‘Growing the retail market is more cost-effective and profitable’
The Managing Director/Chief Executive, Diamond Bank Plc, Uzoma Dozie, at an interactive session with journalists, unveiled its plans to grow its market share in the retail space and the impact of changing policies on its operations, as captured by Clara Nwachukwu. Excerpts:
Let’s start with your divestment from West African countries; what led to that decision especially as its being misconstrued to be some sign of distress, and you returning back home to say you want to consolidate on your operations in-country, can you tell us more about it?
Four years ago, we decided that retail is what we are going to pursue, and what that meant was that we were going to focus our resources on retail drive. The two resources that are key to retail are capital and also human capital. When you look at it from a pure economic sense, you look at where we are, and look at where we were, we were in Nigeria, the biggest economy in Africa, and we were in five different West African countries. But put the population of those countries together, and it’s not up to Lagos and Port Harcourt. When you look at the opportunity and for Diamond Bank then our business was focused on corporate, commercial, it was easy to justify it, because we were actually following our customer’s business and that was the reason why we went into those countries when a lot of Nigerian trade was going through them.
But when we shifted our attention to retail, where is the biggest retail market where the opportunity was? We had 50 million individuals that are unbanked, and on the small business side, we had 17 million unbanked businesses. When you look at where the Nigerian Government is focusing their objectives and priorities on, it’s definitely in that space, because that is where the future of the Nigerian economic development is. In any developed economy, the biggest contributor to GDP is small businesses; biggest employer of labour is small businesses. But in Nigeria, it’s not the case.
For us, we are channelling a lot of resources into that space to bring more people into the banking sector, to provide more financial resources to those people. We are riding that way, and that was what we started three years ago, and we know that we have the capabilities and infrastructure for that. Even if we have, we have to look at the capital. We made a capital plan for a three or five year period – do you have enough capital to focus over where the biggest opportunity is? Or are you going to share that capital with Nigeria, and then spend a lot of more capital and also be at the mercy of the central banks across the borders, and I wake up today and say I need more capital from you? That means they are going to take capital that you should have used here in Nigeria to digress to an area where the returns and opportunities are not as big as Nigeria’s.
If you look at penetration in Nigeria, it’s so fix it, and it’s not going to be bricks and mortar penetration that we’re talking about, but working with existing businesses in different areas. It also involves deploying technology, and spending a lot of resources on training people to understand because it’s a hand-woven process where you have to train people on ways of doing new things and a lot of capital and human resources are required. We need our best people to do that, and we need capital to do that.
So the divestment was not one of distress; it’s one of “put your money where your mouth is,” because the capital is stakeholders’ capital and not ours. We have taken a long term view on it, and not short term view. We took that decision two years ago, but of course, we have to find a willing person to make sure that we find someone that is going to add value, which is what we have successfully done. We have sold to a partner that also gives us the opportunity to also have a relationship in that area. So if it was a distress deal, it would have been an unprofitable one, but because we took our time it was a very profitable venture for us from the balance sheet perspective, from the PR perspective, and also an ongoing relationship.
A follow up to that, I was expecting a response that will go this way. The international expansion strategy was just a bandwagon thing, not just Diamond Bank, but other Nigerian banks, because they felt if this one is there, I can also be there. I believe you should comment on that because most of the international operations of most Nigerian banks are not doing well?
I don’t know the books of other banks, but I have to speak of Diamond Bank and our own international expansion. When we went to West Africa, our reason for going to West Africa was a capital decision, so we got a licence. We were the only Nigerian bank that got a licence from the regulator there that allowed us to go through the West African Monetary Union (WAMU) zone. We didn’t have to buy five licences; we only had to buy one licence that allowed us to open in those locations. While Benin was the head office, the other locations were like branches, and we looked at it as one country, and it was a very cost effective capital utilisation as well, that was why Diamond Bank went in there.
