Chukwu: There Should Be Conservative, Cautious Approach to Banking Sector Recapitalisation

In this interview, the Group Chief Executive Officer, Cowry Asset Management, Johnson Chukwu, spoke on fiscal and monetary policies and their direction into 2024, the planned banking sector recapitalization and other topical issues in the economy. Nume Ekeghe presents the excepts:

Can you give us your take on the banking sector this year as the sector is set to recapitalise?

Well, I think the banking sector is still quite strong,  it still remains one of the strongest sectors in the economy. It is also one of the fastest-growing sectors of the economy. If you look at the third-quarter GDP growth rate, you see that the sector grew by more than 28 per cent. But beyond that, in terms of health, I believe that 99 per cent of the operators in terms of asset size are healthy. There might be a few weak operators, but when it comes to market control or market share it is inconsequential given the size of the market or the structure of the sector. We need some level of consolidation, but also the sector is one of the more dynamic sectors of the economy in the sense that the younger operators or new entrants that come with superior service or high quality have space to compete. We have seen new banks that were licensed a couple of years back and they are competing well. We have also seen other service providers like FinTech, and businesses, providing disintermediation services and financial services. So, I think it is one vibrant sector of the economy irrespective of challenge the economy. In terms of the recapitalisation, you did mention, the CBN governor when he made that statement did not specify a timeline for that. So we are not sure when that process will take place. But I’m one of those apostles that urges that they need to think deeper when it comes to capitalisation of the banks because the banks currently carry operating capital that is sufficient to meet their business needs. And I say that with a high sense of responsibility to the extent that, if you want the banks to carry a capital requirement required for a $1 trillion economy, the Nigerian economy is not going to get $1 trillion in the next 20 years or 30 years at the current growth rate. So you’re gonna have the banks carrying capital that is beyond their operating need. This means you are going to get to a point where the return on capital employed by the banks will be inconsequential and will decline so much that investors will no longer be interested in buying banking stocks.

My take is that even with the government projection based on the medium-term expenditure framework that the economy will grow 3.7 per cent in 2024 and 4.22 per cent 2025 and 4.7 per cent in 2026 and if you use that trajectory, there is no way that growth rates will lead you to an economy of $1 trillion in 2030. Remember the economy today, given the devaluation of currency will certainly be less than $400 billion. So I think the central bank has to be more circumspect when they want to make that decision because it could have a negative impact on the banking industry, where investors will lose interest in investing in bank shares  because the bank shares are generating returns far below the commensurate return they will get from any other asset class.

So what’s a realistic figure instead of $1 trillion economy?

The first thing is, if we are growing at 5 per cent, by 2030, we will just be about $550 billion. So for you to grow to become a $1 trillion economy, you need to grow at more than 20 per cent. And no economy has recorded 20 per cent year-on-year growth for five to six years. But even 20 per cent, you will still not achieve $1 trillion by 2030.

So for me, it was a figure that came from the air. So we need to interrogate that figure and I think that is what is missing.

Nigerians are now asking how we arrive at the $1 trillion, what kind of projected growth rate we expect the economy to record and which sector would drive that growth rate.

The banks would carry capital they need for operating business which means there must be businesses they need that they can lend to. There must be liabilities in the economy that the capital they are carrying will help them generate.  But if you are looking at the current economic size, bear in mind that some of the Nigerian banks already have more than N1 trillion in shareholders’ funds.

How would you access foreign exchange policy and how deep do you see the naira sinking?

The basic thing you to recognise is that we are not generating fund and liquidity into the economy, and we need to generate sufficient foreign exchange into to the economy to moderate the rate at which naira is depreciating. There are some levels of consumption that the economy of this size is bound to demand from foreign goods. For instance, refined petroleum accounts for about 30 per cent of our imports. Then other items like machinery and other items account for 70 per cent of our imports. Even if we eliminate 30 per cent of our imports, you’ll have to still deal with the 70 per cent of imports. So you must have export earnings that are sufficient to meet that demand.

So in terms of export earnings, we are not getting enough of that because our major source of export is crude. Much of it has been pledged upfront and our production has stagnated around 1.3 million barrels a day. If we look at what the budget said, the budget breakdown noted that by September last year, our average crude production was about 1.3 million barrels a day. So we need to increase production to stabilise exchange rates.

