Why some banks fail, others succeed –Zenith Bank CEO

What is it like running a bank in a challenging economy like Nigeria?
It is quite challenging when you look at it globally. If you look at what happened from 2015 when we had massive drop in oil prices, it virtually affected almost every country but it affected us more as an oil producer and as a country that relies so much on foreign revenue from oil. So that in itself was a big challenge on its own. But the key thing is that our previous fundamentals have always been based on prudence in Zenith Bank.

We are very clear as to what we want to achieve and the customers are always our focus and even in the boom time, we try to do things consistently and focus on what we actually plan to do for our customers.
And if we do that, it will help you whether things are good or challenging; and prudence is also something that is very important; that is what we try to do in Zenith and we actually ensure we are on the right track.
Improving on products and services
It is very challenging but we keep moving year in year out and keep improving on our products and services.

In the face of some adverse macro-economic numbers in the second half of 2018 (GDP flip-flopping, reserves going down, inflation ticking up, Stock market indices continue downwards, etc.), CBN is saying that coupled with the election year impacts, it would respond with contractionary monetary policy stance. What, in your view, should be the impact on and responses from the banking sector?
The banking sector itself is always a reflection of the larger economy. It is not a sector that just sits on its own in isolation. Whatever it is, the sector mirrors the happenings in the economy. Everybody actually agrees that 2019 is going to be a very challenging year not just because of the election alone; that is just the smaller part of it if you ask me.
I am very much concerned with what is going to happen even globally. If you look at what is happening in the commodity market you will see that the oil price is coming down again – from $80 it has gone down to just early $50; that is even a bigger challenge on its own. So when you have that and we also have foreign obligation to service our debt, it shows you that we have challenges to contend with which everybody alluded to. Even the President alluded to that. Even, as you said, the CBN Governor has said it that 2019 is going to be challenging. But I will say that we have had worst situations. If you look at what happened in 2015 when oil prices came down as low as $30 per barrel and Nigeria even went into recession, you can see we are recovering now.

We as a people, should help and try to galvanise the economy. It is not just the government alone; it is for everybody, both the services sector and the productive sector. How can we look inward, that is, looking at other alternatives as against focusing just on import or export of crude oil?
Agriculture is one area that there is still a lot of scope; not just agriculture but also other derivatives of it like packaging, food processing and all that. These are the levels we need to start moving into if indeed we actually want to boost our economy and become less dependent on oil.
Zenith Bank and some other tier-1 banks appear to be focusing on building a Shock-Proof Balance Sheet. We see loan to deposit ratio coming down, gross loans and advances also coming down while liquidity ratio is going up. Could that be an indication that you are holding back from giving loans, and building walls against an impending economic crises?

Very interesting question. We are banks and also we are in business too. Our business is lending. There are certain things you look at in lending as well. Even the demand itself is the first thing; it is not like any other business. You need to generate that demand for the loans. What is the position of companies now? How many are expanding, and are new factories being built? We need people to come to us to say we want to build, expand and all that. While an economy is coming out of recession many people are trying to basically reset and not in that expansion mood. That is why even the governments and Central Bank themselves are looking at ways that they can galvanise lending on their own by coming with many interventions at single digit rate.
These are some of the challenges that banks are facing. It is not that banks do not want to lend; this is where they make their profit. When they take deposits, what do they do with it? Yes people can argue that they invest in treasury bills but at the end of the day that is just one single product, and banks will always invest in treasury bills because they need it for liquidity management too.
But the core loan, that is where you actually get your revenue from. There are still challenges, the demand for loan is very important and it is a function of the economy. By the time the economy begins to boom you will see people talking of expanding their capacity.
Expanding ofcapacity
We need to also look at consumption. If consumption drops by virtue of the fact that the purchasing power of the people has dropped, it is also going to affect the people coming for loan because, then nobody will be talking of expanding their capacity. That is why I said we need to look inward and see what we can do on our own locally.
Once we do that, we will see the economy picking up. Even talking about the GDP growth for a country that needs almost everything and for a country that wants to develop, the GDP growth of 1.8% is challenging. Look at even developing countries like India, even Malaysia, they are talking of 9% growth.
Even the US as developed as they are is talking of over 6%. We have no business talking of a single-digit GDP growth but double-digit growth. If we actually want to improve on the quality of our lives and quality of the country itself then we must look inward.
As long as we keep on importing and importing for consumption then it will give us problem. Whether we like it or not once there is any issue in oil prices it would become a bigger problem for the economy. So, from the banking perspective, banks are actually willing to lend; that is our bread and butter, but we need to generate the demand itself.

