Financial Services: Assessing Proshare Bank Share Index

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We’re staying in the financial services sector now uh proshare has released its reports on nigeria’s banking industry for the focus on the case for refining tier one banks oh first bank is also one of those taiwan banks so apparently we’re talking about first bank and some other banks the reports among other areas highlights determinants of long-term profitability

That will lead to the conversation of the impact of that profitability to the real sector and the economy we have abu kudus isiaka economists with pro share joining us for that conversation uh good morning ubiquitous morning yeah i think the last time we had a conversation was on the mpc yes it would be nice to know i mean the impact of that mpc and all that

But i mean that’s not the conversation for today so tell us about this your report on taiwan banks why what’s the essence of it okay so um the idea behind i mean you you went over the title right so the case for defining tier one banks and so we could take the discussion from that point so the idea is we want to you know reconsider why do we you know refer to

Certain banks as tier one and other banks as not tier one or tier two as the case may be so basically um you know we went over the special banking report published by afrinvest a lagos based investment company which um was published in 2013 and that 2013 report actually speaks to in a number of requirements namely assets especially assets of course it talks

A bit about you know some prudential guidelines like non-performing loans and capital adequacy ratio and liquidity ratio but basically it draws the line between tier 1 and tier 2 um based on assets asset size and it stipulated an asset threshold of 1 trillion in 2013. upgraded that to 5 trillion in 2020. but the question from us i mean we try to answer a number

Of questions ask and answer a number of questions right but the question from us was that why assets alone i mean as you know there is no shortage of performance ratios we could consider where we want to analyze or determine the performance and the ranking of banks so we probably want to look at you know you know bank lending capacity ratios like see our ldr um

You know even the capital um the crr ratio cash is up ratio there are also ratios you want to look at again non-performing loans you want to look at the asset quality you want to again look at you know so there is no shortage of ratios so we’re trying to come up with a methodology right and we actually have done that a methodology that is quite testable and that

Scientifically selects weights and sums the most important determinants most important ratios that speak to long-term profitability for banks and so that’s what we’ve tried to do and so we’re also conversing regular review so fundamentally we’re familiar annually at least so we feel that we’ll be doing that review because that’s i mean that’s a lot of work well

That’s what we do at prussia really and that’s why we came up with the prussian bank strength index actually pbsi and the pbsi is like a much more transparent basis of saying what bank is a tier one and so we’re working with you know back the data right from all the banks that the data of course their financial reports publicly available and so we are going to

Assign scores right and banks that come up with scores in the 15 percent are regarded as tier one and those that are done are regarded as tier two so try just trying to make it as transparent as possible i think another important um observation or one important thing you could take away from this report is the fact that we’re saying that you know um arbitrarily

Setting that one trillion or five trillion needs to we need to you know take a second look at it we’re also making a point that um i’m also making the point that um periodically we need to take a second look at it banks should therefore not be regarded as tier one it’s not a case of once and for all once you tell one you you are ever eight year old it’s not once

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A tier one ever etl it’s not it’s not quite the case we believe that you know because as i mentioned there are a number of uh bases for which you want to um on which you want to you know consider the performance of banks so we need to regularly you know reassess that another important reason why is necessary to do so is that you see the tier one appellation is

The single most important determinant sometimes of what banks get the big ticket transactions what banks are able to you know get so much customer deposit what banks are able to issue securities at you know you know considerate or you know lower yields and what banks are able to fund big ticket transactions consequently so if you take all of this together there

Is a very very important need for us to you know look at it again what is a tier one bank and um you know take a second look at it yeah and the review of of the status yeah every year yeah you know to a lot of people especially those who are not very active in the financial services sector who are listening to this conversation they’ll be like okay so whether

It’s a taiwan bank they have high profitability what impacts do they make i mean uh the cost of funds now is so expensive so whether you’re 10 1 bank or not it doesn’t seem sierra it’s also been complained to be to be high you know so that has also reduced what’s available to uh even though recently the cbn has said that credit to the private sector has increased

In the last four months but you know in the midst of all that is happening in the country at this time and in the world actually whether you’re a taiwan bank or your profits or you know what difference are you making to to to the economy especially to msmes okay so essentially whether a tier one bank or not is something of concern to investors so at the end of the

Day whether we are you know um we want to lend we want to borrow from the bank or not we could be invested in the banks right we could own shares in the bank yeah we could also buy their bonds and buy their um their cps you know commercial papers you know every now and again they’re issuing one security or the other that you want to invest in and so i think it’s

At that point it becomes you know crucial for you to know is this bank a tier one bank or a tier two bank because it determines a lot of things it determines most importantly it speaks to the long-term profitability of the bank and what kind of returns you can expect from the bank so again i think at this point i need to make a distinction there is that usual

You know confusion or conflation as the case may be you know between what a systemically important bank is and what a tier one bank is so whereas a systemically important bank is one that’s in the eyes of the regulator is too big to be allowed to fail you know because it has very large deposits and so you know if there’s a bank run you know a lot of people get

To lose their funds but that’s really not the concern of a typical investor the concern of an investor is not too much of financial system stability that’s for the regulator the concern of the investor is how much do i expect as returns and so you want to know is is it a tier one bank what assurances what guarantees do i have that you know there will be so much

Returns on my um on my investment so that’s why we are taking a second look at it and we’re trying to you know come up with something that is much more as i mentioned transparent so um you’re talking looking at it from through the eyes of an investor yeah so an investor of course would be interested to see how the bank how uh sustainable his investment should

