CONFIDENTIAL The Nigerian Banking System and the Challenges

CONFIDENTIAL The Nigerian Banking System and the Challenges of the Global Economic Crisis Mr. Francis Atuche GMD/CEO, Bank PHB 14 th CBN Seminar for Finance Correspondence and Business Editors Makurdi, Benue State May 19 th – 23 rd, 2009

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis : Impact on the Nigerian Economy and the Banking Sector SECTION 3: Sustainability of the Nigerian Banking System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 1

Preamble “The Phoenix represents to many the life cycle: birth, growth, death and re-birth because from the ashes life arises anew often strengthened through reinvention. But this happens not just from reinvention of oneself but through innovation. And innovation helps to propel us forward. ” Susan Cartier Liebel (Jan, 2009) 2

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry SECTION 3: Sustainability of the Nigerian Banking System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 3

Historical Review of the Nigerian Banking Sector 1 st Reform Era 1929 – 1951 • Over 100 banks established in the banking boom between 1940 and 1950 • Attrition of 30 private banks due to poor mgt. , low capital, debt overhang & the financial shock induced by the recession of the 1930 s • British and French Bank established in 1949 • Agbonmagbe (Wema Bank) established in 1945, ACB in 1948 2 nd ‘Reform Era 1952 - 1971 § Enactment of the 1952 Banking Ordinance § Establishment of CBN § Number of tradable financial instruments increased in money market : T/bills (1960), Money Fund (1962), Commercial Bills (1968), Treasury Certificates (1968), Certificates of Deposit, Banker’s Unit Fund and Eligible Loan Stocks (1968) § Banking Amendment Act of June 1962 raised minimum share capital to GBP 250, 000 § Banking decree No. 1 of February 1969 & the Banking Amendment Decree No. 3 of 1970 imposed more stringent conditions in the industry § Industry dominated by govt. owned banks via Indigenization Act of 1971 § Share capital raised to GBP 600, 000 (local) & GBP 1. 5 m (foreign) § By 1980 there were 26 banks 3 rd ‘Reform Era 1982 - 2004 § National Economic Emergency Decree in the wake of Financial distress in the 80 s and 90 s (SAP era) § 120 banks (66 Commercial, 54 Merchant) § Prudential Guidelines Introduced in 1990 § Bank branches jumped from 40 in ‘ 85 to over 2000 in ’ 92 § Public sector accounts transferred from CBN to banks in 1999 § Universal Banking in 2001 with N 1 bn capital base, later increased to N 2 bn with 2004 as deadline 4 th Reform Era July 2004 – Date § Increase in capitalization requirements by 1150% to N 25 bn § No. of Banks reduced from 89 to 24 § Industry revolutionized with competition leading to increased product roll out & growth in credit to economy § Total Assets rose 439% to N 15 trn (latest available figures) § International Expansion with over 43 branches in Foreign markets § Nigerian banks accounted for over 65% of stock market capitalization § Global economic crisis + structural lapses in NSE forces a collapse of the stock market with banks exposed to increased NPLs § Sharp downturn in oil price and revenue leads to introduction of unorthodox policies § Standard & Poor’s downgrades Nigeria’s outlook § New CBN governor takes over vows to sanitize banking system with emphasis on regulation, reporting & risk management 4

The Nigerian Banking sector has continuously evolved… ü Reforms introduced during Obasanjo’s second term has led to a: ü Reduction in Nigeria’s motley group of banks from 89 anemic banks to 24 bigger, stronger and more resilient financial institutions. ü Revolution in the financial services industry leading to an increase in the quality of services provided to the average Nigerian ü Increased number and sophistication of financial products offered by the traditional bank. ü The impact on the economy can be observed through Stronger and more Resilient Financial Institutions the: ü Availability of credit to private sector, which grew by 435% from N 1. 52 trn in 2003 to N 8. 13 trn in Feb 2009. ü Phenomenal growth in the usage of electronic payment systems including the issuance of debit and credit cards. ü Issuance of over 25 million cards being used to process payment transactions on over 11, 000 POS terminals, 7, 000 ATMs, 200 web locations and 50, 000 mobile devices. (per E-business experts) ü Improved standard of living via introduction of consumer finance products (i. e. Leasing of cars, electronic appliances, laptops/desktop computers and availability of mortgage loans and credit lines) Increased number of Financial Products Improved Service Quality 5

Available data on the robustness of the banking sector indicates… ü Increase in total assets/contingent liabilities after the reforms in 2005 ü Successive capital-raising over the last 2 -3 years, which has enabled massive local and regional expansion with total bank branches jumping by 41% (4, 591 branches) ü Average industry PBT growth rate of 141% in June 2008 and CAR of 25. 3% (higher than the regulatory benchmark of 10%) ü Competition for dominance within the industry, leading to East, West and Sub-Saharan Africa Source: CBN 6

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry SECTION 3: Sustainability of the Nigerian Bank System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 7

Significant challenges have already been experienced in the Nigerian Economy • Niger Delta crisis and OPEC’s quota restriction are twin factors undermining the budgeted production target of 2. 92 mbd • Oil production has been declining since August ‘ 08 impacting negatively on government revenue • Nigeria’s continued dependence on crude oil exports exposes it to external shocks • Increased inflationary pressure noticed since Nov/Dec ’ 08 in line with the sharp depreciation of the naira 8

