N25bn Capital: 'We've Overcome the Shock'
On July 6, 2004, a day described by bankers as "black day," the Central Bank of Nigeria shocked the operators by raising banks' capital from N2 billion to N25 billion. But in this interview with Ayodele Aminu, the Managing Director of Equity Bank Plc, Mr. Akin Ajayi, says, among other things, that banks have now overcome the shock
When the CBN governor made his infamous July 6, 2004 pronouncement of the N25 billion new capital base for banks there was uproar in the industry. Between then and now how would you describe the state of the industry vice-a vice implementation of this policy?
I would say that that initial uproar which you referred to was generated by the shock and disbelieve that that pronouncement created throughout the industry. Up to the time that pronouncement was made the entire industry was working on the target which specified N2 billion capital base for each bank which is meant to be achieved latest end of year 2005. That was the agenda we were working towards which was in line with the Basle Accord specification. And so for another pronouncement raising the capital from N2 billion to N25 billion to be made about seven months before the earlier deadline for the initial capital base expires was very difficult and sudden for the practitioners in the industry to come to terms with, particularly as there were no previous consultations at all with us, either to sensitize us about what was coming or seek our inputs in coming up with a final figure. So, naturally there was that shock. But since then, listening to the pronouncements by the CBN Governor and the president to the effect there is no going back on this requirement, the industry players got themselves adjusted to that reality. I say that between then and now that reality has dawned on us as an imperative that we must comply with the directive. We have moved from that phase of shock of disbelieve to taken it on board and accepting it as a fait accompli.
Recently, the bank held an Extra-Ordinary General Meeting in which shareholders supported the raising of capital through Initial Public Offer and private placements. Firstly, was the increase in capital on the drawing board before the pronouncement?
Secondly, despite the fact that Equity Bank is merging with the Intercontinental Group, why do you still want to raise your capital?
Yes, the decision to raise our capital was taken as far back as last year in line with the Basle 2 requirement for which the CBN had directed banks to increase their paid up capital from N1 billion to N2 billion. So, since last year we had made up our mind to raise the capital of the bank to a minimum of N2 billion. But in order to be able to pursue that objective we realized that it would be necessary to change the status of the bank from a private limited company to a public liability company essentially to broaden the shareholding base of the bank from 39 to a larger number. We therefore outlined the strategies and various milestones of steps to take to achieve the eventual increase in our paid up capital. So, the first thing we did was to get the board to approve that the status of the company be changed from a limited liability to public limited company. The board gave that approval early this year and it was also decided that we get the concurrence of the shareholders at the Annual General Meeting of the bank in this regard. And on May this year during our AGM it was approved. Few weeks after we had been formalizing all the necessary procedures to change the status of the bank, the CBN came up with N25 billion capital base.
You also asked why we still want to go ahead on our own to beef up our capital despite alliance with the Intercontinental Group. If you add up the paid up capital of the group it is quite substantial but not up to N25 billion naira yet. So, a decision was taken that each bank within the group should talk to their respective shareholders with a view to beefing up their capital. Once we have done that, we (the group) can then pool all our capital together sometime next year. By the time we come together we will be talking about N40 - N45 billion.
What would be the impact of the current increase in the prices of petroleum products on the banking industry given the fact that banks run their generators for almost 24 hours on daily bases?
The effect would very narrowly evaluate its impact. The impact is far more pervasive, it is far more widespread and more profound than you have stated. Oil is what drives energy in this country and energy is so basic in everything (transportation, servics and all the major conveniences of life) that we do in this country. When you increase the price of this products, it indirectly translate to a cost increase in all input factors across the economy and that in effect automatically has consequences for the rate of inflation in the economy immediately. If the inflation rate goes up and we (banks) are an economic unit in the country, and we derive practically all our inputs from this economy, it means that the cost of all those factors that constitute input would then go up.
You've only narrowed it down to what it would take us to power our branches 24 hours we have not talked of how much it would cost us to run our vehicles. The National Electric Power Authority would also increase their tariff because their turbines are ru with generators, so the effect is going to be so widespread and definitely have an impact.
