nigeria - prime-click business concepts (p.b.c) | bn 2164673 · ... annual growth rate projections...

Q4 2010www.businessmonitor.com

commercial Banking report

iSSn 1747-8669published by Business monitor international ltd.

nigeria INCLUDES 5-YEAR FORECASTS TO 2014

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NIGERIA COMMERCIAL BANKING REPORT Q4 2010 INCLUDING 5-YEAR INDUSTRY FORECASTS BY TO 2014

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2010

Nigeria Commercial Banking Report Q4 2010

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary ......................................................................................................................................... 5

Table: Levels (NGNbn) .......................................................................................................................................................................................... 5 Table: Levels (US$bn) ........................................................................................................................................................................................... 5 Table: Levels At October 2009 .............................................................................................................................................................................. 5 Table: Annual Growth Rate Projections 2010-2014 (%) ....................................................................................................................................... 5 Table: Ranking Out Of 59 Countries Reviewed In 2010 ........................................................................................................................................ 6 Table: Projected Levels (NGNbn) .......................................................................................................................................................................... 6 Table: Projected Levels (US$bn) ........................................................................................................................................................................... 6

SWOT Analysis ................................................................................................................................................. 7

Nigeria Commercial Banking SWOT ..................................................................................................................................................................... 7 Nigeria Political SWOT ......................................................................................................................................................................................... 8 Nigeria Economic SWOT ...................................................................................................................................................................................... 8 Nigeria Business Environment SWOT .................................................................................................................................................................... 9

Business Environment Outlook .................................................................................................................... 10

Commercial Banking Business Environment Ratings .......................................................................................................................................... 10 Table: Nigeria Commercial Banking Business Environment Rating .................................................................................................................... 10 Commercial Banking Business Environment Rating Methodology ...................................................................................................................... 11 Table: Middle East & Africa Commercial Banking Business Environment Ratings ............................................................................................ 12

Global Commercial Banking Outlook ........................................................................................................... 13

Africa Banking Sector Outlook ..................................................................................................................... 18

Table: Middle East & African Banks’ Bond Portfolios ........................................................................................................................................ 21 Table: Middle East & Africa Commercial Banking Business Environment Ratings ............................................................................................ 21 Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP Ratios .............................................................................................................. 22 Table: Anticipated Developments In 2010 ........................................................................................................................................................... 22 Table: Comparison Of Total Assets, Client Loans & Client Deposits (US$bn).................................................................................................... 23 Table: Comparison Of Per Capita Deposits, 2010 (US$) .................................................................................................................................... 23 Table: Interbank Rates & Bond Yields ................................................................................................................................................................. 24

Islamic Banking Overview ............................................................................................................................. 25

Nigeria Banking Sector Outlook ................................................................................................................... 30

Economic Outlook .......................................................................................................................................... 33

Tablle: Nigeria Economic Activity, 2007-2014 .................................................................................................................................................... 35

Competitive Landscape ................................................................................................................................. 36

Market Structure ....................................................................................................................................................................................................... 36 Protagonists ......................................................................................................................................................................................................... 36 Table: Protagonists In Nigeria’s Commercial Banking Sector ............................................................................................................................ 36 Definition of the Commercial Banking Universe.................................................................................................................................................. 36 List of Banks ........................................................................................................................................................................................................ 37 Table: Deposit Money Banks ............................................................................................................................................................................... 37

Company Profiles ........................................................................................................................................... 38

Citibank Nigeria .................................................................................................................................................................................................. 38 Table: Key Statistics Citibank Nigeria, 2004-2008 (NGNmn) ............................................................................................................................. 39



Diamond Bank ..................................................................................................................................................................................................... 40 Table: Stock Market Indicators ............................................................................................................................................................................ 41 Table: Balance Sheet (NGNmn, unless stated) ..................................................................................................................................................... 41 Table: Balance Sheet (US$mn, unless stated) ...................................................................................................................................................... 41 Table: Key Ratios (%) .......................................................................................................................................................................................... 42 FirstBank ............................................................................................................................................................................................................. 43 Table: Stock Market Indicators ............................................................................................................................................................................ 44 Table: Balance Sheet (NGNmn, unless stated) ..................................................................................................................................................... 44 Table: Balance Sheet (US$mn, unless stated) ...................................................................................................................................................... 45 Table: Key Ratios (%) .......................................................................................................................................................................................... 45 Guaranty Trust Bank ........................................................................................................................................................................................... 46 Table: Stock Market Indicators ............................................................................................................................................................................ 47 Table: Balance Sheet (NGNmn, unless stated) ..................................................................................................................................................... 47 Table: Balance Sheet (US$mn, unless stated) ...................................................................................................................................................... 48 Table: Key Ratios (%) .......................................................................................................................................................................................... 48 Intercontinental ................................................................................................................................................................................................... 49 Table: Key Statistics For Intercontinental, 2005-2008 (NGNmn) ........................................................................................................................ 50 Stanbic IBTC........................................................................................................................................................................................................ 51 Table: Stock Market Indicators ............................................................................................................................................................................ 52 Table: Balance Sheet (NGNmn, unless stated) ..................................................................................................................................................... 52 Table: Balance Sheet (US$mn, unless stated) ...................................................................................................................................................... 53 Table: Key Ratios (%) .......................................................................................................................................................................................... 53 Standard Chartered Nigeria ................................................................................................................................................................................ 54 Table: Key Statistics For Standard Chartered Nigeria (NGNmn)........................................................................................................................ 55 Wema Bank .......................................................................................................................................................................................................... 56 Table: Stock Market Indicators ............................................................................................................................................................................ 57 Table: Balance Sheet (NGNmn, unless stated) ..................................................................................................................................................... 57 Table: Balance Sheet (US$mn, unless stated) ...................................................................................................................................................... 58 Table: Key Ratios (%) .......................................................................................................................................................................................... 58 Zenith Bank .......................................................................................................................................................................................................... 59 Tabel: Key Statistics For Zenith Bank, 2004-2008 (NGNmn) .............................................................................................................................. 60

BMI Banking Sector Methodology ................................................................................................................ 61

Commercial Bank Business Environment Rating ...................................................................................................................................................... 62 Table: Commercial Banking Business Environment Indicators And Rationale.................................................................................................... 63 Table: Weighting Of Indicators ........................................................................................................................................................................... 64



Executive Summary

Table: Levels (NGNbn)

Date Total

Assets Client Loans

Bond Portfolio Other

Liabilities & Capital Capital

Client Deposits Other

October 2008 12,220.2 8,003.1 164.3 4,052.8 12,220.2 2,993.4 7,410.3 1,816.4

October 2009 14,405.0 10,124.4 464.7 3,815.9 14,405.0 1,663.5 8,833.7 3,907.8

Change, % 18% 27% 183% -6% 18% -44% 19% 115%

Source: BMI, CBN, regulators

Table: Levels (US$bn)

Date Total

Assets Client Loans

Bond Portfolio Other

Liabilities & Capital Capital

Client Deposits Other

October 2008 103.8 68.0 1.4 34.4 103.8 25.4 63.0 15.4

October 2009 95.5 67.1 3.1 25.3 95.5 11.0 58.6 25.9

Change, % -8% -1% 121% -27% -8% -57% -7% 68%


Table: Levels At October 2009

Loan/Deposit Ratio Loan/Asset Ratio Loan/GDP Ratio GDP Per Capita,

US$ Deposits Per Capita, US$

114.61% 70.28% 32.14% 1,401 380

Falling Falling Falling


Table: Annual Growth Rate Projections 2010-2014 (%)

Assets Loans Deposits

Annual Growth Rate 23 20 22

CAGR 20 18 21

Ranking 2 3 2




Table: Ranking Out Of 59 Countries Reviewed In 2010

Loan/Deposit Ratio Loan/Asset Ratio Loan/GDP Ratio

27 20 52

Local Currency Asset Growth Local Currency Loan Growth Local Currency Deposit Growth

12 6 5


Table: Projected Levels (NGNbn)

2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Total Assets 9,028.37 12,983.16 14,599.57 17,519.48 21,373.77 26,076.00 32,073.48 39,450.37

Client Loans 5,145.52 8,300.87 9,546.00 10,977.90 12,953.92 15,544.71 18,653.65 22,384.38

Client Deposits 5,116.53 8,031.37 9,637.64 11,565.17 14,109.51 17,213.60 21,000.60 25,620.73

e/f = BMI estimate/forecast. Source: BMI, CBN, regulators

Table: Projected Levels (US$bn)

2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Total Assets 76.51 95.46 97.40 118.37 152.67 193.16 258.66 323.36

Client Loans 43.61 61.04 63.68 74.18 92.53 115.15 150.43 183.48

Client Deposits 43.36 59.05 64.29 78.14 100.78 127.51 169.36 210.01

e/f = BMI estimate/forecast. Source: BMI, CBN, regulators



SWOT Analysis

Nigeria Commercial Banking SWOT

Strengths Large and growing population.

Regional and global macroeconomic outperformer.

Improving regulatory environment.

Weaknesses Ongoing political problems that keep oil production below its full potential.

Connected lending and consequently non-performing loans are a historical weakness.

Corruption remains a problem in government and the private sector.

Opportunities The central bank is implementing reforms to improve accounting practices and transparency.

The establishment of the Asset Management Corporation by the central bank and the Ministry of Finance should allow banks to clear bad debts and return to lending.

Lending to small and medium-sized businesses, as well as to the agricultural sector is very low, implying much room for growth.

Threats Perceptions of Nigeria were badly damaged by the crisis in 2009 and have yet to fully recover.

Deposit growth is unlikely to pick up at the weaker banks until they have recapitalised.



Nigeria Political SWOT

Strengths Constitutional limitations on presidential powers, and an unwritten rule whereby the presidency rotates between Muslim and Christian politicians, should prevent abuse of the system.

An active and fairly free media play a key role in the transition to democracy.

Weaknesses Tribal divisions have meant historical disunity among the population.

High levels of corruption – Transparency International ranks Nigeria 130th out of 180 countries surveyed – make policy implementation difficult.

The Christian-Muslim population split (thought to be around 50/50) continues to be a source of tension.

Opportunities Election tribunals have overturned the results of several state governors in the ruling party, further strengthening the country’s democratic mores.

The corruption record is improving slowly: Nigeria’s score with Transparency International has risen to 2.5 in 2009, from 1.4 in 2003.

Threats The Niger Delta militancy could well resume into the medium term, as the monetary rewards for militancy remain high and a speedy end to the region’s poverty is highly unlikely.

High oil revenues have not yet fed through to the population and 90.8% of Nigerians are living on less than US$2 a day, creating the conditions for civil unrest.

Nigeria Economic SWOT

Strengths Large oil reserves promise to remain a key economic driver for years to come.

Investor interest is now firmly focused on Africa; and, as a centrally located oil producer with a pro-reform government, Nigeria is well placed to take advantage of this.

Debt has been practically wiped out through the Paris Club debt relief initiative.

Weaknesses The business environment is in dire need of reform, with heavy bureaucracy and high levels of corruption a key obstacle to private sector development.

Hidden unemployment has not improved with GDP growth and remains widespread.

Opportunities With no heavy debt servicing costs, Nigeria has the capacity to invest heavily in crucial infrastructure.

Planned privatisation deals look set to increase revenues and boost the private sector.

Threats A largely unionised society and ongoing poverty could make further reforms difficult.

Niger Delta militancy could mean oil production remains under capacity, threatening export and fiscal revenues.

Tightening international credit conditions could disrupt the government’s plan to transform the publicly owned petroleum company into a private sector firm.



Nigeria Business Environment SWOT

Strengths A large population means an abundant supply of cheap, albeit unskilled, labour and a growing consumer market.

Taxation is relatively low, with VAT just 5%, corporate tax 30% and individual income tax rising progressively to a top rate of 25%.

Weaknesses Corruption is endemic, with Nigeria scoring just 2.5 in Transparency International’s Corruption Perceptions Index, which places it 130th out of 180 countries worldwide.

Intellectual property protection is very poor.

Physical security, especially for foreign workers, is a significant concern in some regions.

Opportunities Ongoing banking sector reforms have the potential to create a consolidated and much more efficient financial infrastructure.

There has been some improvement in the corruption effort; and, with a pro-market government, this should continue to improve.

Foreign direct investment has brought overseas players into Nigeria, which should help with the spread of international business norms.