There are also other constraints when you talk about bank lending. For every deposit you take you have cash reserve requirement of 22.5 percent. So for every deposit I take the CBN takes 22.5 percent of it. Automatically, that is like part of the cost of that deposit; you also have the Federal Government Savings Bond.
They are also competing for deposits with banks. Instead of giving your deposit to the banks you take it and put in Federal Government savings bond. Even those treasury bills that those banks are investing in, they are not necessarily investing for themselves sometimes, but are investing on behalf of their customers who request for it. So if you look at the deposit growth in the banking industry it is already curtailed, so that also will affect lending. The CBN is also intervening directly to give single digit loans. That will also curtail lending by banks. So
there are quite a number of challenges in terms of lending by banks.

There are expectations that we might see recapitalisation exercise in the banking industry because of the IFRS and Basel-3 that became effective January 1, 2019. What is the thinking in Zenith Bank?
We don’t have any need at Zenith Bank to talk about raising capital. Everybody say we are over-capitalised.

Deliberate strategy
So that issue does not even arise because it is not an issue for us. We have had a deliberate strategy of having capital adequacy ratio consistently at over 21 percent.
If you have so much capital and some other competitors in the Tier-1 category also do, but they are adding or acquiring some other banks with the huge capital at their disposal, to take the lead. Zenith has not done that, what are your thinking along this line?
When you see the way a tortoise and a snake run, they run differently. You see tortoise do its own, while snake goes its own way. The way that you want to dance depends on your style and structure. We have our own strategy. If you look at Zenith, we always grow organically; if you look at the consolidation in 2004 during the Soludo consolidation era, many banks came together; some 10 banks, some 12 banks, some 13 banks; it depends on what they want.
We are one or two banks that did not merge with anyone. Today you are in a better position to compare each of the banks in terms of any parameter whether in terms of profit or size; you can judge what position Zenith Bank belongs. Everybody must dance their own way; some people are better in some areas and you leave them and focus on your own. At the end of the day, it will be better for the industry.

The intervention of AMCON in two or more banks in distress is not too good for the industry. Why can’t mega banks in the country, on their own, come to acquire such banks to avoid a run in the banking industry?
Mergers and Acquisition (M & A) is a normal business strategy. It is something that people do deliberately. Even when two companies are doing well, they can decide to come together. It is not necessarily by virtue of a company or a bank going distress that you intervene.

Actually, we are not AMCON, Central Bank or NDIC that acquire banks. Even if I am talking about acquisition I can deliberately say I see this bank as having strength in a particular area. If I go with my own strength and combine it with their own then we can build a formidable force.
Deliberate business strategy
So we can decide to come together not necessarily being in distress before we can talk of acquisition. Do you know how many companies that the likes of Apple and Microsoft acquire on a regular basis? They would have probably acquired over 100 medium and small fintechs, not necessarily because of the issue of distress; it is a deliberate business strategy. I want to remove the issue of distress.
The issue of M & A in the banking industry in Nigeria is always regulatory induced. There are very few cases that you can think of that are not regulatory induced.
I doubt if it is up to one percent that are not regulatory induced. So when you begin to see businesses coming together to say I think there is value here let us do it together, I think it is very positive. And it also shows we are maturing as an economy; businesses can come together on their own to merge.
If we are matured this way, the issue of distress may not come up. Before it gets to that point, you could have offered yourself for merger. In a way, we are maturing in the industry and the economy is maturing. If the opportunity is there, any bank can be acquired but you must look at what you are acquiring. What is the value proposition? At the end of the day, are we going to be better together? So I think on that ground it is better but not on the perception of whether there is a challenge or not.
What do you have for your shareholders in terms of dividend payment this year?
Shareholders own the bank; there is no way we will not have plans for the owners of the business. We have plans for all the stakeholders; we have plans for our staff, the government in the form of tax payment. The shareholders too have their expectations and that is why we are really here. If we don’t meet their expectations then we won’t be here sitting down today. We take all our stakeholders serious; our customers and our staff too. For our shareholders we hold them in high esteem and make sure we reward them at the end of every financial year.