You must remember that at that time, we were just consolidated and merged, so there was excess capital in the financial sector. People had to deploy their capitals, and we had to go and find actually where we could get return on those capital. Don’t forget, we didn’t have the deployment of capital like IT now, where we can cost effectively start providing small and medium scale like we can do today. As things change, people adapt to your market, and you adapt to your market, and make sure that your business is sustainable in the future.
If you look at the way, the Nigerian banks were operating in the past it was like corporate, and while businesses were largely corporates, the capitals that were deployed then were just to quickly take advantage of cooperate business where we figured that there were high earnings. But now, our strategies have changed, and we are looking at our businesses on the long term, and we are doing retail business, and the opportunities abound in Nigeria. Why hold on to that capital when there is so much that we can do now?
I heard you say many of the banks went international, but it wasn’t a bandwagon thing; it was a kind of business banks were doing then. The business terrain has changed, and everybody has realised that retail banking is really the way to go. It gives you a steadier funding; at the end of the day, its more profitable, lower non-performing loans (NPLs), so it’s just aligning our strategies to realities right now.
Also, the working environment in WAMU Zone; the way they work is completely different from the way we work in Nigeria. They’re a lot more laid back than we are over here. For us, it was a lot tougher managing the people and the business over there, and we felt, why do we have to put in so much in trying to manage what is happening there? For example, when we wanted to roll out the retail space, the cards, the ATMs it was difficult. In Cotonou for instance, you can’t walk into a shop and use your debit card to buy something. Their development level especially Togo and Cotonou was not at the level we have here. Here is where the business is, for us, it was important that we streamlined and refocused on Nigeria. If we deployed the amount of resources that we used out there into the Nigerian space, we believe that we would make a lot more money.
Haven taken the decision to refocus and consolidate your operations here in Nigeria, what are your plans going forward? What have you done with the profits realised from the assets sale in the WAMU Zone?
In the last two years, I think we have shown ourselves to be faster without going back. I say that not from the size of balance sheet perspective. We are the 6th bank in Nigeria. We are a systematically important bank; but that’s just a number. We have grown our customer base faster than some other banks, and we have done that not by stealing market shares, but growing new businesses and executing our strategies, which is growing the retail business. To grow that retail business, you have to build infrastructure, you have to build businesses in areas where there is no retail. It was taking banking to the people, and we’re using technology to do that. When we say we’re going to use a technology-driven strategy it’s because of cost of deployment, access and custom experiences as well.
We’ve managed to add 10 million more customers in our database in three years, and we did our 20 years of service in 2017, and that was because we put the choice of opening an account for the customer online. About 25 years ago, if you want to open an account, you will walk into a branch and the bank might choose whether or not they will save it. If you want to do a single transaction 25 years ago, you have to go into a branch, but today, with an MTN mobile phone, it takes 45 seconds just by dialling *719# and that is it; it’s not mobile money. There is a difference between mobile money and opening account.
Mobile money is a wallet and that is financially exclusive. We want to enable Nigerians regardless of where they are to open a full-fledged banking savings account, and we did that with collaboration with MTN. Dial *710# on your mobile phone, and you will immediately have a menu, which will enable you open an account. As soon as you open that account, immediately you can receive money from anybody, and from any bank in Nigeria, and you can be able to transfer instantaneously, and those are the kinds of services that we provided.
On the business side what we have done is, we have gone to the market and we are working with other partners, mostly international organisations, who have done this in other parts of the world, and took banking to the market space, to displace the traditional financial system. One thing that we know is that people at the bottom of the pyramid are not poor, just that banking is not suitable for them. If banking is not suitable for them, they will keep their money, if not in their pockets, with somebody else. For the fact that you don’t have a bank account doesn’t mean that you don’t carry out financial transactions, you do. What we did was, we created a new banking solution that enables agents to go into the market place and open accounts for market men and women on their mobile phones, and collected cash and do cash in and cash out services every day. People could now put their money in a bank in a cost effective manner.