Threats Industrial action remains commonplace and can disrupt normal business activity.

Investment in the energy sector has been frozen pending an improved strategy for expanding capacity.



Business Environment Outlook

Commercial Banking Business Environment Ratings

Table: Nigeria Commercial Banking Business Environment Rating

Limits of Potential Returns Data Score, out of 10 Ratings Score, out of 100

Total assets, 2009 US$97.4mn 5 Market Structure 63

Growth in total assets, 2009-2014 7

Growth in client loans, 2009-2014 7

GDP per capita, 2009 US$1,333 3 Country Structure 58

Tax 3.9 4

GDP volatility 0.2 10

Financial infrastructure 6.5 6

Risks to Realisation of Returns

Regulatory framework and development 4.5 5 Market Risk 60

Regulatory framework and competitive landscape 7.0 7

Moody’s rating for local currency deposits 6.0 6

Long-term financial risk 1.0 1 Country Risk 48

Long-term external risk 9.7 10

Long-term policy continuity 6.0 6

Legal framework 3.6 4

Bureaucracy 3.4 3

Commercial Banking Business Environment Rating 59

Source: BMI



Commercial Banking Business Environment Rating Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),

a measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries and between the inputs to the CBBER and the Insurance Business Environment

Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings

calculated by BMI for all the other industries on which it reports, the CBBER takes into account the

limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former

and 30% to the latter.

The evaluation of the Limits of Potential Returns includes market elements that are specific to the

banking industry of the country in question and elements that relate to that country in general. Within the

70% of the CBBER that takes into account the Limits of Potential Returns, the market elements have a

60% weighting and the country elements have a 40% weighting. The evaluation of the Risks to

Realisation of Returns also includes banking elements and country elements (specifically, BMI’s

assessment of long-term country risk). However, within the 30% of the CBBER that take into account the

risks, these elements are weighted 40% and 60%, respectively.

Further details on how we calculate the CBBER are provided at the end of this report. In general, though,

three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements

of the Limits of Potential Returns are by far the most heavily weighted of the four elements. They account

for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higher

than the country elements of the Limits of Potential Returns, it usually implies that the banking sector is

(very) large and/or developed relative to the general wealth, stability and financial infrastructure in the

country. Conversely, if the market elements are significantly lower than the country elements, it usually

means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and

financial infrastructure in the country. Third, within the Risks to Realisation of Returns category, the

market elements (ie: how regulations affect the development of the sector, how regulations affect

competition within it, and Moody’s Investors Service’s ratings for local currency deposits) can be

markedly different from BMI’s long-term risk rating.



Table: Middle East & Africa Commercial Banking Business Environment Ratings

Limits of Potential Returns Risks to Potential Returns Overall

Market

Structure Country

Structure Market

Risks Country

Risks Rating Ranking

Bahrain 60.0 75.0 70.0 82.0 69.4 19

Egypt 63.3 60.0 53.3 62.0 61.0 33

Iran 56.7 52.5 10.0 52.0 49.1 50

Israel 53.3 82.5 83.3 58.0 65.9 27

Jordan 20.0 75.0 53.3 38.0 42.6 51

Kuwait 56.7 90.0 50.0 76.0 68.7 21

Oman 23.3 82.5 60.0 76.0 53.8 42

Qatar 53.3 82.5 50.0 82.0 66.3 26

Saudi Arabia 63.3 85.0 60.0 78.0 71.6 18

UAE 70.0 82.5 63.3 70.0 72.7 15

Kenya 16.7 45.0 53.3 40.0 33.2 58

Nigeria 63.3 57.5 60.0 48.0 58.5 36

South Africa 73.3 77.5 83.3 56.0 72.6 16

Scores out of 100, with 100 the highest. Source: BMI



Global Commercial Banking Outlook

Post-Crisis Era Begins To Take Shape

With a number of new regulations being implemented in the US, controversial stress test data released in

the EU and emerging market banking sectors showing resilience, the post-crisis era is slowly taking

shape. The short-term risks abound and our global macroeconomic forecasts include significant

slowdowns in growth in the US and China in H210 and into 2011. This will temper banking sector asset

expansion and, combined with tighter regulatory frameworks, we do not expect a return to the lending

dynamism of the pre-crisis era. The dynamics for national banking sectors vary, but generally we forecast

weaker asset and loan growth in developed markets, in line with our macro view that deleveraging will

continue to dominate the economic agenda in Western Europe and the US over the next few years. In

contrast, most emerging market banking sectors have withstood the global crisis and should continue to

expand in the coming years.

Debt Deleveraging Cycle Underway

US – Lending Growth, % change y-o-y

Source: Federal Reserve

US and Eurozone: We continue to anticipate sluggish loan and asset growth in the US and the

eurozone’s banking sectors, in line with our macroeconomic view that households are in for a prolonged

period of deleveraging. New financial regulations, in particular the signing of the Dodd-Frank financial

regulation act by President Obama in July, reinforce our view that the pre-crisis lending boom will not

return anytime soon, and help justify our headline forecasts for subdued asset and loan growth. This

would be the case even if households and businesses were prepared to borrow, but in our view private

sector deleveraging is only in its early stages. While we believe the chances of a new systematic banking



crisis in the US are low, we also doubt that financial institutions will return to the levels they reached pre-

crisis for the foreseeable future.

In Europe, the results of the much

anticipated EU banking sector

stress test came as little surprise,

with only seven of 91 examined

banks failing to meet the minimum

thresholds determined by the

Committee of European Banking

Supervisors (CEBS). In our view,

the main shortcomings of the test

is that it failed to measure liquidity

risks and exposures to a sovereign

default, which indicates that

uncertainty risks will continue to

force a premium on banks. The test

reinforces our view that the

eurozone banking sector overall

remains relatively healthy and that a systemic crisis is not on the cards. That said, this does not discount

the macroeconomic challenges likely to face European banks through to 2012. Further asset contractions

and impairments remain our core scenario.

Latin America: While the exposure of European banks to the eurozone’s myriad woes has raised

concerns that the Latin America’s banking systems could face serious systemic risks over the medium

term, we believe that Latin American banking sectors are generally well placed to withstand external

shocks emanating from across the Atlantic. While risks to Latin American and Caribbean banking sectors

from Europe’s banking problems remain muted, the region is unlikely to be immune from a sustained

period of weakness for foreign banks. Despite the importance of local affiliates and deposits to many

foreign banks operating in Latin America, a significant worsening of global financing conditions

prompted by a spike in European credit spreads would almost certainly weigh on lending growth in the

region, particularly if Spanish banks suffer heavily from concerns about Spain’s debt obligations.

Domestically owned banks would also suffer from tighter interbank lending, reducing the availability of

credit across the sector.

Stress Test Methodology Summary

EU – Banking Sector Stress Test Key Facts

Source: CEBS



Clear Separation

Latin America – Loan-to-Deposit Ratio, %

Source: BMI, countries’ central banks and regulators

Emerging Europe: We believe that the positive results from the EU’s stress test masks the risks faced by

the region’s banks. The test focused on the predominant financial institutions in Western Europe, but we

emphasise that their emerging European counterparts are still a major weak link in the chain. With a

significant degree of leverage and faced with an elevation in non-performing loans, Central and Eastern

European banking sectors remain vulnerable to another potential constriction in global credit conditions.

Confronted with rising unemployment and weak corporate profitability, banks remain vulnerable to the

elevation in non-performing loans and broader deterioration in asset quality. We hold to our view that

domestic demand across the region will be weak over the medium term as the private sector deleverages

and unemployment is stubbornly slow to decrease, which will hinder demand for fresh credit.



Turkey Leaping Forward

Emerging Europe – Bank Loans, % change y-o-y

Source: BMI, central banks

Asia: Asia region is mixed in terms of its outlook, as some banking sectors have solid enough

fundamentals to support asset and loan growth, while others are set to be restrained by deleveraging.

Based on a number of risk metrics, such as assets-to-equity, loan-to-deposit and assets-to-GDP ratios,

Indonesia and the Philippines are in the best shape. Their banking systems should facilitate an

acceleration in loan growth and profitability in 2010. While Asia’s economic and financial sector

fundamentals are among the strongest in the world, the profit growth currently assumed by market

valuations seems to be overly optimistic. From an investor’s point of view, the Indonesian banking sector

stands out as being very expensive in relation to book value, as does China’s, despite a large decline. We

also believe the markets are not giving enough weight to financial crisis risks in Australia and New

Zealand, while South Korea is relatively attractive.



Middle East And North

Africa: The regional

macroeconomic recovery has

failed to translate into a revival

in bank lending or asset growth

within the Gulf Cooperation

Council (GCC) so far in 2010,

and although we expect overall

positive year-on-year expansion,

this is more a reflection of a low

base than an improvement in

appetite for financial services.

That said, the prospects for

Saudi and Qatari banks are more

encouraging than those for banks

in Kuwait, Dubai and Bahrain,

where there are greater stability

issues albeit with no major

systemic threats. Outside the GCC, Iran’s banking sector is in particular danger, while Israeli lenders

remain at the whim of the global economic recovery - something BMI remains concerned about,

particularly as we go in H210. We expect to GCC banks to continue to look to Iraq, Syria, Egypt and

Libya for untapped growth potential.

Sub-Saharan Africa: The region’s major banking sectors have all come through the global financial

crisis and are continuing to rebound from the various difficulties they experienced in 2009. Broadly

speaking, past practices stood the region’s banking sectors in good stead, allowing them to weather the

storm. Not only did banks have limited exposure to toxic US subprime mortgage assets, they also had

relatively weak links with the global financial system and, with the notable exception of Nigerian banks,

conservative lending habits dominated. We expect a healthy rebound for all of Sub-Saharan Africa’s

major banking sectors in 2010 driven by improving domestic fundamentals. South Africa, Nigeria and

Kenya are forecast to experience GDP growth several percentage points higher in 2010 than it was in

2009, which will boost incomes and in turn enable an increase in deposits and greater take-up of banking

services.

Bottoming, But No Overall Recovery

GCC – Average Commercial Banks Deposit &Asset Growth (% change y-o-y)

Source: GCC central banks, BMI



Africa Banking Sector Outlook

A Fragile Recovery

The South African, Nigerian and Kenyan banking sectors survived the storm of 2009 and are making a

fragile recovery. Rebounding economic activity and improved liquidity are bolstering growth. This

quarter we have chosen Namibia as the case study for our banking sector analysis.

Sub-Saharan Africa’s major banking sectors have all survived the global financial crisis and continue to

rebound from the various difficulties they experienced in 2009. Broadly speaking, past practices stood the

region’s banking sectors in good stead, allowing them to weather the storm. Not only did banks have

limited exposure to toxic US subprime mortgage assets, they also had relatively weak links with the

global financial system and, with the notable exception of Nigerian banks, conservative lending habits

dominated.

The most recent available data for the region show that the recovery is accelerating. In Kenya, total

banking sector assets expanded by 15.0% year-on-year (y-o-y) in December 2009 from a multi-year low

growth rate of 10.0% in April that year. Although aggregate Q110 data has not been published at the time

of writing, the individual balance sheets of several Kenyan banks are encouraging. The average y-o-y

growth in profits in Q110 for the three banks we have analysed - Kenya Commercial Bank, National

Bank of Kenya and the Cooperative Bank of Kenya - was 25.0%.

Data for the South African banking sector are also encouraging. Although client loans and deposits

continued to decline in y-o-y terms in Q110, the pace of contraction lessened compared with Q409, likely

preceding a return to positive territory over the course of 2010. The attractiveness of the sector has been

highlighted by HSBC’s interest in Johannesburg-based Nedbank.

The picture is less rosy for Nigerian banks. Although profits are recovering, this is mainly the result of

lower write-downs compared to previous quarters, while top line earnings are, bar few exceptions,

contracting. The main reason for falling revenues is that traditional loans are not being extended, which

reduces the amount of interest income being generated. Operating expenses are on the rise and banks

continue to take on new deposits, all of which is reducing the final return to shareholders.

