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‘In 2018, banks must expand risk assets to earn profit’

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Guy Czartoryski<br />Photo by: Kelechi Amadi-Obi (www.kelechiamadiobi.com)

Guy Czartoryski is the Head of Research at Coronation Merchant Bank Group. A highly rated, award-winning strategist, with deep sell-and-buy-side experience in emerging and frontier markets, equity and fixed income, has proved his mettle by traversing various top-notch global financial institutions before arriving in Nigeria.

In this interview with CHIJIOKE NELSON, the researcher and investment strategist sees a green field in Nigeria’s merchant and investment banking space and hinges profit in 2018 on the ability of banks to load with government’s risk-free assets waning.

How would you describe the nation’s investment banking landscape in 2018?

Prior to the banking consolidation of 2005, the merchant-banking segment represented a tangible percentage of the Nigerian financial services system.

However, owing to the introduction of the universal banking regime coupled with the increase in the capitalisation requirement for banks from N2 billion to N25 billion, we witnessed a significant structural change within the Nigerian banking system which resulted to the extinction of merchant banks through various consolidation structures.

The introduction of the new banking model i.e. the repeal of the universal banking regime in 2010 has paved way for the re-emergence of merchant banks.

Between 2012 to date, Merchant Banking Licenses has been issued to Coronation Merchant bank, FSDH Merchant Bank, Rand Merchant Bank, FBN Quest Merchant Bank and Nova Merchant Bank.

The emergence of merchant banks in Nigeria reflects the changing structure of the economy due to the increasing need for specialized and sophisticated banking services from various corporates and institutions with a view of positioning their respective businesses with their chosen industries.

In the last 5 years of operation, several landmark transactions have been successfully executed by Merchant Banks in Nigeria.

Of the notable deals executed in 2017, Coronation Merchant Bank closed a total of 16 Transactions in the year under review with a total transaction value of over ₦234 Billion, hence, making it a top five investment banking franchise in the investment banking league table.

Would you explain more on your recent report, which hinged banks’ strength on their ability to load risks in real sector?

For a couple of years, Nigerian banks have been able to rely on thick spreads on government securities, basically T-bills and Federal Government of Nigeria (FGN) bonds, to support their income.

This does not mean that they stopped lending to their private-sector customers, but it does mean that, at the margin, customer lending was not their focus.

Now that interest rates on T-bills have come down, banks are going to lose interest income in 2018 unless they go out and lend more money to their private sector customers.

How has Non-Performing Loans affected investment banking in Nigeria?

Commercial banks were very focused during the period 2015-17, on managing their portfolios of Non-performing Loans (NPL), which to a large degree originated from lending to the oil and oil-related sectors and were in United States dollars. So, for investment banks, restructuring oil assets was the order of the day.

But, as the oil price strengthened later on in 2017, and production levels stabilised this year, that focus has been left behind. Banks can and we think, they should think about making new commercial private sector loans.

What are your strategies in maintaining the zero NPL in 2018?

In 2017, our loan books increased by 42 per cent from N22.7 billion in 2016 to N32.3 billion with zero NPL. Going into 2018, we intend growing our loan books to N70 billion.

As a lender, I believe the most important thing in risk asset creation is the ability of the lender to dimension and mitigate perceived risk inherent in any business.

In line with our Risk Management framework, we will continue to maintain a disciplined and prudent approach to risk asset creation.

Where do you see interest rates in the short term and why?

We have seen a really steep decline in interest rates over the past year – T-bill rates have almost halved – so there is a lot of focus on where rates are going to go now. Inflation has come down steeply as well, so recently, we saw rates higher than inflation.

There is a danger that people extrapolate too much from the trend and start to price in further steep falls in interest rates.

The thing to consider is that monetary policy will probably take into account the need for continued currency stability, and this argues against very low rates and excess liquidity.

So, we would caution against predicting steep interest rate falls in the short term.

Where basically have you been focused as a group strategy in merchant banking?

We are a Nigeria-based investment bank that provides innovative, long-term financial solutions to corporates, state governments and other organizations.

Aside from our core Corporate and Investment Banking functions, the Bank has three subsidiaries namely; Coronation Securities Limited, Coronation Asset Management Limited and Coronation Trustees Limited.

We offer services and products in corporate and investment banking, wealth management, asset and fund management, global markets, securities trading and trust services.

Since our transition from a Discount House to a Merchant Bank in 2015, the Bank has developed unrivalled expertise in offering tailored financial advisory services to corporates and governments alike.

We combine our deep knowledge of local markets with up-to-date research intelligence to meet our customers requirements for capital.

The Bank’s advisory services covers Capital Markets, Mergers and Acquisition and Project and Structured Finance. We possess highly-established negotiation skills, world-class execution capabilities, and provide trusted financial advisory to clients, assisting them with complex and transactions.

Our comprehensive project finance advisory covers the entire lifecycle of a project, from early development to completion. This includes project equity structuring, mezzanine or debt syndications and public private partnerships (PPP).

What landmark deals have you been able to broker in efforts to boost investments?

Of the notable deals executed in 2017, the Bank closed a total of 16 Transactions in the year under review with a total transaction value of over ₦234 Billion, hence, making us atop 5 investment banking franchise in the investment banking league table

Is the time right for lending to the real sectors of the Nigerian economy?

If you look at the commentary following the latest GDP data, a lot of it said that the recovery was definitely a reality, but that it was patchy. Our point is that, by their nature, economic recoveries are patchy.

One sector may recover while another sector stays subdued. You have to find the links between different sectors in a recovery, and these are not always clear.

A notable link was the stabilisation of the currency in mid-August 2017, followed by the recovery in the Trade sector in the fourth quarter, which had been in recession for a long time.

A recovering Trade sector brings improvement to supply chains, and make intermediaries less risk-averse. Combine these factors with reduced interest rates and you have the formula for Nigerian industry to seek out loans from their banks.

Are banks going to rush into lending? Does Coronation Research predict a lending boom?

One of the main points of our report, ‘Nigerian Banks, Winners and losers in 2018’ is that not all Nigerian banks have enough capital to lend more money to their industrial and commercial customers.

We identify a group of banks, Group C, which we believe are likely to spend this year thinking more about their capital adequacy ratios than customer lending.

Next we have Group B banks which will be able to lend more money to their customers than they do now. And then we have Group A banks which have plenty of capital and can easily expand their customer loan books.

So, we don’t think there is going to be a boom: it is going to be quite controlled.

Bank share prices have given up some of their gains since January. Why is this?

Bank stocks are usually much more volatile than the equity market as a whole. There were some spectacular gains made in bank stocks during 2017, and on into January 2018.

At the same time, it was not clear – as we have pointed out – that they could continue to make thick spreads on T-bills and government bonds in 2018, so earnings were under threat. Certain investors chose to take profits, and that was understandable.

Going forward, one has to understand who the winners and the losers will be, and be very selective about where to invest.


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