. But the question I would ask is what is motivating them to do that? What is their motivation? The central bank has done a very good job in sorting out the banking crisis and they are supervising banks much better than before. I think it is more of the focus and the leadership that drives the result as opposed to the structure. Either structure could work, that is my take.
Is the $79 per barrel oil benchmark sustainable?
On the oil price benchmark, I like to be a bit more conservative. I will favour more of the $75 per barrel. Really, I think it is slightly political and also to try and maximise cash into the budget, that is why we have the $79 per barrel. Now, the issue of oil price today in Nigeria, in the short-run, it may be sustainable. You have every West African country producing oil, even East Africa, but in five to eight years time, the oil will add up to something significant and if the United States is not importing oil again, because they are almost self sufficient, the oil price would even be half of that. That for, is a bigger worry for us as a country. If we do not get our act together within the next five to eight years, we would be in trouble as a country. So, I think the next five to eight years is extremely critical to us as a country. We need to diversify, we need to invest in infrastructure, we need to take care of security, we need to sort all our problems out and become a wealthy, up and coming country.
Can you pre-empt the outcome of the Monetary Policy Committee meeting this week?
I don't want to comment on the MPC, but I think it will be too early for there to be anything significant that would be different. On interest rates, first of all, I think there is a basis for your interest rate. Your interest rate would relate to your inflation rate and should be higher than inflation for you to have real interest rate and that is economics. One other fact that is driving interest rates has been the level of government borrowing.
Government has been borrowing at an unsustainable level locally and that has also helped to keep treasury bills up. Now, if you look at inflation, why has it not come down? From an economic point of view, you can say that for rates to be positive to be sustainable, it has to be inflation plus X factor. But, if our inflation is at 12 per cent, there is a strong cost-push in there which is based on the level of inefficiency. Whether it is infrastructure, Customs, electricity and various areas where there are inefficiency. So, these are standard variance in our inflation index that we always seem to overlook but that keep our inflation rate persistently high. So, it is easy to say we should have single-digit interest rate, but how do you justify that and how do you sustain that?
This is because there would now be a disincentive for savings. If you look at our interest rates, even under Abacha, what they did was to try and install single-digit interest rates then and the man that carried the gun tried it and he failed. Even with the gun, he couldn't sustain single-digit interest rate. So, these are some of the factors. Yes, we can say that money supply is a factor in there as well because the central bank has taken out so much cash which should have taken care of interest rates, but if they do that, it will impact on exchange rate. So, they are doing the balancing act between the two and it is a very difficult balancing act. The exchange rate, from an inflation point of view, would impact more on all Nigerians than the inflation rate, simply from the fact that most Nigerians rely on some level of imported goods, but few Nigerians borrow. So, the average Nigerian that is not financially included is not impacted by interest rate.
What is your forecast for the banking industry and stock market in 2013?
For the banking industry, I think what you get in 2013, is more of what happened in 2012. We expect to see more consolidation of the banks. The banks are behaving well, the central bank regime is strong in terms of supervision and the corporate governance and risk management practices in all the banks is very good. So, we don't expect any shock this year. For the stock market, we saw a trend in the last quarter of the year. Between the Securities and Exchange Commission and the Nigerian Stock Exchange, there are a lot of initiatives they are taking to deepen the market and they are quite novel and they are doing a lot of things to make the market robust.
The inclusion on the JP Morgan index has helped, though what you have there is 'hot money,' a lot of short-term money that can go as quickly as they come, depending on how good or bad the economy is and there is no how you won't have some bad news that can affect their behaviour and some of them, based on certain news, may take their money out. But we feel that 2013, for the stock market should be more of what we had in 2012.