We expect a healthy rebound for all of Sub-Saharan Africa’s major banking sectors in 2010 and forecast

total y-o-y asset growth of 8.0%, 20.0% and 17.0% for South Africa, Nigeria and Kenya respectively

(although much of the asset growth in Nigeria will be derived from off-balance sheet items moving onto

the balance sheet). This expansion will be driven by improving domestic fundamentals, with all three

countries expected to experience GDP growth several percentage points higher in 2010 than in 2009. Our

growth forecasts for South Africa, Nigeria and Kenya are 3.0%, 7.5% and 4.2% respectively. This will

boost incomes, which will enable an increase in deposits and greater take-up of banking services.



Country Focus: Namibia

Examination of the South African, Nigerian and Kenyan banking sectors provides only a limited insight

into the banking industry across Sub-Saharan Africa. The region is extremely diverse and country’s

banking sectors vary greatly in terms of the level of development. This being the case, we have selected

Namibia as a useful case study for this quarter’s report.

Although Namibia’s exposure to the global economic cycle had a marked impact on economic growth in

2009, the same cannot be said of its banking sector. From the data published in the Bank of Namibia

(BoN)’s June 2010 economic bulletin and its March financial stability report, we conclude that the

country’s banking sector is still relatively insulated from global forces and it has consequently remained

one of the most stable in Sub-Saharan Africa. With these factors in mind, we believe it will continue to

grow strongly over the coming years, acting as a standard bearer for the region. The only notable problem

is the absence of competition. With only four commercial banks and seven deposit-taking institutions,

consumers face comparatively high prices for financial services.

The majority of the Namibian banking sector’s assets are in the form of traditional loans, which is an

encouraging sign insofar as it suggests that banks are fulfilling their basic role as intermediaries of capital.

Since March 2007, the ‘claims on other sectors’ component has consistently accounted for about 80% of

total assets, with claims on the government, the central bank, and non-residents making up the remainder.

That most of bank lending has been directed towards households and businesses is a positive sign: too

much borrowing by the government will crowd out supply to the private sector, while too much central

bank borrowing would suggest commercial banks lack the confidence to channel money to the real

economy.

Funded Through Deposits

Namibia – Banking Sector Liabilities (NADmn)

Source: BoN



As for business lending, banks’ exposure has been fairly evenly diversified between mortgage loans

(commercial real estate), overdrafts, ‘other’ loans and instalment credit. Although this breakdown does

not reveal much about the concentration of loans to specific sectors - the Achilles’ heel of many African

banks’ reporting - tourist and mining companies are likely to be the most important customers. Given the

difficulty experienced by these sectors during the downturn, it not surprising to see that the total amount

of credit outstanding to businesses contracted during the three months to March 2010. However, we

remain generally positive about the prospects for the economy, especially uranium mining, and we do not

expect a deeper downturn in credit.

The impression from the liabilities side of the balance sheet is also one of stability. The overwhelming

majority of banks’ funding still comes in the form of deposits, which are split between retail and

corporate clients. Although the BoN does not provide a precise breakdown of funding sources, its March

financial stability report did show that customer deposits have been on the rise and intra-bank funding has

declined. Intra-bank funding accounts for only a tiny fraction (0.7%) of overall liabilities, which suggests

that banks in Namibia are well capitalised enough to stand on their own. Too much lending between

banks is often a sign of poor capitalisation or inability to obtain funding from traditional sources such as

deposits.

Despite the Namibian banking sector’s stability, the fact that there are only four commercial banks – First

National Bank of Namibia, Standard Bank of Namibia, Nedbank Namibia and Bank Windhoek –

and seven deposit-taking institutions means that competition is very low. The Herfindahl-Hirschman

Index, a common measure of industry concentration, registers at 2,690, far higher than the internationally

accepted 1,500 benchmark for competitive operating environments. To be fair, the sector is likely to

become more competitive as it deepens - the total assets-to-GDP ratio was 61.3% in 2009 - but with an

average return on equity well over 20% over the past five years the process still has a long way to come.

The impression of an uncompetitive environment is confirmed by the cost-to-income ratios (measured as

operating expenses divided by total income) that have consistently been above 50%, which is the

common target for efficient banking.



Table: Middle East & African Banks’ Bond Portfolios

Bond Portfolio, US$bn Bonds, % total assets Year-on-Year Growth %

Bahrain 9.5 1.6 50.6

Egypt 65.7 31.4 34.5

Iran na na na

Israel 28.6 10.4 12.5

Jordan 6.3 14.0 27.7

Kuwait 10.2 7.3 24.6

Oman 4.7 12.8 82.1

Qatar 13.6 10.6 103.2

Saudi Arabia 41.2 11.3 -26.5

UAE 38.2 9.2 12.0

Kenya 2.9 20.5 12.4

Nigeria* 3.1 3.2 223.3

South Africa 61.0 15.2 -27.8

na = not available; * = BMI estimate. Source: Central banks, regulators, BMI

Table: Middle East & Africa Commercial Banking Business Environment Ratings

Limits of Potential Returns Risks to Potential Returns Overall

Market

Structure Country

Structure Market

Risks Country

Risks Rating Ranking

Bahrain 60.0 75.0 70.0 82.0 69.4 19

Egypt 63.3 60.0 53.3 62.0 61.0 33

Iran 56.7 52.5 10.0 52.0 49.1 50

Israel 53.3 82.5 83.3 58.0 65.9 27

Jordan 20.0 75.0 53.3 38.0 42.6 51

Kuwait 56.7 90.0 50.0 76.0 68.7 21

Oman 23.3 82.5 60.0 76.0 53.8 42

Qatar 53.3 82.5 50.0 82.0 66.3 26

Saudi Arabia 63.3 85.0 60.0 78.0 71.6 18

UAE 70.0 82.5 63.3 70.0 72.7 15

Kenya 16.7 45.0 53.3 40.0 33.2 58

Nigeria 63.3 57.5 60.0 48.0 58.5 36

South Africa 73.3 77.5 83.3 56.0 72.6 16

Scores out of 100, with 100 the highest. Source: BMI



Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP Ratios

Loan/Deposit

Ratio, % Rank Trend Loan/Asset

Ratio, % Rank Trend Loan/GDP

Ratio, % Rank Trend

Bahrain 105.7 20 Falling 9.1 59 Rising 259.2 3 Rising

Egypt 51.0 58 Falling 37.6 53 Falling 40.0 47 Falling

Iran 95.2 29 Falling 43.8 45 Falling 55.5 38 Rising

Israel 80.1 36 Falling 61.8 22 Falling 83.6 22 Falling

Jordan 68.4 55 Falling 41.7 47 Falling 81.9 21 Falling

Kuwait 96.1 31 Falling 66.9 16 Rising 85.2 28 Rising

Oman 108.2 19 Rising 69.4 8 Rising 39.6 46 Falling

Qatar 109.6 17 Falling 57.8 30 Falling 75.6 33 Rising

Saudi Arabia 81.1 38 Falling 55.6 33 Falling 55.1 43 Rising

UAE 103.6 22 Falling 67.0 17 Falling 107.1 14 Falling

Kenya 95.1 28 Rising 68.2 9 Falling 26.6 51 Falling

Nigeria 99.0 27 Falling 65.4 20 Rising 29.5 52 Falling

South Africa 103.3 23 Falling 76.0 3 Rising 92.9 20 Falling

Source: Central banks, regulators, BMI

Table: Anticipated Developments In 2010

Loan/Deposit

Ratio, % TrendLoan Growth,

US$bnDeposit Growth,

US$bn Residual, US$bn

Bahrain 105.7 Falling 4.3 4.0 0.2

Egypt 51.0 Falling 6.3 12.3 -6.1

Iran 93.4 Falling 6.0 10.4 -4.5

Israel 80.9 Rising 11.2 11.9 -0.6

Jordan 66.5 Falling 1.1 2.5 -1.3

Kuwait 88.6 Falling 8.1 17.5 -9.4

Oman 106.2 Falling 1.5 1.9 -0.4

Qatar 107.7 Falling 11.9 12.2 -0.3

Saudi Arabia 79.6 Falling 12.2 20.1 -7.9

UAE 101.6 Falling 5.5 10.7 -5.2

Kenya 93.5 Falling 1.4 1.7 -0.3

Nigeria 94.9 Falling 10.5 13.8 -3.4

South Africa 97.6 Falling 7.5 24.8 -17.2

Note: Incorporates estimated economic data and projected banking data. Source: Central banks, regulators, BMI



Table: Comparison Of Total Assets, Client Loans & Client Deposits (US$bn)

2009 2008

Total

Assets Client Loans

Client Deposits

Total Assets

Client Loans

Client Deposits

Bahrain 589.8 53.4 50.5 671.2 53.3 49.9

Egypt 209.5 78.7 154.4 190.5 78.2 139.9

Iran 477.0 208.7 219.3 428.9 194.6 187.2

Israel 274.5 169.7 211.8 261.8 169.4 202.9

Jordan 45.1 18.8 27.5 42.1 18.6 24.7

Kuwait 140.7 94.1 98.0 142.2 92.3 89.8

Oman 36.8 25.5 23.6 35.8 24.0 22.3

Qatar 128.5 74.3 67.8 110.4 66.7 58.4

Saudi Arabia 365.9 203.6 251.1 347.7 204.7 225.9

UAE 413.6 277.1 267.6 396.5 270.6 251.2

Kenya 14.2 9.7 10.2 14.7 10.1 10.2

Nigeria 97.4 63.7 64.3 95.5 61.0 59.1

South Africa 400.9 304.8 295.1 335.4 245.0 230.1


Table: Comparison Of Per Capita Deposits, 2010 (US$)

GDP Per CapitaClient Deposits Per

CapitaRich 20% Client

Deposits Per CapitaPoor 80% Client

Deposits Per Capita

Bahrain 36,683 71,444 270,386 16,899

Egypt 2,723 1,006 7,894 493

Iran 5,710 2,907 12,442 778

Israel 28,838 23,881 118,093 7,381

Jordan 3,604 3,272 19,683 1,230

Kuwait 48,257 35,705 161,270 10,079

Oman 23,768 9,321 35,114 2,195

Qatar 93,370 57,121 212,132 13,258

Saudi Arabia 17,669 8,303 41,747 2,609

UAE 61,075 60,050 236,463 14,779

Kenya 922 271 1,161 73

Nigeria 1,654 469 1,975 123

South Africa 7,098 6,289 25,763 1,610




Table: Interbank Rates & Bond Yields

3-Month Interbank Rate, %

Current Account, % of GDP, 2010f

Budget Balance, % of GDP, 2010f H110 2009

Bahrain 14.4 3.8 1.25 1.31

Egypt -1.1 -7.5 6.25 9.25

Iran 4.2 -4.8 na na

Israel 3.0 -4.2 1.75 1.58

Jordan -6.7 -5.1 3.20 3.76

Kuwait 35.1 29.3 1.00 1.13

Oman 16.3 7.8 0.23 0.20

Qatar 25.1 12.7 1.01 1.15

Saudi Arabia 16.9 15.9 6.61 7.23

UAE 7.2 3.2 2.34 1.89

Kenya -7.0 -5.9 1.80 6.00

Nigeria 2.2 -3.5 5.96 14.54

South Africa -4.1 -6.2 7.50 7.50

f = BMI forecast; na = not available. Note: Incorporates actual financial markets data, estimated economic data and projected banking data. Source: Central banks, regulators, BMI



Islamic Banking Overview

Macro And Financial Environment Still Challenging For Islamic Banks

The weak performances of Islamic banks are more a reflection of the global circumstances, and in some

cases inexperience, than their compliance with shari’a per se. However, we still contest the view that

Islamic banks are intrinsically better off than conventional lenders and note that sukuk issuers still turn to

established conventional banks

such as HSBC for structuring

and advisory services.

Our view that Islamic banks

have not outperformed during

the global economic slowdown

is well founded, as Q210 profits

and loan contraction continue to

demonstrate. Sukuk issuance in

Asia is picking up but the Gulf

market remains very subdued,

and Islamic retail lending is

stagnant across the globe,

although not necessarily more so

than in conventional banking

sectors. That said, although we

have been among the more

questioning voices on Islamic

finance for some time, we do not subscribe to some of the more dramatically negative views of the

industry, such as Junaid Bhatti, one of the co-founders of Islamic Bank of Britain (IBB), who told The

Times in June that shari’a-compliant banking had been a ‘huge flop’ in the UK. We still see

the potential for good growth in the industry, but banks will have to prove that they are just as cost

efficient and no more risky than their longer established conventional counterparts.

Uninspiring Global Macro Backdrop

There has been little improvement in the global banking sector backdrop since our previous update.

