Top Priorities For Nigerian Banks As They Navigate This Challenging & Uncertain Post-COVID Era.

We’ve been in business for almost 17 years and a good number of our clients operate in the financial service sector (majorly banks) so in keeping with the age old business principle of knowing your customers to better understand how best to add appreciable value to their business, it’s no surprise that we keep our ears and eyes attuned for developments within this sector as it has the potential to directly create opportunities or disrupt our business.

The pandemic necessitated changes in the way we live and work, making 2020 a difficult year to forget. Based on World bank estimates, COVID-19 pandemic eroded over 10-year gains in per capita income across Emerging Markets and Developing Economies (EMDEs). In Nigeria specifically, the prolonged lockdown in Lagos, Ogun and Abuja as well as widespread movement restrictions in most states in a bid to flatten the COVID-19 pandemic curve in Q2 2020 triggered a downturn in economic activities which led to a contraction in 16 of the 19 economic sectors. While Nigerian banks have successfully navigated the immediate dangers of the first two waves of the COVID-19 pandemic, the crisis has brought with it significant changes that necessitate that banks quickly re-imagine their business and operations.

Non performing loan provisions have spiked to the highest levels in decades, net interest income (NII) has collapsed as CBN cuts rates to support the real sector, high currency risk, environmental insecurity, and high unemployment with soaring government deficits have all contributed to declining profitability. In addition to these, many banks are dealing with the operational challenges of remote work as well as tensions arising from balancing a desire to support their customers at their time of dire need against increased concerns about the rise in non-performing loans (NPL), which could lead to significant capital depletion, all with the threat of a third covid wave hanging over the economy. While a healthy and strong banking sector will be required for a quick and sustainable recovery, banks will need to re-focus on the evolving needs of their customers, while simultaneously driving operational efficiency and building resilience.

It’s not all bleak though and banks don’t just have to weather this storm; rather they can turn the experience to their advantage and build the capabilities required to thrive in the new reality. Rightfully so, the first reaction to COVID-19 was the protection of employees and customers (which should pay dividends in future), there are now four key priorities for bank Executives as they navigate the COVID induced challenging and uncertain business environment.

1. Manage the adverse impact of growing NPL

The increasing loan impairments will have a material impact on post COVID provisions of the banks and require decisive action in managing the existing credit portfolio as well as how and where to extend new credit. Banks will do well to drive growth of their retail lending portfolio which traditionally comes at a lower risk while offering higher returns.

2. Hunt for fee income

Net interest income which represented as much as 70% of the pre-covid income for many banks has declined significantly partly as a result of the central bank’s cutting of rates to support real sectors. Industry experts expect rates to remain at current levels until 2022. This is forcing banks to focus on driving fee and transaction based income leveraging e-channels to partly substitute the lost net interest income.

In a rising rate environment fees were frequently waived to secure new accounts and liquidity mandates, which were monetised via net interest income on deposit balances; that strategy no longer works.

In response to the declining NII, banks must now focus on strategies to substitute the lost income, a few to consider include:

• Greater discipline on fee collection, including scaling back use of waivers, ensuring contractual fees are collected, and embedding much stricter controls for discounting.
• Incentivising corporates to place excess deposits in higher yielding investment funds such as money market funds, reducing the returns drag from excess deposits as well as earning arrangement fees.
• Leveraging digital channels to drive transaction volumes and associated fees.
• Creatively creating new fee income streams for services (advisory, transactional FX)

3. Cost discipline (Doing more with less)

Cost optimisation is back on the agenda for most banks after many years of growth and investment. It remains one of the few controllable levers in an uncertain economic environment. The best approach is to take out as much near-term cost as possible to mitigate revenue falls and impairment impacts, whilst protecting investment in longer-term transformation and innovation.