… recent trends from the global economic crisis highlights the adverse impact on the Nigerian banking sector Impact Declining PSG deposits Factors Ø Falling oil prices/production and dwindling government revenue Lower Income Ø Reduction in capital inflows into the economy Ø Restrictive FX policies (Reduction in Net open positions enacted to defend the naira, which has strangled the interbank FX market and related transaction incomes) Ø Reduction and re-pricing/freezing of credit lines from foreign banks Ø Divestment by foreign investors Ø Loss of business income for key financial institutions directly dependent on the stock market (e. g. stock-broking firms, rating agencies, investment and asset management companies, etc) Ø Impact of global crisis on domestic economic & business activities Increased NPLs Ø Downturn in capital markets from facilities granted to investors in the stock market Ø Increase in counterparty risks amid growing business failures occasioned by the global crisis, etc Ø Impact of unemployment on performance of consumer loans and other facilities Increased Borrowing (from PSG) Ø Shortfall in government revenue and resultant crowding out of the private sector The global crisis has the overall impact of making banks more conservative and risk averse thus reducing their propensity to advance credit to the economy to stimulate productive investments 9

…hence, the expected slow down in performance and growth of the banking sector • The ability of banks to withstand the impact of the global economic crisis is highly dependent on the: ü Performance of the economy and the; ü Execution and successful implementation of appropriate regulatory policies ü Strategic options taken by individual players to combat the emerging negative trends in the market and the market’s perception of players resilience • However, the consensus forecast by international organizations for Nigeria’s economic growth in 2009 is 2. 8%, which is about half of the growth rate in 2008. Consequently, stakeholders are concerned whether Nigerian banks are resilient enough to withstand the impact of the global economic tsunami on the economy. 10

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis, impact on the Nigerian Economy and the Banking Industry SECTION 3: Sustainability of the Nigerian Bank System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 11

Incr eas NPL ed s Is the Nigerian Banking system capable of handling these economic challenges? f k o or c La est nce v In fide n Co er Low me o Inc Declining Deposits Oil Falling Prices Rising ent loym nemp U ing lin ec ock t D St e k ar M 12

Incr eas NPL ed s What are the strategic options open to Industry regulators and market players? Falling Oil Prices Declining Deposits ng Risi yment lo mp Une f s n o ure tio s uc Mea d tro tive In a ov nn I er Low me o Inc of ck tor e La es nc v In fide n Co ing lin k c De toc et S k ar M Industry Consolidation cro s a f M licie o o ion ic P pt m do ono A c E

International Analyst’s expect the Nigerian Banking system to outperform the National Economy. Source: EIU • EIU expects average growth rate of 13. 3% for total banking assets between 2009 and 2011 • Total deposits expected to grow by 22. 3% on the average in the same period. 14

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis : Impact on the Nigerian Economy and the Banking Sector SECTION 3: Sustainability of the Nigerian Banking System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 15

Market Players Industry Regulators The following strategic options are open to Industry regulators and market players Adoption of Macro. Economic Policies § Introduction of monetary policy stabilization programmes and fiscal stimuli to restore confidence in the economy. § Isolation of toxic assets nestling in the banks’ balance sheets and parking them in a special purpose vehicle to be called “bad bank” or “bad fund” which would be treated as a long-term facility for both liquidity and accounting purposes. Surgical Intervention/Piece meal Remediation § Injection of liquidity into the banking system via government funded soft loans and recapitalization § Strengthening of capabilities and competencies via appropriate regulatory policies & increased supervision § Regulatory induced consolidation – encouraging the big/strong to acquire the weak/anaemic § Liquidation of weak and anemic banks to avoid contagion effect on total industry Introduction of Innovative Measures § Articulation of self-emancipation strategies to battle negative consequences of the current global economic meltdown § Incremental, radical, and revolutionary changes in thinking, products, processes and service delivery to customers. § Increased value to both the customer and the shareholders to boost investor confidence § Increased productivity and focus on core competencies, which should drive additional inflow of wealth into the economy. 16

Contents SECTION 1: Evolution of the Nigerian Banking Sector SECTION 2: Global Economic Crisis : Impact on the Nigerian Economy and the Banking Sector SECTION 3: Sustainability of the Nigerian Banking System SECTION 4: Strategic Options for Industry Regulators and Market Players SECTION 5: Key Learning Points 17

Key Learning Points • Declining oil prices and the production shortfalls driven by OPEC’s restrictions and the Niger Delta conflict means consistently lower oil and government revenues in the medium term. This implies lower statutory allocations and hence reduction in public sector deposits. It is therefore unwise for banks to continue to depend mainly on a declining sector in these dire times • Banks need to imbibe strict governance principles, including increased disclosure and transparency. The time-worn practice of operational opacity must be avoided completely in this dispensation of banking. Increased transparency will endear international and local investors and will help in building confidence. • Diversification of the sources of liability generation is vitally important (e. g. creating liability pools that adequately compensates investors for the risks assets that such pools are supposed to fund given the increasing sophistication of investors). This ensures a reduction in concentration risk. • The press corps/media plays a crucial role in driving the change needed to propel the banking sector to safety and profitability in these trying times. Consequently, the standards of reporting and knowledge of financial products and the industry in general must be deepened in order for the press to effectively perform this task. Reports on financial markets must be based on adequate research, responsible reporting and discipline. • Unless the above mentioned issues are given due consideration, the vision of making Nigeria one of the top 20 economies in the world and a leading emerging market country by 2020 will remain a mirage 18

Disclaimer This presentation may contain certain forward-looking statements, estimates and targets with respect to the operating results, financial condition and business of the Bank PHB Group. Such statements and information, although based upon Bank PHB’s best knowledge at present are certainly subject to unforeseen risk and change. Future results or business performance could differ materially from those expressed or implied by such forward-looking statements and forecasts. The statements have been based upon a reference scenario drawing on current market conditions, economic forecasts and assumptions, competitor analysis including the regulatory environment. 19