The effect of the increase in prices of petroleum products is just like when you throw a stone in a pool of still water to create initial wave and then the waves keeps expending and expanding. The initial wave of inflation that the effect of the increasein price of petroleum products would create is not definitive, it is not the final. There are also so many other areas of the economy that would ultimately still respond to some of this inflationary pressure and react by increasing their cost of prices eventually. So, the effect moves in larger circles. By the time we sit down to evaluate the ultimate impact of the inflationary effect that that singular decision will create, which would begin almost immediately, it could take another six months down the line. Because you would increase your own price if you are a direct consumer of petroleum products, but you don't know by what measure other people would increase theirs, so eventually those by the time those who also provide input for you increase their own, you'll find the need to also increase your own eventually and that would take would be replicated on and on like that before the effect runs out.
From your explanations it seems as if we should expect higher inflation and there is no hope for reduction in interest rates because definitely cost of banks' operations would increase?
In the absence of any other intervention measures to counteract or to compensate for the increases in the prices of petroleum products, it would be unrealistic for you to expect that once the petroleum products like petrol or kerosene have their prices increased by 20 percent, you expect to see the level of inflation go up in the economy because it is a very basic product that underpins almost all areas of economic activities. It is not the same as increasing cost of airtime on telephone. If for example, there is shortage of fuel in this country, you feel the impact almost immediately. That tells you how widespread the impact of energy is in an economy. So it is the same way that increasing the price of petroleum products would have a direct impact on inflation, it is so pervasive.
What gives you that confidence that the N8 billion private placement would be successful?
The first thing is that we already have existing shareholders who are happy with the performance of the bank, who are happy with the kind of returns that the bank has been able to generate for them in spite of the challenges that we faced in 2002/2003. They feel sufficiently motivated to take up their rights issue of one for one existing share of the bank. As a corollary to that, you need to take a look at the names of people who constitute the shareholders of this bank for you to appreciate that there is no bank in this country that has lined up behind, a single entity the kind of names that we have in this bank. We have many ex ministers, past presidents of Institute of Chartered Accountants of Nigeria (ICAN), former head of service of the federation as well as other eminent personalities such as late professor Adeoye Lambo, Ajose Adeogun, Alex Akinyele, Abimbola Ogunkeye, Chris Ogunbanjo, Sheu Musa, Chief Mrs. Oral Benson as shareholders of this bank. This caliber of people we have as shareholders give us that confidence.
The second thing is that this bank (Equity Bank) has a good brand name. It is an image, which derive from our identity as a bank that cares. That's what stands us out because we care for our customers, we care for the society in which we operate, and we listen to them and anticipate their needs. We have marked ourselves out in the industry as a leading bank integrating information and communication technology into banking services. That has now taken us to a new height where customers who bank with us find out that we are the most convenient banking institution in this country to have access to because with your phone at home you can access your account, with mobile phone you can carry out transactions here and move money from one account to the other and have your phone recharged.
Besides, we pioneered Automated Teller Machines (ATMs) in this country. For example those that have an account with us were not deprived of cash during the last strike. All you needed to do was to work into any of our ATMs and draw cash. We have now become known as the bank that puts banking on the fingertips of its customers. We are known as a bank that is quite innovative. Within the next two weeks the industry will also get acquainted with the latest product on our stable. I don't want to shed more light on it so as not to allow our competitors copy it. The product would radically transform the face of banking in this country. Thats another evidence of our innovativeness, we offer our customers varieties. You can pick one out of the many products that would meet your needs at any point in the time. Some of our customers have also been begging us for years that we should open up this bank for them to also have a permanent stake here. They have seen this as an opportunity for them to be able to achieve that which they have waited long for. In terms of performance there is no bank with our level of share capital that has a greater return on investments than us. Some banks may post higher level of profit than us, that's not what I am saying, look at the capital they are using to generate that profit and look at the capital we are using to generate our own, that's what tells you how efficient the return on investment is. Any analyst who takes a look at our figures would come to the conclusion that those banks that our selling their shares at N3.00 kobo today, are not even as good as we are in terms of returns on investment and yet we are selling ours at N1.50, so it is a good buy for any investor. So for those reasons we are confident that the private placements would success. Don't also forget the fact that most of the other banks that are coming now are raising funds to beef up their capital before they merge with other banks. So, they don't even know whether that merger would be successful or not, whether they would merge eventually or they would find merging partners to merge with. In our own case, anybody who is putting his or her money in Equity Bank now knows that he is already an investor in a banking stock come year 2006 because there is already a path showing that we are part of a group, that is, a bank would emerge, it is sure, it certain. So by investing in Equity Bank you are not putting your money into uncertainty, you are not taking a leap into the dark. You are sure that at the end of the day your shares may not be called Equity Bank shares, it may be called Intercontinental Group or Intercontinental Banking Group but certainly you are an investor in the Nigerian banking industry come rain come sunshine post-2005. So, that clearly separates us from other banks.