Global risk sentiment was very volatile in Q210 as the full depth of the European sovereign debt crisis

gradually became clear and fears of further asset write-downs and defaults resurfaced. Although the

European banking sector stress test in July 2010 was shrugged off by the markets, the methodology was

considered less than credible and the whole exercise has not brought much in the way of reassurance.

Given this uninspiring backdrop, lending activity is subdued and is set to remain so, perhaps for the rest

of 2010. In the Middle East and North Afriaca (MENA) there has been no real recovery in lending

Back In The Game

Global Sukuk Issuance (US$bn)

Source: Islamic Finance Information Service, BMI



appetite, while in Asia the risk of severe losses in the Chinese and Australian property markets could lead

to a renewed wave of risk

aversion and capital hoarding.

This picture of ongoing risk

aversion is equally true, if not

more so, in the Islamic financial

sector, and while we do not

expect any collapses - most

institutions have the advantage

of being very well capitalised

already or being backed by a

government or sovereign wealth

fund - profits and loan growth

will remain low, often

underperforming the market as a

whole. Looking at results

released from within the Gulf

Cooperation Council (GCC) in

Q210, the performance of

Islamic banks continues to

disappoint, even as some more conventional lenders have started recovery. Abu Dhabi Islamic Bank and

Masraf al-Rayan were the exceptions with profit growth of 56% and 65% year-on-year (y-o-y)

respectively in Q210. However, Al-Rajhi Bank’s profits rise by just 0.6% y-o-y, while there were

contractions for Alinma Bank (-95%), Qatar Islamic Bank (-34%) and Bahrain Islamic Bank (-80%,

resulting in a loss of US$18mn). The latter has had such a difficult time that it has resorted to a

US$143mn rights issue at a 37% discount.

Investment Activity Looking Better In Asia, But Still Handled By The Big Boys

As before, where the two major Islamic finance regions are concerned, Asia leads the Middle East, but

there are risks in both areas from a second downturn in global economic activity. We also retain our long-

held view that Islamic banks are not necessarily better placed than conventional ones following the

financial crisis, and as far as the Gulf is concerned Islamic banks appear to be worse off, as profitability

remains subdued and loan books continue to stagnate and contract. This quarter, we look at Islamic

market activity and then at two case studies of Islamic banks.

In terms of investment banking activity, namely the structuring and arranging of sukuk, other products

and trading volumes, the recovery has progressed, but not as impressively as that seen in conventional

markets. Asia has led the way while activity in the MENA region has largely stagnated. Global sukuk

Boom Years Over

Al-Rajhi Bank – Total Loans (SARmn & % change, y-o-y)

Source: Al-Rajhi Bank



issuance reached US$20.4bn in H110, according to the Islamic Finance Information Service, which up by

99% y-o-y growth and equal to 88% of full-year issuance for 2009 (see chart). However, although this

increase generally boosts liquidity and asset diversification options for Islamic banks, they are still not

getting the fees for arranging these deals. It is non-Islamic banks with Islamic divisions that are leading

the charge, such as HSBC, which was the biggest sukuk book runner in the Middle East, and CIMB in

Asia. The third was Samba Capital, part of the Saudi Samba Financial Group that is not only shari’a

compliant.

Asia is leading the way, with

issues down by 25% y-o-y and

no private sector issuance in the

Middle East in the first half of

2010. In Asia, things look a bit

more promising and there has

even been some interesting

cross-market trading. Japanese

investment bank Nomura raised

US$70mn in July through an

oversubscribed commodity

murabaha transaction, which

targeted wealth in the Middle

East and carried a three-year

tenor (with participants

including ABC Islamic Bank,

Islamic Development Bank,

Samba, Sumitomu Mitsui and

Ahli United Bank). Nomura also raised US$100mn through a sukuk al-Ijarah, arranged by Kuwait

Finance House’s Kuala Lumpur arm. Sumitomo Mitsui is reportedly looking to issue a yen-denominated

sukuk in the Japanese market.

One of the reasons that Islamic financial institutions have not cooperated more in this way so far is that

there is disagreement over shari’a standards, with Gulf regulators generally more conservative and

stringent than their Asian counterparts. However, there have been some developments in this regard,

including the Cagamas, Malaysia’s largest mortgage holder, structuring its latest sukuk issue, with which

it is looking to raise US$1.5bn, to comply with Gulf standards. Duet MENA and Algebra Capital from

Dubai have already expressed interest, calling Cagamas’ move to comply with the regulations of the

Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions ‘a milestone’.

Difficult Times

Al-Rajhi Bank – Provisions For Loan Losses (SARmn)

Source: Al-Rajhi Bank



Another product which should boost the sukuk market is Malaysian financial guarantee

insurer Danajamin’s innovative Islamic guarantee (al-Kafalah) for sukuk, with the issue of the first

Danajamin guaranteed sukuk programme. While we are not sure whether all of the Gulf regulators will

agree that this is entirely shari’a compliant, it will go down well in the current risk averse climate. After

the Dubai World crisis, the perception of sukuk as ‘safe haven’ instruments has been damaged, while

Kuwait’s International Investment Group said at the end of July that it was unable to pay US$152.5mn

to sukuk-holders that demanded immediate repayment after the company defaulted on its US$200mn

Islamic bond earlier in 2010.

How To Mecca Lot Of Money

On the retail side, we look here at two case studies: Al-Rajhi Bank and the Islamic Bank of Britain, both

of whose recent performances

illustrate our view that shari’a

compliance does not equal low

risk.

For the Saudi Al-Rajhi Bank,

one of the world’s largest and

longest established Islamic

banks, its Q210 results were

disappointing, with profits up by

just 0.6% y-o-y to SAR1.78bn

(US$474mn) in Q210, taking

H110 profit down by 1.1% y-o-y

according to our calculations.

Provisions were not given in the

Q2 released results but they may

well have risen since Q1, when

the bank booked SAR358.9mn.

The net profit pre-impairment

charge reached SAR4.24bn, according to the bank.

Al-Rajhi’s loans rose by 5.4% to SAR118mn in Q210, while deposits came in 9.8% higher at

SAR135mn, giving a loan-to-deposit ratio of 87.4%. This is in line with trends in the Saudi market as a

whole, where loans were up by 2.7% y-o-y in April, and deposits were up by 2.0%, although both are

likely to have risen by the end of June, with an overall loan-to-deposit ratio of 86%. Even if al-Rajhi has

outperformed the sector as a whole, it still shares its peers’ nervousness in terms of lending, which will

feed through to its profitability in 2011 and 2012. As the chart shows, the bank’s rate of loan growth

Serious Setbacks

Islamic Bank of Britain – Total Loans (GBPmn)

Source: IBB



slowed sharply in 2009, when loans grew by 3.0%, while deposits rose by 2.1%. That said, recovery has

started and al-Rajhi remains very well capitalised.

Honey To The IBB

The picture for IBB is perhaps more worrying. Junaid Bhatti, one of the co-founders of the bank in 2004,

told The Times in July 2010: ‘As we now approach the sixth anniversary of IBB’s launch, I’m sad to have

to finally admit that Islamic finance in the UK has been a huge flop. IBB may still be limping on as

probably the last bastion of the cause, but it’s difficult to imagine it holding out for much longer.’ These

are dramatic words from one of the pioneers of the industry, particularly given the UK’s relatively large

Muslim population, but the figures tell a less than inspiring story.

IBB raised new capital of GBP7.5mn via a placing of new shares in January 2009 and Sheikh Thani bin

Abdulla bin Thani Jasim al-Thani from Qatar increased his personal stake to 30%. However, in its end of

2009 statement, IBB chair Mohsen Moustafa said: ‘While the bank continues to have sufficient capital for

its current requirements, the board is in ongoing discussions with its advisors and interested parties

regarding the raising of additional capital to support planned future growth. If additional capital is not

raised, the bank will need to scale back its growth plans and operations during 2010 in order to ensure

that regulatory capital requirements continue to be achieved.’

Looking at the chart showing the bank’s loan book, there appear to be some serious problems with the

business model: total loans fell by 18.4% in 2008 and by a further 43% in 2009. Islamic banking analyst

Mushtak Parker, writing in Arab News, noted some shortcomings: the decision to base IBB some distance

from London’s financial centre, in Birmingham; the slowness to get involved with home finance; a low

capital base; and an ‘inadequate product profile’.

In this context, we do not believe IBB’s performance is telling of the Islamic banking market in the UK as

a whole – although, as a retail experiment, it has not done the industry many favours, given its high

profile. If it were to go under, then it could diminish confidence among depositors, borrowers and

investors. Its performance so far backs up our view that Islamic banks are not intrinsically better off than

their conventional counterparts. However, to end on a more optimistic note, a more experienced player

could well come in, perhaps from the Gulf or Asia, acquiring the bank cheaply and repairing some of the

damage. At this stage, all the UK’s advantages in the Islamic financial sector, such as its large Muslim

population and forward thinking approach to levelling the playing field in terms of tax and regulation for

Islamic lenders, will come back into play.



Nigeria Banking Sector Outlook

Profits Return, Problems Remain

Although the profitability of Nigerian banks is making an impressive recovery, the absence of top line

growth is a clear sign of malaise. In the absence of more traditional intermediation, banks’ margins will

come under increasing pressure – to the detriment of shareholders and the economy at large.

As Nigerian banks begin publishing results for the first half of 2010, the problems plaguing the sector are

becoming ever more obvious. Although profits are recovering, this is mainly the result of lower write-

downs compared to previous quarters, while top line earnings are contracting, with few exceptions. The

main reason for falling revenues is that traditional loans are not being extended, which reduces the

amount of interest income being generated. Operating expenses are on the rise and banks continue to take

on new deposits, all of which is reducing the final return to shareholders.

Although some major banks have not released H110 results at the time of writing, the impression gleaned

from the results that are available is fairly consistent. Looking first at the balance sheet, the most salient

trend among the banks we examined - UBA, FirstBank, Zenith Bank and Diamond Bank - was the

modest growth in assets, driven primarily by investment securities and other, unidentified assets. While

loans to customers were marginally higher than in the previous six-month period, there was a

simultaneous contraction in ‘dues from other banks’, which raises the question of whether assets are

simply being reclassified by banks. Whatever the case, it is clear that traditional intermediation is not

growing at a pace that is adequate to support the economy.

Missing The Top Line

Selected Banks’ Gross Earnings, NGNmn

Source: Banks’ H110 statements; * = Q210 statement



The story from the liabilities side of the balance sheet is largely unchanged. Total claims on banks are

growing at a healthy rate, driven (somewhat surprisingly) by customer deposits. This is unusual since the

typical deposit rates have been 8-10 percentage points below the rate of headline inflation, but it may

simply reflect the absence of any alternative outlets for investment. there is also likely to be a certain

amount of deposits that banks will generate regardless of the interest rate environment, so long as there

are no fears about their solvency. So in this sense, the rise of deposits could actually be considered a

positive sign.

Loans Stagnant, Deposits Growing

Banking Sector Loan-to-Deposit Ratio

Source: IMF IFS, BMI

The upshot of rising liabilities and stagnating loan growth - the traditional source of interest income,

which is a major share of gross earnings - is lower returns for shareholders in Nigerian banks. To be fair,

profitability has made an impressive comeback since H109 in the majority of cases, but this is largely

because banks are no longer taking big write-downs. Once business returns to normal and non-performing

loans are cleansed from the system profit growth will come much less easily. By way of example, return

on equity (ROE) was 5.4% for FirstBank and 2.3% for UBA, which are underwhelming performances

compared with the many other banks in Sub-Saharan Africa that offer ROE of 15-20%.



Tempered Enthusiasm

NGSE Banking Index

Source: Nigerian Stock Exchange, BMI

The solution to this problem is for banks to start making more loans to the ‘real economy’, which is the

ultimate goal of the Central Bank of Nigeria (CBN)’s reforms and the single most important issue on

which governor Sanusi Lamido Sanusi has staked his reputation. In addition to the Asset Management

Corporation of Nigeria (AMCON), the vehicle that will be used to remove toxic assets from banks’

balance sheets, the CBN under Sanusi has set up the Bank of Industry (BOI) scheme to channel loans into

manufacturing, small business and the aviation sector. As much as these initiatives are moves in the right

direction, they will not be able to resolve fears about the state of the economy or banks’ inability to assess

the creditworthiness of prospective clients. In our view, these factors are real obstacles to unlocking the

Nigerian banking sector’s long-term potential. AMCON and the BOI are important but they are only

small steps along the way.