Access to loans has been a reoccurring challenge to banks’ customers especially small businesses. What are you doing in this regard?

We are not doing any customer a favour by granting loan to any of them. If we don’t do that, we won’t earn any revenue. So it is a symbiotic relationship and it is a mutually beneficial relationship. We on our own are doing a lot to ensure that we reach out to our customers.
Beneficial relationship
We just talked about the loan volume going down in the industry but we are now looking at other areas, which is the beauty of the fact that the economy too is maturing. If the big ones are not taking loans, you won’t fold your hands because those deposits you are holding are liability.
If you take deposit and you don’t deploy it, over-liquidity can sink a bank because of all the regulatory requirements i.e. cash reserve ratio, liquidity ratio, etc. So, we are looking for other outlets.
That is why if you see what is happening today, we on our own are developing our retail end of the market and we are being very aggressive about that.
We believe that is an area that there is a lot of potentials. We are looking at individuals, households, small businesses. We are reaching out to them to give them loans. Whether to pay for school fees or to meet some obligations pending payment of their salaries or whether to develop their small businesses, we are reaching out. About two weeks ago we had an event, tagged, Style by Zenith. The whole objective is to galvanise the economy to let them know that we are well positioned to serve small businesses and to serve households and individuals and even the students; that we are actually there for everybody. That is actually the stage we are moving to.
We are not an elitist bank, we are there for everybody. So those that don’t even have security, we have ways of handling some of those things too. There are quite a lot of ways we serve our customers. The collateral registry too is also in the process which the CBN is piloting.
However, you will find out that people are still complaining, but it takes time. And when you compare us to the developed countries, it is a slightly different terrain. Our credit bureau is working but we can still do a lot. But abroad, in terms of infrastructure we cannot compare. There you can identify where anybody lives, they have their addresses, social security numbers.

Social security
But we are coming up with things, BVN and all that, and I will tell you that things are changing. If you check, access to loans is much more improved now compared to some years ago. It is difficult for any individual before to go to a bank and say I want a loan, but today once you are working, you have easy access to loan.
If you want to try it, just come to Zenith Bank and see them at your branch, or you can even go online, you will see it there; you can have access to different types of loans. So things are actually changing. It might be gradual but I think the landscape is changing in terms of access to loans and facilities.
And in 2019 I expect that it will be much better. For Zenith Bank, retail is actually very key and that is an area we are focused on now and we believe we will see a lot in terms of our loan growth in that particular sector.
Zenith Bank recorded about 40 percent reduction in cost of funds in the nine month ending September 30, 2018. How were you able to achieve this feat? Is it that as a net placer of funds, head or tail you win and smaller banks lose? And what is the industry picture?

We have always been a net placer of funds. We have never taken money from any bank since inception and it is actually deliberate. Our business is to take money from our customers and do business. But the key thing about cost of funds, generally, is that it is not just about Zenith Bank.
In 2017, in the early part of December, treasury bills were about 21 to 22 percent but at some point in 2018, at the beginning of the year, it actually crashed to between 12 and 13 percent. So it was really more from a CBN perspective that cost of funds should come down.
We on our own too, we try to be much more efficient in terms of how we do our business. If you are able to bring down your cost of funds, it is much easier to pass it on to our customers in terms of lower cost of loans. And we believe if you are going to lend to the retail segment, households, small businesses and you are looking at those high rates, then you are inviting a bad loan.
So for you to say you are going into retail, you must be sure of your cost of funds, which is what we are very mindful of. And that is why we said that deliberately we must bring down our cost of funds, which is basically what we are doing, so it makes it much easier for us to lend in the retail space.
Retail space

The rate must be affordable; if it is not affordable from day one, you have set out to fail and to have bad loans.