When you are in the market place like Idumota, I think we have a branch about 500 meters from the market, but nobody goes into that bank because they work from 6a.m. till 6p.m. and some of the marketers have only one person in their shops so they don’t have time. Some of them when they go to the bank don’t understand the nomenclature and the terminology, so we had to create that system where the bank goes to them. You can see how successful that was – 500,000 new customers in two years, balances in excess to N5billion and these were people they said do not have money and they do transactions every day. The most important is the transformation for people, because we have very compelling stories where people come to say, “if not for the BETA account, I wouldn’t have been able to take my children to school.” If you can generate cash and see where to keep it, you won’t keep spending it; and once you can see how it grows, automatically you will start planning for the future, and in most cases, it moves people from the poverty bracket.
On the small businesses side, you talked about lending people money, if you lend some people money, they will throw it away because they don’t know how to use money but the Diamond Business Advantage, which is our small business proposition is about one getting people in the state of readiness to borrow money and also create a platform for them to access the market, because we have many people producing fantastic goods and services, but nobody knows about them. Diamond Bank is a platform where if we identify good businesses, we try to expose them using our network and our footprint and our customer base by connecting customers to the market. We have partnerships and collaborations with capacity building institutions like ourselves and the Lagos Business School (LBS) doing a lot of entrepreneurship. So our business module is not just providing a place to keep your money or a place to borrow, but also a place to help people grow their businesses.
Most customers, especially business customers will tell you that it’s not about the lending or the deposit but about how we help them support their business from either a capacity building perspective or connecting them to market places, because we are in the retail space and our public clients have access to our network, and where customers can channel their products and services, or we also help them facilitate their financial flows.
From your plan in the retail space, you probably needed a lot of capital to do all that you did. Do you have any other plans to raise capital?
Our need for capital is actually to invest in assets, and definitely not fixed assets, because we are not deploying new branches, but just to enhance our technology and lending. Like I said, we are aligning to government’s strategy on building the economy, so our capital requirement for lending to retail is 75 per cent, as opposed to 100 per cent in the business and corporate space. The capital requirement for lending to retail is much smaller, and as we begin to adopt more principles of the international finance reporting standard (IFRS), and the Enterprise Risk Management.
For us, retail helps you diversify your portfolio and your businesses in all dimensions, whether it is risk or customer base or profit centred. Once you’ve identified that your cost of risk should actually go down as well the fact that we have learnt from the last two great economic downturns is that no matter how big you are as a company, when there is a downturn, there are big impacts on businesses. There is no business too big to fail, so the days of saying that you want to own 90 per cent of a customer’s business has gone, and we would rather share, collaborate, partner in the growth of big businesses, because that is the best way to go.
I think that is good for businesses as well because if I as the bank respond to 80 per cent of the customers’ exposure, of course it will have a big impact on my balance sheet. So I now put the customer under pressure to do things that is not economically sound for the businesses in the long term. But if it was a series of banks that I had a share, it will only be a small portion. The issue will then be, how do we help this company through this difficult time to go back to profit making that they were enjoying and sustain the business they are doing?
Our capital requirement is not going to be much as it was before, and we are also getting capital release from many of the things that we are getting out. As a business, if we are not into big infrastructure or businesses; as payments are made, capital is released, and from that capital we now redeploy to our core focus areas.
Right now, we have no plan to raise capital. What we are doing is a capital management activity, and that is moving capital out of where it is not generating enough returns to the bank to the places where we think that we are going to deploy it better to generate better returns. Apart from the business focus being retail, one key thing is the return on capital. Today investments in subsidiaries outside Nigeria were tying down by 15 per cent cost of capital, whereas if you invested such money here, you can get much higher returns than that. So where your investment return is lower than its 15 per cent cost, it doesn’t really make sense from accounting and finance perspective to retain or sustain those investments, so you pull out and redeploy it.
We also talked about the infrastructural investment which interestingly, we are not embarking on. Our model to grow the retail business is completely different from our model to run a corporate investment or business. So the capital need is still there but the source of capital is more like from those areas that were capital intensive with low returns to those areas that require less capital but have higher returns.
In February 2017, we found out that 14 banks including Diamond Bank made over N500billion from investing in treasury bills, and that was like a 50 per cent increase from how much you made same period the previous year. What other alternatives are you looking at this time to grow your interest now the returns are not so high?