Economic Outlook

Putting Together The Growth Puzzle

Although the mood on the ground in Lagos continues to be one of economic uncertainty, we maintain our

headline real GDP growth forecast of 7.5% for 2010. This view is based on expectations that agriculture

and general commerce will be the primary drivers of economic expansion; if issues in the banking and

petroleum sectors are resolved, actual growth could conceivably rise to the double digits in the years

thereafter.

One of the major challenges in assessing Nigeria’s growth outlook is reconciling ‘on the ground’ views

with the trends observed in headline figures. At few points has this dilemma been more apparent than in

2009: in spite of collapsing oil prices, declining petroleum sector output, a severe banking crisis and a

forced exchange rate devaluation, Nigeria notched up headline growth of 6.9%. Much as this was part of

a trend of macroeconomic outperformance across Sub-Saharan Africa, Nigeria’s perceived dependence

on oil was initially thought to make it more vulnerable than it proved to be. One has only to look to

Angola for an example of an economy where growth fell from the double digits in 2008 to nearly zero in

the following year.

With the worst of the global economic crisis now passed and some of Nigeria’s more idiosyncratic

problems moving towards resolution, the same challenge has arisen. On one hand, the impression gleaned

from BMI’s March trip to Lagos highlights some key concerns: banks are still reluctant to engage in

traditional lending, concerns over corporate creditworthiness persist, some important pieces of legislation

are hanging in the balance and there are growing concerns about the extent of government involvement in

the economy. Amid this general climate of uncertainty, however, Nigerian equities seem to have been

decisively re-awakened and private sector activity continues apace. Evidence of positive sentiment can be

seen both in the trajectory of the benchmark Nigerian Stock Exchange All Share Index (NGSE) and in

actual trading volumes, which are sharply off the lows of NGN200-250mn experienced during much of

2009.

In order to reconcile these divergent impressions of the economy, we take a look at some of the major

challenges facing Nigeria over the coming months and how we expect these to play into our headline real

GDP growth forecast of 7.5%.

Funding The AMC

One of the most obvious challenges facing the Nigerian economy over the coming months will be gaining

approval for the proposed Asset Management Corporation (AMC). The first step of this process, passage

in the House of Representatives, has already been achieved. What remains to be done is bringing the

corporation to an operational stage, which will require substantial amounts of both human and financial



capital. While we are with the market in believing that the AMC will eventually reach this stage, a major

concern is how much it will end up costing.

According to local news reports claiming to have seen the legislation, the AMC would be endowed with a

capital base of NGN10.0bn (US$66.7mn), funded jointly by the Central Bank of Nigeria (CBN) and the

Ministry of Finance. CBN Governor Lamido Sanusi later confirmed that the central bank had set aside a

further NGN50.0bn (US$333.3mn) with a view to eventually raising NGN500bn (US$3.33bn) from both

public and private sources. Assuming the entire cost of the AMC was absorbed in one year, this would

amount to 1.6% of GDP, thereby taking the projected budget deficit in 2010 from 4.0% to 5.6% of

national output.

Although these figures look benign, we think the CBN is likely to be understating the actual cost of the

AMC. Working with our core assumptions on the size of banking sector assets - we estimate total loans to

have reached NGN8,451bn by the end of 2009 - we think a more realistic projection for the cost of the

AMC is somewhere between NGN1,500-1,800bn (US$10.0-12.0bn). This figure is based on a ratio of

non-performing loans to total loans of 23% and a recovery rate on those assets of 30-40%.

However, even if the cost of the AMC comes in at the higher end of these estimates, the long-term

macroeconomic implications are far from being dire. Indeed, NGN1,800bn still only represents 5.2% of

forecast GDP in 2010 - a relatively modest sum when compared with the experiences of many other

emerging markets that suffered banking crises throughout the 1980s and 1990s.

Government: An Unwelcome Partner?

Whatever the eventual cost of the AMC, many observers have seen its establishment as part of a trend of

growing government involvement in the economy. Support for this argument can also be read in the

greatly expanded budget for 2010, the government’s increasingly active role in directing credit to the

power sector and the authorities’ existing interest in agriculture. Indeed, at the time of writing, the CBN

was preparing to hold a special monetary policy committee meeting to determine how it would disburse

NGN500mn in concessional lending to the power industry via the state-owned Bank of Industry.

The main question arising from the government’s growing visibility in the economic sphere is the degree

to which it is becoming the largest - or even the only - driver of growth. Where we stand on this question

is simple: we acknowledge that the government is becoming a more active partner, and certainly a more

visible one, but we do not think that growth is dependent on its involvement. In the case of agriculture,

for example, the government’s much-discussed Agricultural Credit Guaranty Scheme (ACGS) has

typically only disbursed around NGN300-500mn (US$2.0-3.3mn) per month - a very small sum for an

industry that has historically accounted for around 40% of nominal GDP.



Although its share in the banking sector is admittedly much larger, we are not convinced that banks have

played a pivotal role in Nigeria’s real growth story over the past several years. Working with official

statistics, we see that finance and insurance have not accounted for more than 5% of nominal GDP since

2000. Real growth of the sector, meanwhile, has been lagging that of agriculture by a significant margin.

This is not to say a healthy and vibrant banking sector is not important to the functioning of an economy,

but the structure and maturity of Nigeria’s economy is such that the real sources of growth are elsewhere,

at least for the time being.

New Vectors Of Growth

Over the longer term, we do expect a rebalancing of the economy in favour of services, and a healthy

banking sector will play a key role in this transition. Likewise, reforms under way in the

telecommunications and petroleum sectors are also important steps in bringing the Nigerian economy up

the value chain. So while a forecast for 7.5% real GDP growth in 2010 may already make Nigeria an

outperformer, its actual growth potential is likely to be in the double digits.

Tablle: Nigeria Economic Activity, 2007-2014

2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Nominal GDP, NGNbn 1 22,848.9 26,999.7 30,569.5 33,483.0 37,273.7 41,212.8 45,272.2 49,400.4

Nominal GDP, US$bn 1 185.6 227.1 201.1 230.9 271.1 311.0 356.5 401.6

Real GDP growth, % change y-o-y 2 6.5 5.9 6.9 7.5 7.3 7.6 7.1 7.5

GDP per capita, US$ 2 1,208 1,536 1,333 1,499 1,724 1,939 2,179 2,407

Population, mn 3 143.9 147.8 150.9 154.1 157.2 160.4 163.6 166.9

Industrial production index, % y-o-y, ave 4 -0.2 -3.5 -1.1 3.8 4.7 4.5 4.2 6.1

Unemployment, % of labour force, eop 5 14.6 14.6 17.3 15.5 15.8 16.2 15.8 14.6

e/f = BMI estimate/forecast. Source: 1 Nigerian National Statistics Bureau/CBN, 2 Nigerian National Statistics Bureau/CBN/BMI, 3 IMF, 4 IMF IFS, 5 Nigerian National Statistics Bureau



Competitive Landscape

Market Structure

Protagonists

Table: Protagonists In Nigeria’s Commercial Banking Sector

Central bank: Central Bank of Nigeria (CBN)

www.cenbank.org

The mandate of the central bank was established in 1958 and started operations in July 1959. The CBN issues notes and coins and is mandated to: maintain Nigeria’s external reserves; conduct monetary policy; manage the payment system; act as banker to government; regulate the banking system; and act as banker to the banks. The CBN has also performed major development functions in important areas of the economy such as the financial, agricultural and industrial sectors.

Principal banking regulator: Central Bank of Nigeria (CBN)

www.cenbank.org

In addition to its other functions, the CBN is the regulator of the banking system.

Banking trade association: Chartered Institute of Bankers of Nigeria (CIBN)

www.cibng.org

The CIBN, established in 1963, is a self-regulating body that promotes banking and finance education, ethics and professionalism that meets global best practice standards.

Definition of the Commercial Banking Universe

The Central Bank of Nigeria identifies 24 deposit money banks in the country, which we consider to

make up the universe of commercial banks in the country.



List of Banks

Table: Deposit Money Banks

Access Bank Nigeria

Afribank Nigeria

Citibank Nigeria

Diamond Bank Nigeria

Ecobank Nigeria

Equitorial Trust Bank

Fidelity Bank

FirstBank of Nigeria

First City Monument Bank

First Inland Bank

Guaranty Trust Bank

Intercontinental Bank

Oceanic Bank International Nigeria

Platinum Habib Bank

Skye Bank

Spring Bank

Stanbic IBTC Bank

Standard Chartered Bank Nigeria

Sterling Bank

Union Bank of Nigeria

United Bank for Africa

Unity Bank

Wema Bank

Zenith Bank

Source: CBN



Company Profiles

Citibank Nigeria

Strengths As a subsidiary of Citigroup, Citibank Nigeria is able to leverage off the scale and global network of its parent company.

One of the smallest loan loss provisions out of the banks investigated in the August-September 2009 audit.

Weaknesses Citibank Nigeria essentially operates as a corporate bank, it has little branch network or personal banking business.

By Citigroup standards, it is a small operation with total assets of just over US$1bn.

Opportunities Nigeria is regarded as an easier country in which to do business for the multinational companies that form the key client base for Citibank. Assuming the financial problems in the country can be overcome, or at least mitigated, then Citibank can look at increasing business from multinationals operating in Nigeria.

Threats In the event that the political and economic difficulties are not resolved, Nigeria could remain a backwater with little potential business growth for Citibank.

Company Overview Citibank has had a presence in Nigeria since 1984. In 2008, the subsidiary that operated under

the name Nigeria International Bank was renamed Citibank Nigeria to fully align with Citigroup’s

global brand and identity. The bank offers a range of services, including global transaction , sales

and trading, corporate finance and investment banking services to corporate and commercial

customers, financial institutions (including other banks) and the public sector.

In August 2008, Citibank launched its direct custody and clearing (DCC) services in Nigeria, the

53rd (and largest) market on its proprietary network. The DCC business facilitates business

transactions for clients and investors looking to do business in Nigeria. In August 2009, the CBN

concluded an initial audit of 10 Nigerian banks. The results were worse than many feared, with

five banks (Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank) deemed to

be on the edge of failure. In response to the findings, central bank governor Sanusi fired the

CEOs of these banks and injected NGN420bn in the form of Tier 2 capital, to be repaid by an

unspecified date. Sanusi also said some of Nigeria’s biggest banks (Diamond Bank, First Bank of

Nigeria, United Bank for Africa, Guaranty Trust Bank and Sterling Bank) had passed the audit.

The remaining banks’ audit began in September 2009. As a result of the audit, all banks

investigated were ordered to give loan loss provision figures. Citi’s loan loss provisions stood at

NGN320mn at the end of September 2009, one of the smallest among all the audited banks.

In November 2009, Citibank Nigeria looked to increase its corporate social responsibility by

developing its grassroots for the local community. For Citigroup’s annual Global Community Day,

hundreds of volunteers from the company organised donation drives and charitable events across

Nigeria.

The bank operates from its headquarters on Victoria Island, Lagos. Key personnel

include: Citibank Nigeria CEO Emeka Emuwa, chief operating officer/executive director Funmi

Ade-Ajayi and head of commercial banking Emeka Okonkwo. Citibank has a small network in

Nigeria of 13 branches and about 300 employees. In early 2010, Citibank Nigeria was named



Nigeria’s Best Bank for Risk Management and Best Overall Bank for Cash Management by

Global Finance magazine.

A new scheme has been launched by Citibank Nigeria in 2010 to reward entrepreneurs of small

businesses as part of the company’s commitment to the development of the microfinance sector

in Nigeria. The programme aims to focus on local micro-entrepreneurs that are helping to improve

the economic fortunes of their communities, resulting in potential opportunities to bring in capital.

Cash prizes will be given to the winners.

