In this exclusive interview, Odume Festus, Editorial / Project Director Of Financial Edge engages Tosin Ige, Head of Research at Proshare, to discuss the Proshare Bank Strength Index (PBSI) report on Tier 1 Banks in Nigeria. He delve into the methodology behind the PBSI, the key findings of the report, and the implications of the Tier 1 and Tier 2 bank classifications.
FINANCIAL EDGE: Can you explain the Proshare Bank Strength Index (PBSI) and how it evaluates banks?
TOSIN IGE: The art and science of banking have evolved on the back of the evolution of the global financial system, with technological innovation and integration, risk management, and even size.Similarly, the classification of banks into tiers has evolved over time. The problem with extant tiers classification with absolute figures, like asset size, gross earnings, and share capital, is that they undermine the importance of efficiency and may disproportionately favour larger banks. For instance, when considering a bank’s assets, a larger size is a compelling basis for ranking it higher than a smaller institution. Nevertheless, this approach neglects the crucial aspect of asset quality. A similar oversight occurs with Gross Earnings, as it does not distinguish between Interest and Non-Interest Income.
The Proshare Bank Strength Index (PBSI) evolvesas a fit-for-purpose refinement and redefinition of the extant approach to Tier-based Nigerian Banks classification. It is an aggregate index that selects, weighs, and sums the most significant and essential determinants of long-term profitability and strength of banks. The PBSI emphasises efficiency and effective metrics related to bank size, profitability, risk management and efficiency, technology integration, and governance, amongst others.Thus, The model provides an objective basis for classifying banks and enables market stakeholders to understand the fundamentals of tier 1 and 2 descriptions for local banks.
FINANCIAL EDGE: What are the key findings of the Tier 1 Banks Report: The Class of 2024?
TOSIN IGE:: In reviewing bank performances based on their FY 2023 results, Proshare analysts found that Nigerian banks remained resilient despite operating in a volatile macroeconomic landscape. Despite modest risk profiles across sectors in the economy, banksincreasingly pursued aggressive approaches such as acquiring digital market share while supporting loweroperating costs (lower cost-to-income ratios (CIRs)).
Notably, the2024 PBSI rankings revealed Access, UBA, GTCO, FBNH, and Zenith retained their position as Tier 1 Banks.ETI entered the elite banking class of Tier 1 as Stanbic dropped out, perfectly consistent with our pre-emptive analysis of H1 2023 in the last edition, which showed that Stanbic IBTC and Fidelity Bank were out of the Tier 1 Bank. The ranking showed Fidelity, FCMB, Stanbic IBTC, Sterling Holdco, WEMA, and Unity Bank as Tier 2 Banks, scoring below the 50th percentile.
FINANCIAL EDGE: How do Tier 1 banks differ from Tier 2 banks, and what implications does this have for the banking industry?
TOSIN IGE: Tier 1 banks differ from Tier 2 banks primarily in terms of their size, financial strength, and market influence. Tier 1 banks are typically the largest and most significant players in the banking industry. They have substantial assets, extensive branch networks, a wide range of financial products and services, and a capital buffer that derisk their operations relative to other tiers. These banks have the capacity to handle big-ticket transactions for both public and private sector clients, giving them a competitive edge in the market. In contrast, Tier 2 banks are smaller in size, have fewer resources, and may not have the same level of market penetration or influence as Tier 1 banks. As such, Tier 2 banks tend to focus on niche markets or specific customer segments where they can compete effectively.
By implication, Tier 1 banks, the major players, often set the benchmark for industry standards, innovation, and best practices. They play a crucial role in driving competition, shaping regulatory policies, and influencing market dynamics. Tier 2 banks also contribute to diversity in the banking sector, offering specialised services and fostering innovation. The coexistence of Tier 1 and Tier 2 banks creates a balanced banking ecosystem that benefits customers, promotes financial stability, and supports economic growth.
FINANCIAL EDGE: The report mentions the concept of FUGAZE. Can you elaborate on what this means and its significance in the banking sector?
TOSIN IGE: The concept of FUGAZE mentioned in the report is an acronym for the 2024 class of Tier 1 banks, including FBNH, UBA, GTCO, Access Corp, Zenith Bank, and ETI. The PBSI rankings in 2024 reinforced the concept of FUGAZ, which was the case before the Proshare maiden edition of the Tier 1 Banks Report in 2022. The class of 2023 included UBA, GTCO, Stanbic IBTC, Access Corp, Zenith and FBNH as Tier 1 banks; however, in the class of 2024, ETI made an entry into the Tier 1 class while Stanbic fell out.
FUGAZE, based on PBSI,signifies that these banks are the most robust and financially stable institutions within the Nigerian banking sector. Being Tier 1 Banks means they have substantial capital reserves, strong financial performance, and significant market influence, which positions them as key players in driving economic activities and instilling confidence among investors and customers. Their classification as Tier 1 highlights their ability to withstand economic fluctuations, grow and derisk their portfolios, and lead in banking innovations and services, ultimately acting as pillars for the overall stability and growth of the financial system.
FINANCIAL EDGE : How do you see the ongoing recapitalisation program impacting the banking sector, and what opportunities or challenges do you foresee?