First of all, that notion about treasury bills is not our primary objective, that’s just a full out. We were operating in an environment that was not conducive for lending, because you do not lend in an environment where consumption is down, and so we had to invest in treasury bills, but then that is not our strategy. Our strategy now is lending to a wider sector of the economy, which means more businesses. The environment is still not very conducive now, but it’s a lot better, and there were some few steps that were put in place like the introduction of BVN. There is more information and data, collateral registry is there now, but it was not there before, which will also help us to learn cost effectiveness with the small businesses, and before that, collateral management was very expensive for small businesses.
One of the things I look at is the youth and the youths have two sides. We have the positive side and the negative side and so we will deploy one of our retail strategies. About 80 per cent of our deposits are local deposits, while 20 per cent is fixed. As youths grow, it also means that we can learn to move people because the interest rate will go down, the cost of borrowing will go down for people, and the risk of failing is lower; so it’s a welcome development.
Our business is like oil; you can decide to drill oil and then sell it and be exposed to market conditions, or you can refine it and then command higher price. For us, you can just do treasury bills and wait for market forces. If treasury bills go down then you will go down or you can invest in businesses with people where you have the chances of harnessing new customers, and also generating higher fees from the services you are providing for them, and that is our strategy. The treasury bill strategy means that I cannot predict and I have less control of what my earnings are going to be.
Talking of oil pricing, this is the highest in three years now, how has that impacted your business?
Basically what happened in the last two years was like crazy, because oil prices came down, and there was the issue of transporting the oil through the pipeline that was busted, so oil production and bringing out the oil from wherever it was drilled was as a disaster. Of course that impacted on almost all the oil services and exploration companies. It was only the downstream, which are the people that buy and sell fuel that was doing business.
Now the price of oil has gone up, and a lot of explorers have gone back to drilling, and they are back in business. They can also evacuate whatever they have drilled, so in the last few months, we are beginning to see cash flow come back again. The oil services, who are the people that own the rigs and the vessels, are beginning to have new jobs, which had been stalled before; so things are much better. The NPLs are beginning to perform, and in fact, early this year we had three or four customers that never had anything coming in 2017, so we believe it’s a good one and it is going to impact the profitability of banks, including Diamond Bank, and we believe that it will be sustained going forward.
Speaking about the NPLs, you know of the CBN regulation, based on a survey of banks, we noted that you met the minimum bank bench mark for CRR, for the NPL, you are at 9 per cent, and you had just 30 per cent dividend. What will it take apart from the retail angle you have been talking about to retain stakeholder’s confidence?
It depends on how you look at Diamond Bank’s stock, and who invests in Diamond Bank’s stock. I think most people invest in Diamond Bank’s stock as a good stock. Dividend is important because it helps people catch loans but also taking the right decision on how much capital to put back into the business to grow it, or to give to the shareholders a well. I think for us; we have not finished our result so I cannot give you much now but to tell you that our shareholders always expect the board to take the right decision that makes the business successful.
There is no point giving 100 per cent dividend and then in three months’ time I’m asking for a capital raise. If I’m going to give you dividend, which is of course taxable, then I would have cost you more money. It would have been better to just say, “I would have given you such money, but I don’t want to give it to you, and ask it back from you later, because you will give me 20 per cent more because the tax is 20 per cent more.” We look at that capital management even from the shareholders’ perspective as well, but it is important to manage, how much do you give to shareholders, how much do we retain and how much do we add to what we need depending on what we need?
We have a policy, and we are also guided by regulations as well. We will look at that and how much will be ploughed back depending on who the shareholders are, what the regulations is, and what is the state of capital requirement, and what the capital excesses are.
The NPL is going down, and some of those accounts are now seeing transactions because of the improvement in the oil and gas. We cannot give specific numbers here, because our report has not been approved by the Central Bank, but the truth is that things are looking up, and we do not expect to be above 10 per cent.