Company Data Website: www.citigroup.com/citi/global/nga.htm

Status: Private sector bank, subsidiary of Citigroup

Table: Key Statistics Citibank Nigeria, 2004-2008 (NGNmn)

2004 2005 2006 2007 2008

Total Assets 66,247 86,979 111,381 135,879 157,527

Loans & Mortgages 17,494 28,886 36,520 43,044 58,710

Total Deposits 42,067 44,969 61,062 79,134 97,635

Total Shareholder Equity 12,337 28,120 33,813 35,032 37,694

Source: Citibank Nigeria 2008 annual report



Diamond Bank

Strengths As well as its listing on the Nigerian Stock Exchange, Diamond Bank is listed on the London Stock Exchange’s professional securities market. The bank has shown itself capable of meeting London’s listing requirements and can therefore expect to have better access to capital and lower investor risk than most other African banks.

Weaknesses Diamond Bank is relatively small, with total assets at the end of 2008 of NGN625bn (US$4.2bn) and 2,889 staff.

In November 2009, Diamond Bank announced that its pre-tax profit had shrunk by 91.5% since May 2009.

Opportunities A well established and recognised regional brand supported by its branch network.

Threats Despite being well run, Diamond Bank remains a small, developing market bank.

Company Overview Diamond Bank began as a private limited liability company in 1991 after being incorporated in

December 1990. In February 2001, it became a universal bank. In January 2005, following a

successful private placement share offer that raised the bank’s equity base, Diamond Bank

became a public limited company. In May 2005, the bank was listed on the Nigerian Stock

Exchange. By January 2008, Diamond Bank’s global depositary receipts were listed on the

professional securities market of the London Stock Exchange, making it the first bank in Africa to

do so.

Diamond Bank has a network of 132 branches in Nigeria. It has won several awards, including

Most Improved Bank of the Year and Best Bank in Mergers & Acquisition from the This Day

newspaper. Most recently, it won African Leadership Magazine’s African Bank of the Year award

2009.

In June 2009, the government gave Diamond Bank the right to perform the functions of a primary

dealer market maker in government bonds. According to the bank, bond markets play an vital role

in mobilising capital investments that are crucial for economic growth in Nigeria. An efficient bond

market will help economic development and reduce the risk of financial crises.

In August 2009, the central bank concluded an initial audit of 10 Nigerian banks. The results were

worse than many feared, with five banks (Afribank, Finbank, Intercontinental Bank, Oceanic Bank

and Union Bank) deemed to be on the edge of failure. In response to the findings, central bank

governor Sanusi fired the CEOs of these banks and injected NGN420bn in the form of Tier 2

capital, to be repaid by an unspecified date. Sanusi also said some of Nigeria’s biggest banks

(Diamond Bank, First Bank of Nigeria, United Bank for Africa, Guaranty Trust Bank and Sterling

Bank) had passed the audit. The remaining banks’ audit started in September. As a result of the

audit, all banks investigated were ordered to give loan loss provision figures at the end of

September 2009.

In September 2009, shareholders in Diamond Bank approved capital raising of NGN200bn

(US$1.3bn) and in December 2009 the bank issued NGN3bn to help microbusinesses and SMEs.

The assistance scheme is intended to prompt entrepreneurs into the habit of saving,

therby increasing the growth and development of the sector. Earlier in 2009, the bank sponsored

seminars and events to help SMEs excel in their businesses.



Company Data Website: www.diamondbank.com

Status: Private sector bank, listed on the Nigerian Stock Exchange

Table: Stock Market Indicators

2004 2005 2006 2007 2008 Sept 2009

Market Capitalisation, NGNmn 8,382.2 56,798.9 181,606.3 107,985.3 128,829.7

Market Capitalisation, US$mn 64.3 441.0 1,540.3 773.0 852.3

Share Price, NGN 7.1 6.8 17.6 7.5 8.9

Share Price, US$ 0.1 0.1 0.1 0.1 0.1

US$ Share Price, % change (eop) -2.4 182.6 -64.2 10.3

Change, % (2009 only) 19.3

Shares Outstanding, mn 1,189.7 6,682.7 8,364.0 10,339.9 14,475.3

Source: Bloomberg, Diamond Bank

Table: Balance Sheet (NGNmn, unless stated)

2004 2005 2006 2007 2008

Total Assets 73,040.0 131,341.3 227,833.2 320,950.2 625,669.6

Loans & Mortgages 20,780.2 42,751.1 80,560.5 100,971.7 240,448.8

Total Deposits 46,886.6 80,402.7 148,562.8 217,737.4 419,707.6

Total Shareholder Equity 6,842.6 20,835.9 35,204.0 53,254.0 117,255.8

Earnings Per Share, NGN 0.52 0.37 0.54 0.67 1.08


Table: Balance Sheet (US$mn, unless stated)

2004 2005 2006 2007 2008

Total Assets 545.7 989.0 1,775.4 2,518.2 5,307.0

Loans & Mortgages 155.2 321.9 627.8 792.2 2,039.5

Total Deposits 350.3 605.4 1,157.7 1,708.4 3,560.0

Total Shareholder Equity 50.8 156.9 274.3 417.8 994.6

Earnings Per Share, US$ 0.00 0.00 0.00 0.01 0.01




Table: Key Ratios (%)

2004 2005 2006 2007 2008

Return On Assets 1.3 2.5 2.2 2.1 2.7

Return On Equity 15.1 18.3 14.2 13.1 15.1

Loan/Deposit Ratio 46.2 55.2 56.6

Loan/Asset Ratio 29.7 33.8 36.9

Equity/Asset Ratio 9.2 15.8 15.4 16.4 18.6




FirstBank

Strengths Large by the standards of Nigerian domestic banks.

Long-established and relatively strong.

Gross earnings for the bank increased by 40% y-o-y from NGN155.7bn in 2008 to NGN218.3bn in 2009.

Total assets increased by 32% y-o-y from NGN1.53bn to NGN2bn.

Weaknesses Small for a commercial bank by global standards.

Opportunities FirstBank has a well established and recognised regional brand supported by a network of over 450 branches.

Threats Despite being well run, FirstBank remains a small, developing market bank.

Company Overview FirstBank, then called Bank of British West Africa, was incorporated as a limited liability company

in 1894 by shipping magnate Sir Alfred Jones, with its head office in Liverpool, UK. There were

several name changes as the organisation developed, with the name FirstBank of Nigeria

adopted in 1991.

With a network of over 450 branches, the bank has the largest branch network in the

Nigerian banking industry in Nigeria. FirstBank’s services include capital market operations,

insurance brokerage, currency exchange, private equity/venture capital, pension fund

management, registrarship, trusteeship, mortgages and microfinance.

In 2002, FirstBank established a wholly owned banking subsidiary in the UK, regulated by the

Financial Services Authority. It was the first Nigerian bank to own a full bank in the UK. FBN Bank

(UK) ‘has exploited the UK base further than any other bank’, according to The Banker magazine.

In 2007, FBN Bank (UK) obtained authorisation to set up a Paris office as a marketing base to

serve Francophone West Africa. FirstBank also has a representative office in South Africa and is

making progress to establish offices in Asia.

In 2007, the bank’s NGN100bn hybrid offer marked a key milestone by testing the depth and

sophistication of the local market. The hybrid offer, locally known as ‘the big one’, was

oversubscribed by 753%. In 2007, the bank established a global custody business. A key element

of the bank’s strategy is its continued focus on retail banking/consumer financing, gradually

shifting towards a diversified high yield portfolio by targeting the relatively under-banked

consumer market. The market opportunities are evident in the fact that consumer spending, which

is a major driver of domestic demand in developing economies, still constitutes a lower

percentage of GDP in Nigeria.






(Diamond Bank, FirstBank, United Bank for Africa, Guaranty Trust Bank and Sterling Bank) had

passed the audit. The remaining banks’ audit began in September.



FirstBank was the first Nigerian bank to have a presence in the UK with its offices in London. The

company also has settlements in Paris and Johannesburg. The group has 39 business

development offices focused on solid customer relationship management across all aspects of the

company.

In December 2009, FirstBank launched a bank subsidiary to support small businesses, FBN

Microfinance Bank, as part of its commitment to helping Nigerians, especially those on low

incomes, achieve economic growth and a better standard of living.

Company Data Website: www.firstbanknigeria.com



2004 2005 2006 2007 2008 Sept 2009

Market Capitalisation, NGNmn 59,957.4 137,190.6 347,051.7 546,393.3 524,847.4 454,527.7

Market Capitalisation, US$mn 450.3 1,052.3 2,694.5 4,634.4 3,757.0 3,007.1

Share Price, NGN 5.6 9.4 19.7 30.7 18.1 15.7

Share Price, US$ 0.0 0.1 0.2 0.3 0.1 0.1

US$ Share Price, % change (eop) 28.8 73.1 111.9 70.1 -50.2 -20.0

Change, % (2009 only) -13.4


Source: FirstBank, Bloomberg


2004 2005 2006 2007 2008

Total Assets 384,211.0 470,839.0 616,824.0 884,604.0 1,527,542.0

Loans & Mortgages 83,500.0 123,739.0 179,004.0 220,497.0 469,670.0

Total Deposits 255,491.0 332,196.0 448,915.0 598,177.0 700,197.0


Earnings Per Share , NGN 0.83 0.78 0.37 0.88 1.83





2004 2005 2006 2007 2008

Total Assets 2,870.5 3,542.8 4,813.3 6,913.7 13,048.7

Loans & Mortgages 623.8 931.1 1,396.8 1,723.3 4,012.0

Total Deposits 1,908.8 2,499.6 3,503.0 4,675.1 5,981.3

Total Shareholder Equity 316.1 374.8 501.6 651.7 3,037.9




2004 2005 2006 2007 2008

Return On Assets 2.9 3.1 2.8 2.4 3.0

Return On Equity 33.9 28.9 27.3 24.9 16.6

Loan/Deposit Ratio 49.4 48.7 38.0 68.5

Loan/Asset Ratio 32.8 34.3 25.7 31.4


Total Risk Based Capital Ratio 19.4 19.7 23.4 42.3

Tier 1 Capital Ratio 21.5




Guaranty Trust Bank

Strengths As well as its listing on the Nigerian Stock Exchange, GTB also has gross depository receipts listed on the London Stock Exchange. The bank has shown itself as bale to meet London listing requirements, so can expect to have better access to capital and lower investor risk than most other African banks.

Q309 gross earnings rose by 72% y-o-y to NGN114.5bn from NGN66.53bn.

Net profits rose by 34% y-o-y in 2009.

Weaknesses GTB is relatively small, with total assets at the end of 2008 of NGN736bn (US$5.0bn).

GTB’s pre-tax profit for Q309 fell by 22% y-o-y to NGN20.38bn.

The approximate pre-tax profit for 2009 is close to NGN30bn, which is below GTB’s target.

AT the end of FY08, GTB’s non-performing loans ratio stood at 1.8%, but by Q309 NPLs were up to 3.7%.

Opportunities Well established and recognised regional brand supported by a network of over 150 branches.

Threats Despite being well run, GTB remains a small, developing market bank.

Company Overview Guaranty Trust Bank (GTB) was incorporated in July 1990 as a private limited liability company

wholly owned by Nigerian individuals and institutions. It was licensed as a commercial bank in

August 1990 and started operations in 1991. In September 1996, GTB became a publicly quoted

company on the Nigerian Stock Exchange. It was awarded the President’s Merit award that year,

and four times since. The bank was also runner up for the quoted company of the year award in

2005. In February 2002, the bank obtained a universal banking licence and was appointed as a

settlement bank by the central bank in 2003.

GTB established a UK subsidiary in March 2008. GTB UK is authorised by the British Financial

Services Authority to operate as a full commercial bank, offering corporate and retail banking

services, in the UK. Based in London, GTB UK is the group’s first operation in Europe. The

company will focus on business where there are already established links between Nigeria and

the other countries where GTB operates, including Gambia, Sierra Leone and the UK. The

subsidiary will provide banking services such as receiving deposits and writing mortgages for

commercial and retail customers and intermediaries.






(Diamond Bank, FirstBank, United Bank for Africa, GTB and Sterling Bank) had passed the audit.

The remaining banks’ audit began in September 2009.

GTB has over 6,000 employees, over 150 branches and more than 230 ATMS across Nigeria. It

also also runs GTB On Wheels, which provides mobile branches. The bank has a presence in

Ghana, Gambia, Sierra Leone and Liberia.