How do you intend to manage your NPLs, because apart from the oil & gas loans the next source of high NPLs, according to some banks, is SMEs?
As I said earlier, we are not going to lend at exorbitant pricing. It has to be affordable such that we will not have issues. Our job is not to start selling people’s properties or securities; no, it is to ensure that from day one things are put right, and again, what you are lending to, you want to actually see through that particular business.
If you say your business is hair dressing and you say you need some amount to pay for the rent, we would want to ensure you pay the rent, which is the purpose the loan was meant for, even if we have to pay directly to the shop owner or owner of the property, we would do that.
Or if you are going to buy any equipment, if we are even issuing a cheque directly, we would do that. So we ensure all those safeguards, not just to disburse the money and allow you to do whatever you wish; we actually want to see through the transaction.
Then the issue of security becomes a bit downplayed. Because you can have all the properties in this world and somebody defaults, he just goes to court and get an injunction and you will be in court for ten years. Is that what you want? You don’t want that. You want people to take a loan and use it for the purpose for which they have taken the loan.
The beauty of retail is that most of the loans are not huge; they are well spread. I lend N1 million here, N2 million, N3 million; unlike oil and gas where somebody comes and say I want $50 million, that is where you have challenges, and that is why you see that the NPL in the oil and gas industry is very huge. But for the retail, even if N1 million goes bad, it won’t kill you unlike the challenge that the banking industry had with over concentration of loans on few people in all these capital intensive industries.
The Nigerian economy and the banking industry of today are far different from what existed when you started your banking career. So what is your advice to people just coming into the banking profession?
I will say that banking is not the most difficult profession. Far from it; it is probably way down. The only thing I will say is that for you to be successful, not only in banking, but in any business, integrity is very important. Don’t look at the short term. If you look at things from a long term perspective it helps.

Can you share with us some of those things that can make a bank fail?

To me, I think on a scale, the first thing I will probably say is ownership. If the ownership is not right, forget it, it can never survive. If you come together and have people who are not of like minds, there is no way it can survive. If you check, as at 1988 and 1989, we had about 126 banks. How come many of them failed? It is because people of all forms of characters, without focus came together to own the banks. You have your own agenda, and others have their own agenda. The second thing is the quality of management which also will derive from the quality of ownership.
If ten people of different characters come together to start a newspaper business, they will likely fail, not because they should fail but because of the way we ourselves as a people are structured; it is part of the developmental processes. Look at the newspapers that are surviving today, you have an anchor person. Look at the banks that survive till today, like Zenith Bank, you can say, this person was the driver. People can come together and start a business and they will do very well but people must have like minds.
When you start a bank and you start borrowing from the bank, it is a problem. We even have it as a policy that time that none of our shareholders should borrow money from us. If anything, they were giving us deposits. If shareholder A takes a loan, shareholder B will start looking and asking for his own and so on. So those are the key things.
Other things like business strategies are issues that can be resolved easily. But from an individual perspective, integrity is very important. And have a very open mind, be open; you want to be aware of your environment, you read so many things, you have to expand your horizon. Those ones are even much easier, but the very difficult ones are the very personal attributes.
In banking you are dealing with people’s money, it is different from manufacturing, where you do cashflow, but banks, you just see the cash. So you must have that personal integrity, it is very important.
Once you do that, you might not be the most profitable bank but the bank will survive overtime; and you have to be very cautious too, and have an antenna. You must know that bad loans can kill a bank, so you must be able to discern even beyond the analysis, whether this loan can be sustained.
That is why to me, I don’t think banking is the most difficult job. After all, people invented the airplane and their job is more difficult than banking.Vanguard.
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