Driven by fears of declining profit margins in the face of reduction in bank charges by the Central Bank of Nigeria (CBN) commercial banks are converting to holding companies (HoldCos) in a bid to accommodate more lines of businesses and maximise profit.
No fewer than six banks have already converted to HoldCos even as more are already discussing at the board and management level on the need to equally adopt the same banking model.
Shareholders of Access Bank of Nigeria last Thursday rose from a court-ordered meeting to approve the proposed transformation of Access Bank Plc into a holding company, thus, making it the sixth commercial bank to operate a holding structure in the country.
This trend, according to analysts, is expected to continue as banks seek new ways to improve profitability.
Earlier, Stanbic IBTC, First Bank and First City Monument Bank (FCMB), had opted for the HoldCo structure but had recently been joined by Guaranty Trust Bank, Access Bank and Sterling Bank which had also received all approvals to transform into an HoldCo.
The six banks jointly have a market capitalisation of N2.07 trillion with GTCO having the highest market cap of N753 billion followed by Stanbic IBTC with a market cap of N466 billion while FBN holdings has a market capitalisation of N433 billion. The market capitalisation of Access bank by December 17, 2021 stood at N322 billion while that of FCMB and Sterling Bank are N59 billion and N43 billion respectively.
A financial holding company, according to Investopedia, offers a range of non-banking financial services, engaging in non-banking financial activities which are not permissible under a banking licence. These activities include insurance underwriting, securities dealing, merchant banking, underwriting initial public offerings (IPOs), and investment advisory services, amongst others.
In 2010, the CBN, in a bid to manage the risks in banks being involved in other businesses, such as insurance, had repealed the Universal Banking Guidelines, introducing a new banking model that is aimed at repositioning the Nigerian banking system on the path of sustainable viability.
The new model permitted banks and banking groups to retain non-core banking businesses by evolving into a non-operating Holding Company (HoldCo) structure.
Under this model, a non-operating HoldCo is expected to hold equity investment in banks and non-core banking businesses in a subsidiary arrangement. This arrangement seeks to ring-fence depositors’ funds from risks inherent in non-core banking businesses.
Analysts believe the stringent regulations as well as a tech-driven world, which makes profitability a hard reach, is prompting banks to look at expanding their businesses beyond core banking and venture into other aspects of the financial industry to boost their reach in a fast-changing world.
With lower interest rates as well as reduced bank charges, analysts say they expect banks’ profit to be slightly affected as more tech firms divest into banking activities.
Last year, despite the pandemic and the downturn in economic activities, 12 commercial banks had jointly pulled in N933.16 billion in profits and made N216.52 billion from charges on electronic transactions while between January and June this year, Zenith, Access, First Bank, Union, Fidelity, Stanbic IBTC, Wema, Unity, GTCO, Sterling, First City Monument Bank and United Bank for Africa had jointly pulled in N404.22 billion in after tax profit.
Renaissance Capital’s director, Frontier/ Sub-Saharan Africa Banks and Fintech, Adesoji Solanke, believes that more banks are more likely to join the HoldCo bandwagon.
This, according to the head, Financial Institutions Ratings at Agusto&Co, Mr Ayokunle Olubunmi, is due to the narrowing profit base of banking business in the country.
“With the CBN stance, the incomes of banks have actually shrunk. For example, effective January 2020, the fees and commission that banks could charge had reduced significantly, some as much as 75 per cent. The only thing that helped the bank last year was that, because of the pandemic, the volume of transactions went up which was why a lot of banks did not really feel the significant drop in the fees.
“Apart from that, with the low interest rate, the interest income of banks has actually gone down. So, in summary, there is a significant pressure on the earnings of banks and most banks are now thinking of other ways in which they can make money. This is why they are thinking that having an HoldCo which will give them leeway to go into other businesses asides from the traditional banking business,” Olubumni said.
This is in line with the view of the group chief executive of Guaranty Trust Holding Company (GTCO), Segun Agbaje.
According to Agbaje, the overall strategy is to create an operating model that would profitably grow the bank’s presence in the market for commercial banking and non-banking financial services, in order to achieve the aspiration to be the dominant financial services group.
Likewise, the HoldCo structure supports Access Bank’s international expansion plans as its chief executive, Herbert Wigwe said: “We want to be present in 22 countries over the next five years, and the idea is to be present in the large trade corridors of the continent.”
Payments and fintech services are also important to Access Bank’s future, Wigwe said.
“Growing customer base and payments innovations are a couple of things that we’re driving and in that space. For us, that’s what is important and that’s what’s going to drive our growth,” he stressed.
For Sterling Bank, the HoldCo structure is to allow it venture into other aspects of the financial system, including expanding its non-interest businesses. The bank’s managing director, Abubakar Suleiman explained that the bank is not looking to compete with fintechs.
He said, “We want to be number one for risk underwriting. We want to develop a capacity for risk underwriting at a level that no one can compete with. That’s our intention. I think the role of the bank above all else is to underwrite risks so that capital can flow and the economy will grow.”
Olubunmi noted that, for Sterling Bank, it is a bit interesting because having seen the success of non-interest banks, Sterling, which has a window for that, realised that there is so little which that window can achieve unless it is a standalone bank.
“So, it is better to upscale it, make it a full-fledged bank which can do a lot more and that is what is inspiring Sterling Bank. So, the HoldCo structure is something that we can still see more of it.”
The HoldCo structure is expected to be seen more among tier 2 banks as Olubunmi said: “The pressure we are talking about is on the tier 2 banks than the tier 1 banks and most of the CBN harsh policies have more effect on the tier 2 banks. So, I see a lot more of them going into HoldCo.”
LEADERSHIP learnt that United Bank for Africa (UBA) and Ecobank Transnational Incorporation (ETI) are operating a pan Africa banking model slightly similar to holding structure, but each of the subsidiary companies has a level of independence more than what the Holdco structure offers.