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Banking Sector

African Banking: The Productivity Opportunity

African revenues have recovered and are now higher than prepandemic levels, driven by sustained volume increases, higher interest rates, and stable risk costs.

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Global Banking - Investors King

In 2022, African banks are showing growth, despite significant headwinds, including macroeconomic uncertainty.

According to new research by McKinsey regarding the productivity opportunity, revenues have recovered and are now higher than prepandemic levels, driven by sustained volume increases, higher interest rates, and stable risk costs.

However, banking return on equity (ROE) in all African geographies except Kenya, still remains one to two percentage points (pp) below pre-COVID-19 levels, despite a strong rebound in 2021. Part of the reason for this is that many of the downward pressures on ROE in African banking predate the pandemic. To return to profitability, banks may therefore need to look deeper to address productivity blocks within the sector.

Profitability in Africa’s five biggest banking markets (Egypt, Kenya, Morocco, Nigeria, and South Africa) has been on a steady decline, decreasing by an average of two pp over the past six years. Egypt has experienced the steepest decline (–9.5 pp), followed by South Africa (–2.7 pp). Coming off of a low base, Nigeria is the only major African economy that has seen an increase in banking ROE since 2016 (3.6 pp), driven by a decline in risk costs following Nigeria’s economic reforms post the 2015–16 recession, a partial recovery of oil prices, early easing of COVID-19 restrictions and Central Bank of Nigeria (CBN) forbearance measures.

“African banks are costly to run, with an average cost-to-asset ratio of between 4 and 5 percent, almost twice as high as the global average. At the same time, the economic environment within which many African banks operate, often characterized by lower bancarization rates and loan-to-deposit ratios, means that the domestic revenue pools offer fewer scale benefits.

This suggests that banks may need to review their cost base and operating models, especially if they want to keep investing into technology and increase access to the banking system,” says Francois Jurd de Girancourt, a partner in McKinsey’s Casablanca office and leader of the firm’s Financial Institutions Group in Africa.

McKinsey analysis suggests that African banks may need to achieve productivity gains of between 25 and 30 percent if they are to restore prepandemic profitability. In many respects, the pandemic and a tightening global economy have already prompted most banks to begin this journey. To help accelerate progress, the firm is suggesting six productivity streams that could be considered as part of a holistic response to the productivity opportunity.

  1. Retail: Embracing the ‘phygital’ reality

For African banking, our analysis finds that digital adoption is between 20 to 30 percent; however, it could be higher. In Latin America and Asia, for example, digital adoption is around 50 percent, while in other global markets, it is as high as 72 percent. As service and sales in digital channels continue to gain prominence globally alongside the more traditional physical channels, there are two key levers African banks could consider driving further digital adoption and embrace the “phygital” reality.

     2. Central and back office: Considering a path to zero operations

One of the key trends shaping the future of central and back office is the hyperdigitization of work. Our research suggests that there is more than 50 percent automation potential across selling, general, and administrative expenses (SG&A) functions and 40 to 60 percent cost-savings potential from using automation in these functions. Leading banks are increasingly moving toward zero-based operations with the implementation of automation and digitization across the banking value chain. Despite several years of investment in lean, digital, and automation, we estimate that a significant part of the banking value chain remains dependent on manual tasks, driving 60 to 70 percent of costs.

    3. Support functions: Moving from transactional to value-added partner

African banks could consider adopting lean ways of working as a basic building block. Embedding an outward-looking and commercially focused orientation in support functions could help banks anticipate and respond more quickly to a rapidly evolving environment. Banks could also deploy digital and analytics technologies to generate relevant insights for the business.

     4. IT: An opportunity to accelerate technology adoption

To move to the next level, IT banking departments may want to consider accelerating their migration of applications and infrastructure to the cloud. Cloud-enabled technology has now reached a tipping point, and McKinsey analysis indicates that banks could double the productivity of their IT engine by deploying newer-age technology platforms. Additionally, by automating infrastructure deployment and switching to a DevOps model that automates manual tasks and enables the management of complex environments at scale, teams can rapidly and reliably implement and innovate for their customers.

     5. Real Estate: Flexibility is the new watchword

Hybrid working is now the norm. This provides African banks with an opportunity to rethink their use of physical assets. For example, banks could offer employees more workplace flexibility with an opportunity to work from home. Cloud platform migration could introduce a work-from-home/anywhere policy for its contact center employees. Such shifts in working conditions have the potential to offer employees a better work–life balance, a more tailored employee experience, and could have a positive impact on diversity, equity, and inclusion efforts as well as performance.

    6. Procurement: Digital collaboration and advanced analytics

Next-generation procurement improvements could include a focus on the acceleration of automation and digital collaboration. Investing in digital capabilities allows banks to automate processes and create transparency. For example, a “control tower” for the procurement function that captures and shares data could help to drive 100 percent visibility across the organization. This, in turn, could enhance efficiency, leading to shorter cycle times and contributing to tighter controls and compliance scalability with the option for immediate decision-making on spend requests. Ultimately, this could help to embed a stronger culture of accountability within the organization.