The other option we have will be for the federal government to borrow long-term from either multilateral partners or bilateral partners. So that will require government borrowing without having to pay immediately. Not the type we have from Afrexim bank, we need a loan that would give us five-year moratorium to stabilise our foreign exchange market.

If you borrow and you have to start paying back immediately, it then means that the receipts you would have gotten from the sale of crude will be forgone.

Also, eliminate the panic buying because the panic buying comes from those whose monies are trapped so when they see a further movement in exchange rates, they are compelled to demand for it at any cost. We need to eliminate that so that we know that demand is based on current market demand.

 Away from monetary policies, what are your takes on the fiscal policies that have been implemented now and how do you see it playing into 2024?

Firstly, fiscal policies also have their challenges. We have had some level of boldness on the part of the President in making difficult decisions, which for me are commendable. But how those decisions were taken, created challenges that should have been avoided. For instance, if you talk of fiscal policy, the President had proclaimed the elimination of subsidies on petroleum products but we know the subsidy has come back because the exchange rate has devalued materially so the landing costs of fuel are clearly above the pump price. So you have the well-intended policy decision on the fiscal side, but obviously, through the process of implementation and other exigencies, it looks like the benefit is being reversed.

The other aspect is the harmonisation of the exchange rate. which also is ell well-deserved talked-about policy but as we speak, we are seeing the depression of the local currency to the extent those of us who had aggravated for harmonisation were right.

Another aspect of the fiscal policy is when you look at the budget. If you look at the implementation of the budget, and I’m talking about the period that the current government was in power last year. And then you consider that based on the report published by the government, the performance of the 2023 as at September last year the federal government budget deficit was N4 trillion and at that point, if you consider the fact that the government total revenue for the first nine months of last year was N12.7 trillion. Total revenue was N8.65 trillion, leaving you with a budget deficit of N4 trllion which the government had said was funded locally, mostly by ways and means. But that is not the big story. The big story is that by December, the government went to the National Assembly with a request to securitize N7.3 trillion, which implies that N3.3 trillion was incurred as a budget deficit within a period of three months. So it is difficult for me to see how the government bought the N3.3 trillion in three months and where it was invested in and those questions are not being asked. So if it turns out that the government incurred N3.3 trillion in three months, because we had an increase from 4 trillion according to government publication then it puts a huge question mark on the government’s fiscal responsibility.

Recently, data shared by CBN showed that currency outside banks is 92 per cent of the currency in circulation, which is way above what prompted the naira redesign. How can you relate that to present rise in insecurity which was also key reason for the naira redesign policy?

 I have said in previous engagements that the cashless policy of the government has very positive security implications. I’m not going about cashless as to what the immediate CBN governor did towards the end of 2022 and last year, when he denied people having legitimate access to thier cash. I’m talking about the cashless policy that specified N150,000 as a maximum withdrawal limit for personal accounts, and N500,000 for corporate accounts. 

Unfortunately, the current CBN has revised that which means it’s an intentional act to allow cash outside the banking system. What we are witnessing now is it designed by the current administration of the central bank by reversing the entire cashless policy and removing all penal charges for cash withdrawal and cash lodgment. So, once you do that, you have unwound years of cultural change, or attitude change that had been implemented from the Sanusi era to the now. So it’s not strange that we’re seeing an increase in the volume of cash outside the banking system. Also, remember, that there is a transaction charge for every transaction with the bank. So an average businessman who will want to bypass, circumvent or avoid the charge if there is no penalty for keeping cash. And as you rightly said, we’re seeing an increase in kidnapping for ransom because if they know that they can get cash from you they don’t need to lodge the cash into the banking system. Then they are not encouraged.

Remember that during the cashless policy, we almost eliminated incidents where people came to people’s homes to rob them of cash. So we eliminated robbery at homes and highway robbery because the robbers knew that the chances that they would get cash were minimal. But now if you reverse that process, you’re going to have those crimes come back. So you’re not just going to deal with kidnapping for ransom. You may also deal with highway robbery and robbers come into homes because they expect people to keep cash.

So would suggest we go back to limits, or what is a quick win?

I really don’t understand the reason for that. Because in terms of technology, we have seen a huge improvement in technology. So in terms of the payment system, we have one of the most inefficient in Africa. So, I wouldn’t know what prompted the decision to reverse the charges on cash withdrawal and cash lodgment. I don’t think it is a technology issue, because Nigerians are adopting technology at a very fast rate. So unless you have other compelling reasons I think they need to review that decision.