In January 2010, an analyst at Bank of America said: ‘We see Guaranty Trust Bank as the best in

class bank within Nigeria that provides exposure to upside surprises to the oil and

macroeconomic story.’ This came after FirstRand of South Africa said it will be starting a new

division in Nigeria. Nigeria is regarded as a hot spot for interest from foreign banks due to the vast

amount of potential in financial services. With a population of over 150 million and only about 10

million owning bank accounts, there appears to be a large gap in the market for international

investors.

Euromoney magazine awarded GTB the Best Bank in Nigeria award 2009. The bank was praised

for its measures to widen its client base, developing in areas with inadequate banking facilities,

and for adopting International Financial Reporting Standards before their competitors. GTB’s

net profit also rose by 34%.

Company Data Website: www.gtbplc.com



2004 2005 2006 2007 2008 Sept 2009


Market Capitalisation, US$mn 450.3 1,052.3 2,694.5 4,634.4 3,757.0 3,007.1

Share Price, NGN 5.6 9.4 19.7 30.7 18.1 15.7

Share Price, US$ 0.0 0.1 0.2 0.3 0.1 0.1

US$ Share Price, % change (eop) 28.8 73.1 111.9 70.1 -50.2 -20.0

Change, % (2009 only) -13.4


Source: GTB, Bloomberg


2004 2005 2006 2007 2008

Total Assets 384,211.0 470,839.0 616,824.0 884,604.0 1,527,542.0

Loans & Mortgages 83,500.0 123,739.0 179,004.0 220,497.0 469,670.0

Total Deposits 255,491.0 332,196.0 448,915.0 598,177.0 700,197.0


Earnings Per Share, NGN 0.83 0.78 0.37 0.88 1.83





2004 2005 2006 2007 2008

Total Assets 2,870.5 3,542.8 4,813.3 6,913.7 13,048.7

Loans & Mortgages 623.8 931.1 1,396.8 1,723.3 4,012.0

Total Deposits 1,908.8 2,499.6 3,503.0 4,675.1 5,981.3

Total Shareholder Equity 316.1 374.8 501.6 651.7 3,037.9




2004 2005 2006 2007 2008

Return On Assets 2.9 3.1 2.8 2.4 3.0

Return On Equity 33.9 28.9 27.3 24.9 16.6


Loan/Asset Ratio 32.8 34.3 25.7 31.4


Total Risk Based Capital Ratio 19.4 19.7 23.4 42.3

Tier 1 Capital Ratio 21.5




Intercontinental

Strengths One of Nigeria’s larger banks, albeit small by world standards, with total assets of US$9.4bn.

Listed on the Nigerian Stock Exchange.

Weaknesses Depends on local capital raisings to support any growth plans.

Intercontinental reported a pre-tax loss of NGN447.45 (US$3bn) for the first three quarters of 2009.

Opportunities Well established and recognised regional brand supported by a network branches.

Threats Intercontinental remains a small player by global standards.

Governance concerns have returned to the fore.

Company Overview Intercontinental Bank was established in 1989 Nigerian Intercontinental Merchant Bank. It started

business with paid-up ordinary share capital of NGN12mn. Its first subsidiary, an investment

company called Intercontinental Securities Limited (Intersec) was established in the same year.

The bank took its current name in 1999.

In 1993, the bank acquired a substantial equity stake in the largest discount firm in Nigeria,

Associated Discount House Ltd (ADHL). In 1996, the bank acquired a majority equity stake in a

commercial bank, Equity Bank, to enhance its commercial operations. It also acquired a

controlling equity stake in one of the biggest insurance companies in Nigeria, West African

Provincial Company (WAPIC). In 2002, Intercontinental became a publicly quoted company on

the Nigerian Stock Exchange. An IPO of 283,995,000 ordinary shares was fully subscribed. In

2004, a further public offer for 2.75mn ordinary shares was oversubscribed, reaffirming investors’

confidence in the bank. Intercontinental merged with Equity, Gateway and Global banks in

October 2005.

Intercontinental has a technical partnership with BNP Paribas, one of the 10 largest banks in the

world, for the management of Nigeria’s foreign reserves. The partnership is also to fuel its drive to

be a strong player in global banking by cooperating in areas of trade finance, asset management

and product innovation.








In December 2009, Intercontinental sacked approximately 1,500 of their 5,000 employees

(roughly five people per branch) due to the economic crisis. In January 2010, the bank said it

may re-employ some of the workers once the financial situation has improved.



Company Data Website: www.intercontinentalbankplc.com


Table: Key Statistics For Intercontinental, 2005-2008 (NGNmn)

2005 2006 2007 2008

Total Assets 204 369 705 1,392

Loans & Mortgages 74 161 263 450

Total Deposits 134 252 468 1,078

Total Shareholder Equity 36 55 159 200

Source: Intercontinental Bank



Stanbic IBTC

Strengths As part of the Standard Bank Group, Stanbic IBTC has access to the resources of a parent company with an impressive knowledge of African commercial environments and a strong capital position.

Weaknesses Significantly smaller than some of its Nigerian competitors.

Stanbic’s pre-tax profit for the first three quarters of 2009 fell to NGN5.1bn, down by 63% y-o-y. Gross earnings also fell, from NGN47.1bn to NGN42.8bn.

Opportunities Leverage off the links to Standard Bank Group.

Well established branch network in Nigeria.

Threats Depending on economic conditions in Nigeria, the bank’s relevance to the parent company could wane.

Company Overview Stanbic IBTC is the result of Standard Bank Group merging its Nigerian operation, Stanbic Bank

Nigeria, with IBTC Chartered Bank. Standard Bank, which has a controlling stake of 50.7% in

Stanbic IBTC, has been in business for 148 years and is Africa’s largest banking group in terms of

assets and earnings. It operates a range of banking and related financial services in 17 African

countries and 16 countries outside Africa, with an emerging markets focus. Stanbic IBTC has 60

branches in Nigeria with over 1,500 employees, which is small compared to the other banking

corporations in the country.

The merger, by way of the first ever tender offer in Nigeria and US$525mn in foreign direct

investment (the largest in Nigerian financial history), led to the formation of Stanbic IBTC, which

became part of the Standard Bank Group. The merger was completed in September 2007.

Stanbic IBTC is listed on the Nigerian Stock Exchange.

Through its wholly owned stockbroking and asset management subsidiary, IBTC Asset

Management, Stanbic IBTC has several mutual funds, including the IBTC Nigerian Equity Fund,

which is Nigeria’s largest mutual fund with a net asset value in excess of NGN25bn by December

2007. It is the only bank that has a direct pension fund administrator subsidiary, the market

leading IBTC Pension Managers Ltd (IPML). The corporate and investment banking divisions

offer products in global markets, project and structured finance, equities trading, corporate

finance, global custody and a range of transaction and electronic banking solutions.

Stanbic IBTC plays a significant role in some of the largest capital markets deals in Africa. It was

involved with Standard Bank London and Afrinvest as lead arrangers of the US$350mn Eurobond

issue for Guaranty Trust Bank in January 2007. With its parent company, it put together the

largest telecommunications deal ever in Africa: a US$2bn syndicated loan for MTN Nigeria in

October 2007.

Traditionally strong as a corporate and investment bank, Stanbic IBTC aims to strengthen its

position in this sector and will increasingly play a significant role in the personal and business

banking retail environment.









Bank) had passed the audit. The remaining banks’ audit began in September.

The economic difficulties caused Stanbic IBTC’s net earnings for Q309 to decline to NGN3.7bn,

compared to NGN10.6bn in Q308. This was due to a 32% increase in operating expenses and

higher impairment charges following the CBN’s audit.

In January 2010, Stanbic IBTC said it was ready to work with the Nasarawa state government and

other corporate organisations in efforts to improve infrastructure development and socioeconomic

growth. The Stanbic IBTC regional manager said: ‘The bank will encourage entrepreneurship and

support small scale businesses to create more employment opportunities.’

Company Data Website: www.ibtc.com

Status: Private sector bank, listed on the Nigerian Stock Exchange, partly owned subsidiary of South Africa’s Standard Bank Group


2005 2006 2007 2008 Sept 2009

Market Capitalisation, NGNmn 85,003.3 239,817.9 136,250.0 85,750.0

Market Capitalisation, US$mn 660.0 2,034.1 975.3 567.3

Share Price, NGN 4.6 7.1 19.9 10.9 6.9

Share Price, US$ 0.0 0.1 0.2 0.1 0.0

US$ Share Price, % change (eop) 56.2 208.2 -53.8 -41.8

Change, % (2009 only) -37.1

Shares Outstanding, mn 12,057.2 13,750.0

Source: Stanbic IBTC, Bloomberg


2006 2007

Total Assets 113,225.8 150,870.0

Loans & Mortgages 48,274.5 57,782.1

Total Deposits 55,492.3 77,483.1

Total Shareholder Equity 35,241.2 41,379.3

Earnings Per Share, NGN 0.56 0.47





2006 2007

Total Assets 883.5 1,179.1

Loans & Mortgages 376.7 451.6

Total Deposits 433.0 605.6

Total Shareholder Equity 275.0 323.4

Earnings Per Share, US$ 0.00 0.00



2006 2007

Return On Assets 4.3

Return On Equity 15.0

Loan/Deposit Ratio 101.5 85.3

Loan/Asset Ratio 49.8 43.8

Equity/Asset Ratio 31.0 27.3




Standard Chartered Nigeria

Strengths As a subsidiary of the Standard Chartered group, Standard Chartered Nigeria is able to leverage off the scale and strength of its parent company and its long standing connections in Africa.

Investment in branches in Nigeria helped improve Standard Chartered Nigeria’s performance in 2008, with income up by US$15mn, 58%, and liability growth of 41%.

Weaknesses Operates essentially as a corporate bank, with only a small branch network and little personal banking business.

Opportunities Nigeria is regarded as an easier country in which to do business for the multinational companies that form the key client base for Standard Chartered. Assuming the financial problems in Nigeria can be overcome, or at least mitigated, the group can look to increase business from multinationals operating in Nigeria, especially those with British connections.

The bank expected a record profit in 2009. In July, Standard Chartered completed the acquisition of First Africa Group, a pan-African mergers and acquisitions advisory firm, to provide finance services to all international clients in African transitions.

In 2010, Standard Chartered intends to extend its wholesale banking division across many parts of Africa and is also looking to recruit some high profile appointments.

Threats In the event that the political and economic difficulties are not resolved then Nigeria could be a backwater with little potential business growth for Standard Chartered.

Company Overview Standard Chartered Nigeria is a subsidiary of Standard Chartered, the British banking group with

a strong franchise and presence across global emerging markets.

In its 2008 annual report, Standard Chartered said operating income from Africa rose by 14% y-o-

y, ‘driven by increased sales of treasury products to wholesale banking customers’. Nigeria was

its biggest market in Africa again, with operating income increasing by 30% y-o-y. The number of

branches in Nigeria increased from 12 to 18, the number of ATMs increased to 25 and online

banking was launched.

In 2008, Standard Chartered Nigeria increased its corporate client base, winning sole banking

mandates from British American Tobacco Nigeria and Guinness Nigeria. Standard Chartered

structured a US$5mn loan for Nigerian microfinance institution Lift Above Poverty Organization

(LAPO).







Bank) had passed the audit. The remaining banks’ audit began in September.



Company Data Website: www.standardchartered.com/ng/en

Status: Private sector bank, part of the Standard Chartered group

Table: Key Statistics For Standard Chartered Nigeria (NGNmn)

2006 2007

Total Assets 89,140 130,450

Loans & Mortgages 29,408 35,740

Total Deposits 37,542 47,113

Total Shareholder Equity 32,359 33,239

Source: Standard Chartered Nigeria financial statements



Wema Bank

Strengths Long established and publicly listed bank.

A ‘grass roots’ retail bank.

Weaknesses By its own description, Wema is only ‘adequately capitalised’.

Small, with total assets of just over US$1bn.

Wema reported a pre-tax loss of NGN29.43bn in the six months to September 2009, down from NGN1.41bn profit a year earlier.

Reduced their staff strength by 500 workers.

Opportunities Wema has a well established and recognised brand supported by a network of 110 branches.

Threats Extreme volatility in its balance sheet is dangerous for any bank, more so for a small one.

Wema is a small, emerging market bank.

Company Overview Wema Bank was incorporated in 1945 as a private limited liability company and started business

operations as a commercial bank that year. The bank was converted to a public limited liability

company in April 1987 and listed on the Nigerian Stock Exchange in January 1990.