“If African banks are able to prioritize their productivity in these six areas, they could help optimize their cost base, better allocate financial resources to fuel growth areas, and partially counter ROE erosion. There is also an opportunity to lower cost-to-serve consumers and assist governments in the drive to advance financial inclusion, unlocking the next wave of growth,” says Jurd de Girancourt.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

Banking Sector

CBN Rate Hikes Raise Borrowing Costs for Banks Seeking FX

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Retail banking

The Central Bank of Nigeria (CBN) has implemented a significant adjustment to its borrowing rates.

The move, which follows the CBN’s recent decision to adjust the asymmetric corridor around the Monetary Policy Rate (MPR), has led to an increase in the cost of borrowing for banks seeking foreign exchange (FX).

This decision comes amid heightened concerns over the Naira’s performance and inflation rates.

According to Bismarck Rewane, Managing Director/CEO of Financial Derivatives Company Limited, the adjustment means that banks now face borrowing costs of nearly 32% from the CBN, a sharp increase from the previous rate of approximately 26%.

This change in borrowing costs is intended to deter banks from relying on the CBN for FX purchases, thereby reducing pressure on the Naira.

Data reveals that in the first five days of July 2024, banks borrowed an unprecedented N5.38 trillion from the CBN, marking a record high.

The increased borrowing costs are expected to reduce this practice, thereby alleviating some of the strain on the Naira.

Despite these efforts, the Naira has continued to struggle. On Tuesday, the Naira depreciated by 3.13% against the US dollar, with the exchange rate falling to N1,548.76.

This decline is attributed to reduced dollar supply and ongoing uncertainty surrounding Nigeria’s foreign reserves.

The black market saw an even sharper drop, with the Naira falling to 1,687 per dollar, reflecting broader concerns about currency stability.

Rewane highlighted that the recent rate hikes are part of a broader strategy by the CBN to manage inflation and stabilize the Naira.

“The increase in borrowing costs is a necessary step to address the carry trade practices where banks use cheap funds from the CBN to buy FX and sell it at higher rates,” he explained.

The CBN’s decision to raise borrowing costs comes amid a backdrop of persistent inflation and rising interest rates.

Over the past three years, the CBN has raised interest rates 12 times, with recent adjustments aimed at managing liquidity and curbing inflation.

As of June 2024, Nigeria’s headline Consumer Price Index (CPI) reached 34.19%, up from 33.95% in May.

The central bank’s policy changes are expected to have mixed effects.

Analysts at FBNQuest anticipate that banks will continue to benefit from the high-interest rate environment, potentially leading to a shift of assets from equities to fixed-income securities as investors seek higher yields.

The CBN remains committed to navigating Nigeria through these challenging economic conditions.

By adjusting borrowing costs and implementing tighter monetary policies, the central bank aims to strike a balance between managing inflation, stabilizing the Naira, and supporting overall economic growth.

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Banking Sector

Zenith Bank Retains Position As Nigeria’s Number One Bank By Tier-1 Capital For Fifteen Consecutive Years In The 2024 Top 1000 World Banks’ Ranking

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For the fifteenth consecutive year, Zenith Bank Plc has retained its position as the Number One Bank in Nigeria by Tier-1 Capital in the 2024 Top 1000 World Banks’ Rankings, published by The Banker Magazine.

This ranking places Zenith Bank Plc as the 565th Bank globally with a Tier-1 Capital of $2.01 billion. The rankings, published in the July 2024 edition of The Banker Magazine of the Financial Times Group, United Kingdom, recognise Zenith Bank’s continued financial strength and stability.

They are based on the 2023 year-end Tier-1 capital of banks globally and remain the primary source for global bank financials used by most international organisations in their assessments of banks.

Tier-1 Capital describes capital adequacy, the core measure of a bank’s financial strength from a regulator’s perspective.

According to the ranking, Tier-1 Capital, as defined by the latest Bank for International Settlements (BIS) guidelines, includes loss-absorbing capital, i.e., common stock, disclosed reserves, retained earnings, and minority interests in the equity of subsidiaries that are less than wholly owned.

A strong Tier-1 capital ratio boosts investor and depositor confidence, indicating the Bank is well-capitalised and financially stable.

Commenting on this achievement, the Group Managing Director/CEO of Zenith Bank Plc, Dame (Dr.) Adaora Umeoji, OON, said, “We are deeply honoured to be recognised as the Number One Bank in Nigeria by Tier-1 Capital for the fifteenth consecutive year. This recognition is a testament to our strategic focus on sustainable growth, innovation, and customer satisfaction. It also emphasises our resilience and strength in navigating the ever-evolving financial landscape. Our dedicated team of professionals has remained steadfast in ensuring that we maintain our position at the forefront of the banking industry.”

