Cases Of Banks Net Profitability Falling By Over 50% Are Just Too Many


John Izuka, (LinkMoment).

Have you had the time to look at the 2015 audited financials of the many Nigerians banks that have been published? Let me spare you the rigour, many are not looking as their managements would have wanted. In fact, cases of net profitability falling by over 50% are just too many. Drawing conclusions, assessing a commercial bank or comparing one against another based on the Profit or Loss in just one year is not advisable.

From those I have checked so far, Zenith and GT Banks grew in most indices that are lifted off the financial statements such as Interest Income, Fees and Commission, Cash, etc., but when tested for more technical indicators like Return on Equity or Return on Capital Employed, Return on Assets etc, their performances may not be as beautiful.

Between the two banks, they grew profits organically by about NGN5-6 billion each year-on-year. They made about NGN200 billion (US$1 billion) in 2015. First Bank (FBN) saw profitability fall by about 82% year-on-year. To put it in perspective, First Bank made NGN84 billion (US$509 million @ NGN165/Dollar) in 2014 and this year 2015, FBN Holdings returned about NGN15 billion which translates to just over US$75.5 million @ NGN200/Dollar. So, you see, there are issues and they are serious for Nigerian banks.

However, we must note that no two banks have the same circumstances even though they all operate in the same socio-economic and political environment. There are internal forces, cultures and historical commitments that also impact heavily on the outcomes a bank gets at the end of every December 31st. From where I stand, I see one mistake the banks make in trying to redeem poor performances – reduction of their staff strength. You guessed right, First Bank has said, according to Punch Newspapers, that they will right-size from 8,000 down to 7,000 staff soon. While that move can only improve their Cost-Income ratio in the short run but cannot improve overall Asset Quality. It says absolutely nothing about how you want to ramp up income immediately.

Basically, capitalism teaches a very unsustainable outlook to business and governance. Capitalism likes to make leadership teams think or act like 30-50% business growth can be achieved on a sustained basis, in perpetuity. This is not practical and goes against natural trends. I have always told people that it is more realistic to project gradual but solid and organic growth year-on-year, a maximum of 15% Y-o-Y at best. That way, we disable the greed that ultimately and too frequently drives corporations through very short boom-burst cycles.

When your growth projections are moderate and realistic, everyone wins since the boom-burst cycle will elongate drastically. It makes little or no business sense growing your branch network to 1,000 when 50% or more are achieving negative profit aka losses. Everything should measured. While speed is profitable you will agree that speed also kills! One burst session could wipe out a company/bank and then those shareholders for whom management puts everyone under immense pressure to deliver will ultimately count their losses.

A bank’s bad performance can easily be attributable to the economic and political environment more than the number of staff it runs its business with. After all, recruitment is a deliberate process and must have been justified by transaction volume.

Instead of exiting staff as first option to recovery, banks should cut profligacy. Banks are not tech companies and cannot afford monstrous pays that some top dogs get. Banking institutions must entrench excellent Governance, Risk, Compliance and Control framework. This is what the foreign banks do to earn better than the Nigerian banks when compared on Return on Capital Employed. Cut costs. You must not be in the papers every day. It is expensive!

Banks should choose the markets they want to play in. Banks must not do all kinds of business. Some industries are just so unpredictable e.g oil and gas, government, real estate etc. In as much as these maybe very profitable areas but the pitfalls are too many. They are usually large tickets deals and they also create large ticket problems when they go bad.

Let’s look for more creative and ingenious ways to grow our business just before letting the 1,000 go instead of worsening the unemployment problems for the President Mohammadu Buhari government.

By John Izuka (Banker).