Be if i invest in this bank the management you know and the transparency of it i i believe but what about for the for the person who is looking for funds um well you want to imagine that if a bank is truly a tier one bank um relatively you want to imagine that cost of funds in such a bank would be lower it’s not the reality not necessarily but but you want

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To imagine that to some extent right they have a much more robust credit risk management and so they are not running that large risk okay of you know um illiquidity as a case may be unlike smaller banks and so you want to imagine that they’re able to lend easier okay and more to the private sector and the point you made about private sector lending rising is

Quite valid and it’s expected as a matter of fact because you know when you exit when you begin to see economic recovery right you see um credit expansion unlike what happens where there is a recession where there is a skill you know banks tend to scale back their lending because of course credit performance is problematic at those times i mean we mentioned mpc we

Drew a part of the other time and interest rates now you know being higher that’s that’s also good scale back yeah yeah yeah i agree with you but again i think we’re looking at a balance right so one factor trumping another factor but then again it’s valid observation that you know the mpc um mpr yeah so the npr higher by 150 basis points going to kind of signal

Some negative sentiments especially when you want to look at funding business is true bank loans you know it’s not likely to be as things as it used to be in the past but but then again um as the economy recovers from the recession from 2020 recession we’ll see more lending i mean something similar played but i think we’re on the path of recovery until the war

In ukraine yes exactly exactly but i would still say in the case of nigeria was still recovering um despite you know exiting 2021 which largely was supported by low base effect we still recorded three points um about three percent real gdp growth so um i i would still say that we are still on the path of recovery and maybe that’s why we’re seeing lending to the

Private sector how how long that would be sustained is something we would have to wait on seriously before the uh the impact of the war started fighting it yeah i mean we’re already seeing um aviation field long queues at petrol station all of this i know you know feed into the figures that we’ll see yeah certainly growth figures activity manufacturing you know

And all of that i mean most likely they should so now that prochae has uh uh this report and are proposing an annual review of taiwan banks so what do you do with this report what was the way forward okay so um the number of takeaways from the report first of all we’re introducing the project bank strength index which is as i mentioned the multi-stable approach

To determining what banks are tier one and what banks are you know tier two um firstly that report i mean that module or that methodology highlights very important metrics that were considered previously we’re talking about governance we’re talking about governance metric like um you want to talk about board balance which wasn’t considered before now we’re also

Looking at um you know a method through which we’re summing we’re waiting and we’re and that’s based on data i think it’s important to to mention that so we’re not just selecting arbitrarily as we used to have it we’re selecting those particular variables that have proven over time okay to be you know determinant of long-term profitability and maybe i should

Also say this in subsequent um editions or reviews of this you know model we expect that some new variables will come up for example you know it’s a trend the trend is that you know there’s so much competition especially in the retail banking end right because of the influx of payment service providers that are non essentially non-bank financial institutions

Right and so the influx has made you know so much competition go on there and we’re seeing banks themselves also up their game in that regard we’re seeing them you know put up a fight and they are increasing their digital earnings so we’re seeing digital income to you know as a ratio of gross earnings also increase for many of those banks right but as of

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Now it’s not such a very critical determinant of long-term profitability but we expect that going forward right we will see that a much more critical factor yeah because digital bankers are giving them a run for their money now yeah yeah the fantastic if if traditional banks do not stand up they might they might just get run over yeah so so they’re trying to

Actually put up a fight although um some of that considering collaboration as a strategy but um at the end of the day they’re trying to protect their earnings right so by the end of the day what’s likely is that if they choose to collaborate with p these psps um the likelihood is that they would just be kind of re they’ll be realigning and maybe diversifying

Their earnings because what will happen is they’re also earning from this um clearing services that they offer to these psb so psb’s are not deposit money banks at the end of this so they can’t do without dmbs so there’s still is going to be some form of collaboration between them more than competition well i would also like to ask that as you review you know the

Factors also uh calculate their impacts i think it’s it’s important i mean what are banks there for what’s their functionality apart from you know their profitability and their tears and all that they should also be impactful to the real sector so i guess that should also be a component i can tell you that we actually took a look at that in this report right so

We um evaluated the loan books of many of these banks right and we considered to which sectors we tried to answer the questions to which sectors and nigerian banks lending right so we found that between 20 and 45 percent of most nigerian banks loan book is exposed to the oil and gas sector now that’s problematic for two reasons number one we are seeing an energy

Transition and we are seeing you know the drive for you know climate change we’re also seeing the oil and gas sector in nigeria not do so well it’s maintained consistently it’s been you know recording negative growth but but and i mean if you take all of that together you’re asking questions about the long-term sustainability of the earnings for such banks that

Are so largely exposed to you know the oil and gas sector so again we also looked at manufacturing you know manufacturing was less than 20 percent in the case of most banks that’s also problematic because you know why economy grows without being industrialized then we also we also try to make a case for what sectors going forward should be considering banks

Should be considering to fund of course infrastructure funding is a major one but then again there’s been arguments about whether banks you know are in position to fund um public infrastructure which you know you consider to not be so bankable but then you know the counter argument we made is that you know there are several models that can be you know adopted

There’s a ppp model there’s also the you know financialization model that can be adopted to ensure that you know uh despite being a public infrastructure project it can still be profitable to private concerns banks and i know the federal government has a lot of programs also trying to bring in the private sector into infrastructure funding and all that well thank

You so much uh for this expose into your report uh we do look forward to it being impactful and making changes in the financial uh services sector thank you so much abdu kudos asia economics with proshare let’s take a break now after the break apex commodities market is next to stay with us this is business morning on channels television you

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