She extended her profound and sincere appreciation to the Founder and Chairman, Dr. Jim Ovia, CFR, whose visionary and transformative leadership has played a pivotal role in cultivating a resilient and thriving establishment.

She also expressed her deep appreciation for the board’s insightful governance, the staff’s relentless dedication, and the unwavering loyalty of the bank’s esteemed customers to the Zenith brand.

Zenith Bank’s financial performance for the year was driven by a remarkable triple-digit growth of 125% in gross earnings, from N945.6 billion reported in 2022 to N2.132 trillion in 2023. This growth led to an improved market share in both the retail and corporate segments despite a persistently challenging macroeconomic environment.

The increase in gross earnings was primarily due to growth in interest and non-interest income. Interest income growth was attributed to the increase in the size of risk assets and their effective repricing, while non-interest income was driven by significant trading gains and gains from the revaluation of foreign currencies.

Zenith Bank recently commenced recapitalisation efforts with the conclusion of its Capital Markets Day held on 11th July 2024. It aims to raise the least amount of capital amongst its peers at N230 billion, considering it already maintains a robust capital base of N270.7 billion.

The Bank remains dedicated to supporting the growth of the Nigerian economy and providing its numerous customers with innovative and efficient banking solutions.

Zenith Bank’s track record of excellent performance has continued to earn the brand numerous awards, with these latest accolades coming on the heels of several recognitions. These include being recognised as the Number One Bank in Nigeria by Tier-1 Capital for the fourteenth consecutive year in the 2023 Top 1000 World Banks Ranking, published by The Banker Magazine.

The Bank was also awarded the Bank of the Year (Nigeria) in The Banker’s Bank of the Year Awards for 2020 and 2022; and Most Sustainable Bank, Nigeria in the International Banker 2024 Banking Awards.
Further recognitions include Best Bank in Nigeria for three consecutive years from 2020 to 2022 in the Global Finance World’s Best Banks Awards and Best Commercial Bank, Nigeria for three consecutive years from 2021 to 2023 in the World Finance Banking Awards.

Additionally, Zenith Bank has been acknowledged as the Best Corporate Governance Bank, Nigeria, in the World Finance Corporate Governance Awards for 2022 and 2023, and ‘Best in Corporate Governance’ Financial Services’ Africa for four consecutive years from 2020 to 2023 by the Ethical Boardroom.

The Bank’s commitment to excellence saw it being named the Most Valuable Banking Brand in Nigeria in the Banker Magazine Top 500 Banking Brands for 2020 and 2021, and Retail Bank of the Year for three consecutive years from 2020 to 2022 at the BusinessDay Banks and Other Financial Institutions (BAFI) Awards.

The Bank also received the accolades of Most Sustainable Bank, Nigeria, in the International Banker 2023 Banking Awards, Best Commercial Bank, Nigeria and Best Innovation in Retail Banking, Nigeria, in the International Banker 2022 Banking Awards. Zenith Bank was named Bank of the Decade (People’s Choice) at the ThisDay Awards 2020, Bank of the Year 2021 by Champion Newspaper, Bank of the Year 2022 by New Telegraph Newspaper, and Most Responsible Organisation in Africa 2021 by SERAS Awards.

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Banking Sector

Jaiz Bank Boosts Chairman’s Income to N24m Amidst Strategic Expansion

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Jaiz Bank

Jaiz Bank has announced a 20% increase in its chairman’s annual income to N24 million.

This decision was unveiled in a recent statement filed with the Nigeria Exchange Limited, highlighting the bank’s commitment to rewarding leadership amidst its expansion plans.

The bank, renowned for its pioneering role in non-interest banking in Nigeria since 2012, also approved a remuneration package of N20 million for each non-executive director.

The announcement was made by the bank’s secretary, Mohammed Shehu, highlighting the importance of competitive compensation for board members who provide crucial oversight and strategic guidance.

Shareholders at the Annual General Meeting (AGM) expressed confidence in the board’s leadership by approving the resolution on directors’ fees.

This move aligns with Jaiz Bank’s ongoing efforts to enhance its capital base to N70 billion by the end of 2024.

The bank also announced a dividend of 4 kobo per share, which will be distributed to shareholders on July 16, 2024.

This dividend declaration was welcomed as a testament to the bank’s operational success in a challenging economic climate.

Also, the AGM saw the re-election of Muhammadu Indimi and Muhammad Abdulmutallab as non-executive directors, reaffirming shareholder trust in their leadership capabilities.

Jaiz Bank’s financial performance has been impressive, with a 67% increase in profit before tax, reaching N11.1 billion in 2023.

Gross earnings also rose by 42% to N47.2 billion from the previous year, showcasing the bank’s successful growth strategy.

As Jaiz Bank continues to expand its services, the enhanced remuneration package signals a commitment to maintaining strong governance and leadership, paving the way for future achievements in ethical banking.

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