TOSIN IGE: The ongoing recapitalisation programme in the banking sector will ultimately result in larger banks with higher liquidity for productive activities in the economy and a risk buffer in protecting the bank’s return on capital employed (ROCE). We believe the broad aim of the capital raise programme is to enhance the financial strength, stability, and competitiveness of banks operating in the country. The Tier 1 banks are likely to conveniently raise the required capitalisation through right issues, private placement, and public subscription. However, there is also the possibility of consolidation, especially among the lower-tier banks, in cases where they are unable to raise the requisite capital, with smaller banks either merging with larger institutions or exiting the market through acquisition. The industry may see smaller but stronger and more resilient banks that can better withstand economic shocks, meet customers’ evolving needs, and drive the projected one trillion-dollar economy. The recapitalisation programme also presents opportunities for banks to expand their market share, increase spending on research and development (R&D), improve their risk management practices, and enhance their capacity to support economic growth through increased lending to key sectors, as we have seen some announced.
The possibility of daunting tasks for smaller banks to raise the necessary funds through internal sources or external investorscould lead to increased pressure on profitability, liquidity constraints, and potential disruptions in the banking sector. Additionally, there is a risk that the recapitalisation programme could reduce competition in the banking sector, potentially limiting choices for customers and affecting service quality.
We believe it is unlikely for the consolidation process to face hurdles of regulatory approvals, integration complexities, and cultural differences between merging entities due to the existing custodianship of some of these banks by the CBN.
FINANCIAL EDGE : The report highlights the importance of digital asset engineering and customer service scalability. Can you expand on why these aspects are crucial for banks’ future success?
TOSIN IGE: We speak basically about the future of bank service delivery, product initiation, and innovation, which will continuously disrupt banking. It will be impossible to see the future of banking without referring to technology. We foresee further evolution driven by technology integration in banking in the years ahead. As new technologies such as blockchain technology, robo-advisory technology, and artificial intelligence are continuously integrated into the core of banking, the mode of product and service delivery will change as banks seek to expand the digital products they offer customers.
FINANCIAL EDGE: What lessons can be drawn from the experiences of US banks that failed due to poor asset and liability management (ALM)?
TOSIN IGE: The US economy witnessed the fall of five mid-sized banks (Silicon Valley, Signature, First Republic, and Hartland Tri-State Banks) in 2023, with a combined total asset size of US$753.5bn. Some analysts have linked this to factors such as undercapitalisation, while others, such as the European Banking Authority (EBA), had attributed the distress to the rapid decline in bank liquidity as they stumbled in matching loan asset tenor and deposit liability structure or ALM.
The learning points from the experiences of US banks that failed due to poor asset and liability management (ALM) are the critical importance of maintaining a balanced and prudent approach to managing assets and liabilities. These failures underscore the necessity of conducting thorough risk assessments, stress testing, and scenario analysis to identify potential vulnerabilities in the bank’s balance sheet. Effective ALM practices involve aligning the maturity and liquidity profiles of assets and liabilities, diversifying funding sources, derisking portfolios, and monitoring interest rate risk exposure. Furthermore, robust governance structures, clear communication channels, and a strong risk management culture are essential to ensure that decision-making processes are transparent and aligned with the bank’s risk appetite.
FINANCIAL EDGE: How do you respond to the report’s assertion that raising Nigerian banks’ equity base is no guarantee for economic growth and development?
TOSIN IGE: Raising bank equity should increase real sector growth and development through possibleincreases in loans and advances aside from the organic growth of the financial institutions.Higher banks’equity levels make them better equipped to absorb losses, manage risks, and maintain financial resilience. This increased stability and confidence in the banking sector should lead to improved access to credit for businesses and individuals and greater investment in productive sectors of the economy. As banks strengthen their capital base, they are more inclined to expand their lending portfolios, facilitate infrastructure development, support small and medium-sized enterprises, and drive overall economic growth through increased financial intermediation and capital formation.
While we believe in this transmission mechanism, it largely depends on factors such as macroeconomic stability, the economy’s pipeline of opportunities, and external shocks, which have become a reoccurring phenomenon. The real challenge here is the absence of macroeconomic stability and the high-risk profile associated with the real/high-growth sectors of the economy. A high-risk profile associated with real growth sectors of the economy maynot facilitate lending for investment and growth activities.
FINANCIAL EDGE: What do you think is required for banks to effectively transform their equity into drivers of economic growth?
TOSIN IGE: The new banking environment must be clear about its purpose, and its managers must be skilled in their administration and execution. The government-as-a-service (GaaS) concept should feed into a banking template, allowing optimal collaboration between the public and private sectors, translating into a larger GDP. The monetary authority must be deliberate about its policy to support the credit creation activities of financial institutions while fixating on stricter prudential guidelines. We must realise that when banks grow bigger, they are not necessarily better. However, a bigger bank unlocks opportunities for creating larger business value at cheaper operating costs.
FINANCIAL EDGE: Will Proshare’s future reports delve into other sectors, such as technology, healthcare, or energy, to provide a more comprehensive view of the market?
TOSIN IGE: Proshare reports have delved into several sectors of the economy and the markets. We will continue to provide quality and insightful reports backed by data, intels, and market rules while maintaining our credibility reporting. Our future reports will, notwithstanding, the sector prioritisemarket actions and inactions, household welfare, and Nigeria’s macroeconomic conditions.