NPLs go down in two ways, either by recoveries and you can see that most of the NPLs, majority of them are from the oil and gas, and we are seeing flows and it is going down. We have strengthened our risk processing to lend efficiently to the retail space, and we lend more and remember that fee income is really what you get when you do retail lending. So your fee income increases as well, profitability also increases.
Still on NPLs, I don’t know if our investigation is right, but we learnt that some of the loans were taken by some bank directors, and people are saying that rather than stop giving loans, why don’t these banks go after the people that borrowed from them, or probably sell the collaterals raise money and then move on?
The beauty about the new IFRS reporting now is that there is free disclosure. If you look at our 2016 accounts, you will see everybody that we have lent to, whether they are doing well, the ones that were performing, and the ones that were not performing, and it is easy to see the ones that were non-performing. Also, the Central Bank already has rules and guidelines that actually make it very difficult for internal-related loans to be paid. For us to lend to insider, it’s 100 per cent collateral for a start, and when the loan goes bad, Central Bank will not allow you to write it off. You have to sell off the collateral and the insider must pay.
But are the insiders paying?
First of all, in Diamond Bank, we don’t have a lot of insiders. There are fears that this new regulation of non-payment of dividend by CBN based on banks with low CRR and their NPLs fall below the minimum requirement will stifle investments in the capital market. So under this current quagmire as it were, how do you think this can be resolved considering that returns on investments are what shareholders are looking out for?
The two ways you can look at it depending on your view is, if you are a trader and you are buying and selling, it might impact you, but if you are customer, like someone who will say, I am investing in this company because I believe that this company will grow, and the Central Bank has said they are putting in that regulation to protect the shareholders and checkmate whatever they are doing. It should actually also reflect in the shares as well. Secondly, banks are only a sector in the Stock Exchange (but they are the most active). It also means that we should start diversifying the capital market as well just as we are trying to diversify the banking space by giving licences to micro finance people, looking at Fintech and everything.
Every sector should play their role in the diversification so that we don’t have that pressure where one sector controls the fortunes of others, whereby putting pressure on banks to take short term decisions, which is not what we want to do. Banking is very key and instrumental to the growth of Nigeria and Nigeria’s growth is not a tomorrow thing. If I could think of infrastructure and building capacity, all those are long term things, and then we must enable the banks to take decisions that are sustainable at long term because it’s the bank sector that they rely on in the whole capital market.
We shouldn’t be worried about the modification in policy; like you know that policy has been there before, and what happened was that CBN now separated one line into two items, and this will affect banks that wish to pay up to 75 per cent of their profits as dividend; and no bank has historically done that. The highest are GTB and Zenith that pay 50 per cent.
The policy has been there since 2014, 2015, and 2016. Nigeria is now a more transparent country, which is good, and people know more now and can hold others accountable. I think it was an idea to hold people accountable, and when you manage expectations, you now take it to your buying decisions of shares; so it’s not just that this bank gives me only 10 per cent dividend pay-out.
Talking about your exposure to the energy sector, what is your level of exposure to the power sector, which has been problematic, and what are you doing about it? Secondly a lot of banks are leveraging technology including your; how much has technology impacted on your performance, even after cutting down your staff strength, how much good has technology really done to you?
Let me start with the last one, technology has played many roles. The first is that we are now paperless in Diamond Bank. We don’t use paper unless we have to write CBN and sign a document. Now, we are paperless not because of cost but what it does. It means that we don’t actually have to be in our offices. I can stay at home if I want to and do the work. If any approval is required, I can do it, I can communicate and I don’t have to be physically here for the meeting. Because we are paperless, there is more security of information in Diamond Bank. Right from the board and down, we don’t use paper, so it gives us flexibility to handle the customers and that where the benefit is.
Cost of serving has also come down; imagine you opening nine million accounts in two years, and those accounts were opened by customers themselves on their phones. For the cost effective, the nine million customers didn’t have to pay transport to go to Diamond Bank to open accounts, and that saves money for the customer. Also, we didn’t have to give out nine million forms, and they didn’t have to stop their activities; imagine the savings that was achieved. If we did three million activities in a month, 85 per cent of them are actually done on other channels. Imagine if all of them were done in a branch. I think one of the biggest benefits of that is security.