Banks are focusing on a number of levers to manage their costs and protect their margins:

• Tactical cost reduction: reducing discretionary spend (for example travel) and re-prioritising the investment portfolios.
• Footprint reduction: closure of unprofitable branches (the need to secure CBN’s approval clearly places a limitation on effectiveness of this lever), aggressively grow its agency banking network, cut off unprofitable clients and product/service lines with the view of removing entire segments of the cost base and freeing up risk-weighted assets to be redeployed more productively
• Process streamlining: re-engineering major processes such as account opening, credit approvals and customer onboarding to structurally take cost out (end-to-end) and improve the customer experience. This often relies on cross-functional collaboration and deploying integrated workflow solutions.
• Organisational simplification: combining operational and support teams across Cash, Trade and Lending, and client segments; hubbing teams in fewer and lower cost locations; creating utilities for common activities (such as client servicing, document management)
• Digitization and technology enhancement: retiring legacy technology/systems and deploying new, cloud-based and modular technology platforms to support end-to-end digital journeys, lower operational cost and improve customer experience (thereby gaining market share). While the CAPEX for these initiatives may be high (particularly considering the rising cost of foreign exchange), the business case is to move the bank to a structurally lower (and variable) cost base for the future.

4. Continue to explore opportunities for profitable growth

It may be necessary to reset short term growth expectations in light of a more challenging business environment and poor economic outlook. While almost all banks have benefited from the consolidation and growth in the industry over the previous years, opportunities for profitable growth are now much more limited and not all banks will be positioned to capitalise on them. Banks should explore growth opportunities across 3 primary verticals:

• Sector-led growth: re-orienting the bank to place high growth sectors as the primary axis of organisation, balance sheet strategy and capital allocation, to skew focus towards faster growth and avoid excess exposure to adversely impacted sectors. A good example is Sterling Banks HEART of Sterling strategic approach where the bank has propelled its growth over the last few years by structuring, branding and resourcing around the Health, Education, Agricultural, Renewable Energy and Transport sectors. Sterling Bank brought in sector heads from the target industries and leveraged their deep sector insights, relationships/network and analytics to support client conversations, while developing targeted sector focused propositions, such as real-time payments solutions to automate operations, revenue collection and e-commerce marketplace capabilities.
• Digital/E-Banking: the limited branch opening hours and fear of contaminated Naira notes, left millions of Nigerians that were previously resisting or reluctant to embrace digital banking with little choice but to take a leap of faith. This adoption upsurge has encouraged most banks to drive the growth of their E-banking and payments-related business (including wholesale and retail payments, cards, transactional FX and merchant services). This is an integral growth strategy for the tier-1 banks — FUGAZ (First Bank, UBA, Access Bank, GT Bank, and Zenith Bank) with FCMB, Union Bank, Sterling, Stanbic, Wema and Fidelity bank also making great strides in this area.
• Open Banking: BaaS is an end-to-end model that allows digital banks and other third parties to connect with banks’ systems directly via APIs and overlay financial services offerings on top of the banks’ regulated infrastructure. With CBN’s release of the regulatory framework for open banking in February this year (2021), Nigerian banks can now officially deploy Banking-as-a-service (BaaS) offerings to other banks, Fintechs and e-commerce companies, monetising their infrastructure, customer data and banking license. These offerings can vary from execution and clearing services, to operational processing, full-stack technology provision, and white-labelling of customer channels. The main monetisation strategies for BaaS are charging clients a monthly fee for access to the BaaS platform, charging a la carte for each service used or a blend of both. Fintechs and digital banks have been encroaching on traditional banks and disrupting the age old banking business model — but by moving into the BaaS space, banks can turn this looming threat into an opportunity. BaaS can also be offered to smaller banks who do not have the transaction volume to justify the fixed cost base of the technology and operations for these products and are looking to move to a more flexible cost structure while offering significantly lower customer acquisition costs than traditional methods. With over 250 Fintechs in Nigeria and 25,000 companies globally, the options to integrate innovative applications and new services are unprecedented.

The sun may be setting on traditional banking as customers are becoming more accustomed to the “bank” as an app on their phone rather than a building. If traditional banks are to continue to thrive, they must start acting more like digital businesses before the Fintechs start acting like banks. As Bill Gates famously said in 1994, “Banking is necessary, banks are not.” So banks will have to adapt rapidly to remain relevant and viable.