In February 2001, the CBN granted a universal banking licence to the bank, allowing it to perform

a range of financial services. Wema is ‘adequately capitalised’, with shareholders’ funds in excess

of NGN25bn and an asset base of NGN165bn. Odu’a Investment Company holds a 10% equity

stake in the bank, while private individual investors and members of staff own the remaining 90%.

Wema’s head office is in Wema Towers, Lagos. It is one of the largest banking institutions in

Nigeria and a leading financial services provider, with a network of 110 branches in all regions of

the country, including the Federal Capital Territory. Wema is one of the longest surviving

domestic banks in Nigeria.



and Union Bank) deemed to be on the edge of failure. In response to the findings, CBN governor

Sanusi fired the CEOs of these banks and injected NGN420bn in the form of Tier 2 capital, to be

repaid by an unspecified date. Sanusi also said some of Nigeria’s biggest banks (Diamond Bank,

FirstBank of Nigeria, United Bank for Africa, Guaranty Trust Bank and Sterling Bank) had passed

the audit. The remaining banks’ audit began in September. As part of the aftermath of the audit,

all banks were to declare their loan loss provisions. Wema’s loan loss provisions in September

2009 came to NGN33.4bn.

In October 2009, the CBN said that it would provide Wema and three other banks with NGN300bn

as they were at risk of a liquidity crisis. The government has since announced that it may acquire

shares in these ‘rescued’ institutions if the banks fail to recapitalise.

In December 2009, Wema said that it had gone from a pre-tax profit of NGN1.41bn in Q2-Q308 to

a pre-tax loss of NGN29.43bn for the same period in 2009. Wema’s Q309 results for show that

gross earnings increased by 82% to NGN23.683bn. However, the increase was not reflected in



the net result because of additional provisions of NGN36bn.

Towards the end of 2009, Wema reduced its workforce by 500 employees following the reforms in

the banking sector and mass redundancies across the industry. The CBN have refuted any

involvement in the sackings and has urged the banks to honour agreements with their workers.

Company Data Website: www.wemabank.com



2004 2005 2006 2007 2008 Sept 2009


Market Capitalisation, US$mn 46.0 89.2 238.8 1,222.7 1,042.0 75.5

Share Price, NGN 3.7 3.7 3.2 15.0 14.3 1.1

Share Price, US$ 0.0 0.0 0.0 0.1 0.1 0.0

US$ Share Price, % change (eop) 27.7 2.1 -13.4 412.2 -19.6 -92.8

Change, % (2009 only) -92.2

Shares Outstanding, mn 4,354.3 9,348.4 9,923.0 10,186.3

Source: Wema Bank, Bloomberg


2004 2005 2006 2007

Total Assets 71,423.8 97,909.1 120,109.1 165,081.5

Loans & Mortgages 36,607.2 46,183.1 53,702.8 68,796.7

Total Deposits 55,071.9 61,284.5 85,605.3 125,476.0

Total Shareholder Equity 8,040.3 24,258.9 20,540.0 25,182.7

Earnings Per Share, NGN 0.22 0.09 -0.67 0.25





2004 2005 2006 2007

Total Assets 533.6 736.7 937.3 1,290.2

Loans & Mortgages 273.5 347.5 419.1 537.7

Total Deposits 411.4 461.1 668.0 980.7

Total Shareholder Equity 60.1 182.5 160.3 196.8

Earnings Per Share, US$ 0.00 0.00 -0.01 0.00



2004 2005 2006 2007

Return On Assets 1.5 1.0 -6.1 1.8

Return On Equity 12.7 5.2 -29.5 11.2


Loan/Asset Ratio 58.5 55.7 44.7 41.7

Equity/Asset Ratio 11.3 24.8 17.1 15.3




Zenith Bank

Strengths Relatively large by the standards for domestic Nigerian banks, with total assets of US$11.4bn.

Connections and offices across Africa, including a new branch in the Gambia, and the UK.

Weaknesses Small for a commercial bank by global standards.

Q409 pre-tax profits were dented by the loan loss provisions.

Opportunities Zenith has a well established and recognised regional brand supported by an existing network of more than 400 branches and business offices.

Threats Zenith remains a small emerging market bank in a volatile economy.

Company Overview Zenith Bank is one of the biggest and most profitable banks in Nigeria and the third largest in

terms of assets. The bank was established in 1990 and started operations as a commercial bank

in July that year. It became a public limited company in June 2004 and was listed on the Nigerian

Stock Exchange in October 2004 following a successful IPO. The bank has a shareholder base of

over 1mn, which is an indication of the strength of its brand. It has over 400 branches and

business offices.

Its head office is based at Victoria Island, Lagos. Zenith is present in all the state capitals, the

Federal Capital Territory, major towns and metropolitan centres of Nigeria. It’s expansion is not

limited to Nigeria. Zenith became the first Nigerian bank in 25 years to be licensed by the British

Financial Services Authority to start banking operations with Zenith Bank (UK) in April 2007. It is

also present through subsidiaries in Ghana, Sierra Leone and a representative office in

Johannesburg, South Africa.

Zenith moved the end of its financial year from June to September, so its 2008 annual report

covers a period of 15 months up until September 30 2008. Consistent investment and deployment

in ICT is a strategic imperative to give the bank a competitive advantage.

Zenith Bank said in November 2008 that it had ‘reaffirmed its leadership position in the banking

industry, with its 2008 audited result showing shareholders funds of NGN346.6bn, a 198% rise

from NGN116.4bn recorded in the previous year’. Nigerian ratings agency Agusto & Co rated

Zenith Bank AAA for the ninth consecutive year in 2008. It said: ‘The bank is a financial institution

of impeccable financial condition and overwhelming capacity to meet obligations as and when

they fall due.’ Fitch gave Zenith a national rating of AA-. Zenith was named Best Global Bank in

Africa 2009 by the African Banker magazine. In August 2008, the bank was named the Best Bank

in Nigeria by Euromoney magazine.



and Union Bank) deemed to be on the edge of failure. In response to the findings, CBN







As part of the aftermath of the audit, all banks were to declare their loan loss provisions. Zenith’s

loan loss provisions following the audit in August 2009 were at NGN26.14bn. Due to high

provisioning for margin loans, Zenith reported a 50% drop in its net profit for the first three

quarters of 2009. In June 2008, Zenith’s total loans stood at NGN470bn, whereas by June 2009

they had risen to NGN680bn. Despite the difficult economic conditions, Zenith continued to grow.

In Q409, gross earnings rose by 19.42% to NGN166.63bn. Q409 pre-tax profits were dented by

loan loss provisions.

In January 2010, Zenith opened its first branch in the Gambia, bringing the total number of

commercial banks in the country to 14. Zenith continues to increase its client base across Africa.

The the bank said: ‘We hope to expand our business through the establishment of key

subsidiaries for the provision of non-bank financial services to accentuate the service offerings

and experience of our customers, whilst continually enhancing our processes and systems

platforms to deliver new capabilities and improve operational efficiencies and achieve economies

of scale.’

Company Data Website: www.zenithbank.com


Tabel: Key Statistics For Zenith Bank, 2004-2008 (NGNmn)

2004 2005 2006 2007 2008

Total Assets 193,321 332,885 610,768 883,941 1,680,302

Loans & Mortgages 53,391 122,494 199,708 218,305 413,731

Total Deposits 131,095 233,413 392,894 568,012 1,161,476

Total Shareholders’ Equity 1,548 21,224 72,346 73,870 338,484

Source: Zenith Bank



BMI Banking Sector Methodology

BMI’s Commercial Banking Forecast Report series is closely integrated with our analysis of country risk,

macroeconomic trends and financial markets. As such, the reports draw heavily on our extensive

economic data set, which includes up to 550 indicators per country, as well as our in depth view of each

local market. We collate our commercial banking databank from official sources (including central banks

and regulators) wherever possible, and only fall back on secondary sources where all attempts to secure

primary data have failed. Company data is sourced, in the first instance, from company reports, with

central bank, regulator or trade association data only used as a backup. All of the risk ratings and

forecasts within this report are a result of BMI’s own proprietary research and do not in any

circumstances include consensus or third party numbers.

How Our Data Set Is Structured

The reports focus on total assets, client loans and client deposits.

Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular

country. They do not incorporate the balance sheet of the central bank of the country in question.

Client loans are loans to non-bank clients. They include loans to public sector and state-owned

enterprises. However, they generally do not include loans to governments, government (or non-

government) bonds held or loans to central banks. Client deposits are deposits from the non-bank public.

They generally include deposits from public sector and state-owned enterprises. However, they only

include government deposits if these are significant.

We take into account capital items and bond portfolios. The former include shareholders funds, and

subordinated debt that may be counted as capital. The latter includes government and non-government

bonds.

In quantifying the collective balance sheets of a particular country, we assume that three equations hold

true:

Total assets = total liabilities and capital;

Total assets = client loans + bond portfolio + other assets;

Total liabilities and capital = capital items + client deposits + other liabilities.



In terms of the equations, other assets and other liabilities are balancing items that ensure equations two

and three can be reconciled with equation one. In practice, other assets and other liabilities are analogous

to inter-bank transactions. In some cases, such transactions are generally with foreign banks.

In most countries for which we have compiled figures, building societies/thrifts are an insignificant part

of the banking landscape, and we do not include them in our figures. The US is the main exception to this.

In some cases, total assets and client loans include significant amounts that are owned or that have been

lent to customers in another country. In some cases, client deposits include significant amounts that have

been deposited by residents of another country. Such cross-border business is particularly important in

major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain

countries in Central and Eastern Europe.

Commercial Bank Business Environment Rating

In producing our Commercial Banking Business Environment Rating, our approach has been threefold.

First, we have explicitly aimed to assess the market attractiveness and risks to the predictable realisation

of profits in each state, thereby capturing the operational dangers facing companies operating in this

industry globally. Second, we have, where possible, identified objective indicators that serve as proxies

for issues/trends within the industry to ensure consistent evaluate across states. Finally, we have used

BMI’s proprietary Country Risk Ratings in a nuanced manner to ensure that the ratings accurately capture

broader issues that are relevant to the industry and which may either limit market attractiveness or imperil

future returns. Overall, the ratings system, which integrates with all the other industry Business

Environment Ratings covered by BMI, offers an industry-leading insight into the prospects/risks for

companies across the globe.

Conceptually, the ratings system divides into two distinct areas:

Limits of potential returns: Evaluation of industry’s size and growth potential in each state,

and also broader industry/state characteristics that may inhibit its development.

Risks to realisation of returns: Evaluation of industry-specific dangers and those emanating

from the state’s political/economic profile that call into question the likelihood of anticipated

returns being realised over the assessed time period.

In constructing these ratings, the following indicators have been used. Almost all indicators are

objectively based.



Table: Commercial Banking Business Environment Indicators And Rationale

Limits of Potential Returns Rationale

Banking market structure

Estimated total assets, end 2008 Indication of overall sector attractiveness. Large markets are considered more attractive than small ones

Estimated growth in total assets, 2008-2013

Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score

Estimated growth in client loans, 2008-2013 Indication of the scope for expansion in profits through intermediation

Country structure

GDP per capita A proxy for wealth. High-income states receive better scores than low-income states

Active population Those aged 16-64 in each state, as a % of total population. A high proportion suggests that the market is comparatively more attractive

Corporate tax A measure of the general fiscal drag on profits

GDP volatility Standard deviation of growth over seven-year economic cycle. A proxy for economic stability

Risks to Realisation of Returns

Banking market risks

Regulatory framework and industry development

Subjective evaluation of de facto/de jure regulations on overall development of the banking sector

Regulatory framework and competitive environment

Subjective evaluation of the impact of the regulatory environment on the competitive landscape

Country Risk from BMI’s Country Risk Ratings

Short-term financial risk Rating from CRR, evaluating currency volatility

Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy

Legal framework Rating from CRR, to denote strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets

Bureaucracy Rating from CRR to denote ease of conducting business in the state

Source: BMI



Weighting: Given the number of indicators/datasets used, it would be inappropriate to give all sub-

components equal weight. Consequently, the following weights have been adopted.

Table: Weighting Of Indicators

Component Weighting, %

Limits of potential returns, of which: 70, of which

– Banking market structure 60

– Country structure 40

Risks to realisation of returns, of which: 30, of which

– Banking market risks 40

– Country risk 60

Source: BMI

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