On Sunday 16 June, President Uhuru Kenyatta told a religious gathering at a stadium in Nairobi: “When they see me remain silent, they should not think they are threatening me. I will flush them out from where they are.”
Profile: Abubakar Suleiman, Chief executive officer, Sterling Bank, Nigeria
For Abubakar Suleiman, chief executive officer of Sterling Bank, and his counterparts in Nigeria’s banking industry, the aftermath of the abrupt fall in the global oil price in late 2014 provided an important lesson. The price slide laid bare the gaps in their assessment of the risks involved in financing players in the country’s energy sector, which, like the global industry, is susceptible to both random and cyclical price shocks. Led by Suleiman, Sterling Bank, a mid-tier Nigerian lender, is now betting on a strategy that prioritises underserved sectors of Nigeria’s economy such as health and transportation.
The lessons of the oil rout are key to Sterling’s new strategy. The difficulties took place in the period from 2011 to 2014, when a flurry of economic reform activity created opportunities in Nigeria’s oil and gas and power sectors for local business players. Both efforts required a significant injection of capital, so local businesses turned to the banks to obtain funding for their acquisition and expansion plans. Sterling Bank, like most other banks in the country, issued loans on the basis of the prevailing oil price and Nigeria’s economic fundamentals, which were underpinned by the oil. So when the price of oil fell from record highs of more than $100 per barrel to around $30, banks were left scrambling as loans started to go bad.
Suleiman, who was chief finance officer at the time, says: “I must confess that we didn’t have enough time in oil and gas and power because there was a national need to finance those assets and we hadn’t had time to specialise.” He points out a key error: underestimating how low the price of oil could fall. The stress tests that Sterling and its counterparts carried out prior to financing projects failed to take the historical trend of oil prices over a longer period into account. Their financial models had worst-case scenarios of $75 or even $60 per barrel. This oversight contributed significantly to the non-performing loan (NPL) ratio for the industry rising to more than 15% at the middle of the last financial year. This is three times the regulatory threshold.
Sterling Bank saw its NPL ratio jump sharply initially, peaking at 12% in early 2017. It gradually declined after the bank restructured most of the problematic loans. Its NPL ratio is now 6% and has been declining each quarter. Suleiman is confident that Sterling will get the portion of its troubled loans to well below the threshold by the end of the financial year.
Sterling has since devised a new strategy to be profitable sustainably while also contributing to the development of Nigeria’s economy. The strategy is known as HEART and involves the bank developing specialist knowledge of key sectors. The sectors it has identified are health, education, agriculture, renewable energy and transport.
Suleiman says he recognises that taking time to study the sectors before making any significant loans means that Sterling will not be able to generate high levels of returns in those sectors in the short term. He argues that focusing on long-term value is in the bank’s best interests. He explains: “The five sectors we have chosen are sectors where there is a massive demand-supply gap. It means that if you do the right thing with the right partners you will create the supply that is required at a lower cost to the consumer, and therefore the sector would actually expand.”
Suleiman cites two examples of how the bank made similar bets on projects that are paying off. First was its foray into Islamic or non-interest banking, which Sterling got involved in several years ago after the central bank established guidelines for banks. Sterling spent more than three years piloting the activity without profiting from it. But since then, the bank has been able to sharpen its sword and its non-interest banking business has turned profitable. It contributed 5.5% of profit before tax, or N470m ($1.5m), in 2017. Sterling is now planning to scale up its activity.
The other example was the bank’s financing of the bus rapid transit scheme in Lagos State. Sterling Bank lent $50m to the state government in 2015 for new vehicles and rolled out a new contactless payment system for the buses late last year.
“The five sectors we have chosen are sectors where there is a massive demand-supply gap”
Retail banking is another of Sterling’s growth targets. In the car park across the street from Sterling Bank’s 23-storey head office on Lagos’ Marina Street, a prototype, solar-powered kiosk is stationed on a lawn. From his office in the building, Suleiman points it out as he speaks of his plans to expand the bank’s agent network. Sterling plans to distribute 10,000 of these kiosks to agents across the country after a pilot run. The kiosks will enable agents to carry out basic banking and airtime-vending services. The central bank estimated in June that more than 40 million people are still excluded from accessing financial services despite authorities’ efforts to drive up inclusion.
As the 2018 financial year plays out, Suleiman says he is confident that Sterling Bank will achieve its guidance numbers and consolidate on the progress it has been making over the past 18 months. For 2017, Sterling reported 65% year-on-year growth in its net profit, N8.5bn, in 2017. Its Tier 1 capital increased to N80.7bn in the first quarter of 2018, further shoring up the bank’s capital base. Sterling is also in the process of securing an injection of Tier 2 capital to balance its capital structure.
Friend of fintech
Suleiman says that Sterling Bank is sparing no effort in the “race to digitisation”, where it is competing with its banking peers and financial technology (fintech) start-ups. Sterling launched a digital loan product called Specta in April. The bank claims it can assess loan applications and disburse approved loans within five minutes, leveraging data from both internal and shared industry databases to determine if a customer is creditworthy.
Suleiman says he is unruffled by the threat posed by fintech. He argues that banks are actually the biggest fintech firms, but they are highly regulated because of their principal function of collecting deposits from consumers. Suleiman says rather than viewing each other as competition banks and fintech firms should seek opportunities to work together: “There has to be a space where fintechs can operate but they must be prepared to collaborate with banks because there are things that they cannot do without falling under regulation. And the most critical one is that they cannot become a deposit money bank. If you become a deposit money bank then you have to be prepared for regulation.”
This article first appeared in the September 2018 print edition of The Africa Report magazine