People always talk of risk of cybercrimes, but at least you can quantify it. You don’t hear of bullion van raids anymore, because most banks have lower costs, so if the costs of management have gone down, you can see the effect. If look at the cost of our businesses between 2016 and 2017, despite the increase in petrol price, despite the increase in diesel price, despite the inflation, which was 16 per cent, despite the devaluation of the currency, which was 30 per cent our cost was flat. It could only have been flat because of deployment of technology, and even with that technology, we have more people working in Diamond Bank. Those more people working in Diamond Bank was because of the opportunities in the retail space, we had to employ for direct sales, 2,000 more workers were employed, although they are not full time employees, but they are employees, so we added more jobs to the market.
If we hadn’t done the financial inclusion of providing services for them, we don’t need many full time employees. We are still employing people in the full time employees’ space because there are more jobs to be created because once you create opportunities in a new economy there are people that you need to go and show people how to use those things, and that is what technology has done. It has created and reduced the cost of service, and has increased customer experience. Customers can do more and they are doing more. There are people who do one transaction every two days, and going to the bank is problems and they now have the power to do it through phone transactions by themselves without any interaction, and that is what technology has done. In fact some of the plans that we are launching this year actually have actually allowed people to do more, and ask more questions, and be more engaged with their banks and feel more secure and safe, and also hold the bank accountable if anything happened, which is very important and create more transparency as well. It’s still a long way to go in technology, as it is enhancing opportunities.
What became of your tech fest that was supposed to hold in January?
It’s still going to hold in April. I think we wanted more time to get some more activities that will be more beneficial to all the partners that are involved. It’s not just Diamond Bank that is involved that fest. Our technology partners, our communication partners as well as others that are going to be involved.
What about selling of branches?
We are not going to sell branches. We are going to look at our footprints, and we are going to decide the maximum use of for each one; whether it’s changing it, modifying it, or adding more solutions. In some areas, where it is not beneficial to customers, we will send it to CBN for approval to get rid of it.Still on technology, I remember when Diamond Bank launched in the 90s, and a whole lot of things have happened in the Fintech space especially now with block chain. How is Diamond Bank adapting to these?
The difference between Nigeria and Western Europe with a simple example is, in Western Europe there is a new rule called PSV 2 through which all banks in Europe has to open their system and everything for customers to have more choice. Back to Nigeria, there are some things that we have been doing for the past 10 years. Like in 1992, I came back from England, I had a debit card and I had a credit card but there was no debit card and retail was underdeveloped, but today, we have leaped forward to a lot of these games and its working with Fintech. And so why the banks had a monopoly in their system, like the legacy system that had prevented them from actually doing some of the things they would do here in Nigeria. In Nigeria, we have done more mobile payments than they have done in the U.K. I’m yet to see a mobile app that is actually better than ours in high premium delivery cases.
In Nigeria, when I transfer money to you, you will receive that money immediately, but if I told you that when I transfer you will receive it tomorrow, you will think I‘m trying to defraud you. In the U.K. that is a premium service, and we were able to do this because as a bank, when we started, we were collaborating with a Fintech company.
Our Diamond Yellow Account solution was in collaboration with a Fintech company, we embraced Fintech, and my tech talk show was actually about engaging with Fintech and exposing them to a wider market at large as well so we are in a completely different market and because of our infrastructural challenge, we know that for us to reach the market, we have to innovate.
Back to block chain, I don’t have to worry about that. All I have to do is to find someone who can give me a solution, and a Fintech that can say Diamond Bank, here is the solution built on block chain that can help you drive financial inclusion and that can provide a better way for people making payments to buy micro electricity. There are many applications for the block chain, but not necessarily the bank that will benefit from it. I have my own competencies and capabilities, and I will stick with that, and I will partner with people who have capabilities in block chain. I won’t start or open up a new department on block chain when I don’t know