What is the Unique Selling Preposition Equity Bank is bringing to the Intercontinental Group?
Our leadership in adaptation of communication technology to banking services is one major asset that we are bringing to that group. The innovativeness, which has come to characterize the quality of thinking of our employees is a major asset. The entire world moves forward either on the bases of invention or in innovation. Inventions takes a lot of time to come and can be very expensive but innovations are taking place everyday because you are applying existing knowledge to create things. And you know that any institution that thrives on innovation values knowledge and encourages experimentations. Ours is also an institution that has a lot of youthful people. More importantly is the qualities of our employees. They are energetic, vibrant, innovative, customer-focused and friendly. I am sure you know that the asset of any nation or organisation is its people.
What would be the effect of consolidation on bank employees?
There is no way we (the Group) would be beefing up our capital and we would not be compelled to grow our size significantly both within and outside Nigeria. We are not going to share all the additional funds raised by the Group, we are going to use it to increase the operations of the Group both within and outside Nigeria. And who are those that are going to manage and drive those businesses? They are people. So we need more people. Eventually, we would poach people from banks that are not able to merge to add to what we have because we need to expand. Remember that part of the genesis of this, is to actually stimulate foreign investment inflows into the country because we know that when the banks are large and strong investors more investors can bring money into the country. Presently our inflation rate is one of the highest in the world. If we have the kind of strong banks that we expect to emerge from this country. Would it not be a surprise to you if depositors from abroad convert their money to naira and actually deposit it in Nigeria to take advantage of the high rate of interest here and take it back abroad after one year, knowing that the depreciation of our currency year in year out is less than 5 per cent. If you get interest rate of 15 per cent here, you have increased your wealth by 10 per cent when the comparable rate of interest abroad is just 1 or 2 per cent.
What message/signal is the on-going consolidation in the industry sending to the international community?
I believe there are two schools of thoughts on this. A school of thought believes on the fact that adequate consultations were not done before this measure was introduced and that the implementation of a different agenda besides the initial N2 billion capital would sent a signal of inconsistency and lack of in-depth consultation to the outside world. It would seem to give the impression that things are done on a kneel-jerk bases here. They believe that it sends the signals of an unpredictable business setting, which is quite unfortunate, but it would be difficult to fault that viewpoint. When investors say that they would prefer to work in a democratic environment, what they are saying is that part of what democracy entails is that for any important policy measures to be introduced in the economy, they prefer it is debated thoroughly and all vital segments of the economy will make their inputs before a final decision is taken. It seems that some of those democratic framework, which were taken for granted, were actually not there. That's a viewpoint.
But another view point is that for quite a long time foreign investment that was supposed to have come into the country was held in abeyance because the banking system here was perceived to be characterized by players that are not individually very strong themselves to act as a vehicle for these investment flows. And so they felt that by telling banks to recapitalise it would wield out so many of the marginal unsound players and unsure that the only banks that survive are the very strong ones.
In my own view, if we have good roads, constant energy supply, good logistic framework in the country whereby you can easily clear your goods through the ports very without any hassles and you are also able to export very rapidly - if all these are addressed in tandem, then in my own view, those expectations would be realized. But if they were not, then we would just find out that banks have consolidated yet other expectations in terms of foreign investment inflow would not be met.
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