Published On: Sun, Feb 4th, 2018

Nova Merchant Bank will battle digital challenges- Oduoza

With the Nigerian economy showing signs of mild recovery (gross domestic product (GDP) rose by 1.4 per cent in the thirds quarter of 2017 and is expected to rise to 2.1 per cent in 2018), the banking sector is beginning to show signs of spark and spunk with new banks, particularly merchant banks rushing to provide bespoke banking services to a sophisticated clientele.

In an interview with Business Hallmark’s Teslim Shitta-Bey and Okey Onyenweaku, the Chairman of one of the new kids on the banking bloc, Phillips Oduoza of Nova Merchant Bank, explains why he decided to come out of retirement to support another foray in the adrenaline-pumped industry. Excerpt:

 How does one get to be a first class graduate of engineering, a first rate banker and a modest and humble human being all rolled into one?

One does not see himself exactly the way others see him. You may be thinking you are big and others may be seeing you as a small. So, it is very gladdening to hear a favourable depiction of my personality from you. I would, however, say that upbringing plays a major role in how any individual turns out in life. I had parents that were both educationists. They were very strict disciplinarians. And we all grew up in a very strong Christian family. We were all brought up that way. Deviation was not allowed in any form. There were 10 of us from the same mother and they have all distinguished themselves in various sector. A few of my siblings are outside the country presently. But it is gratifying to note that the family has been blessed with professors, doctors and various professionals in other human endeavours in different parts of the globe, from Britain to the United States and Canada.

One of the things we were taught when we were growing up was that you had a moral and spiritual boundary and you never steered outside the boundary. You must always remember that no matter how attractive the other side may be, you stuck to the values that shaped your membership of the family. These values included humility, hard work, and respect. All these put together has led to my modest success.

You are coming from a commercial banking background but you are now suddenly foraying into merchant banking. What informed this transition?

People have said that a lot to me that you have successfully piloted a very large bank in Nigeria, now you want to start another one. The truth of the matter was that I studied Engineering and I did an MBA after that. The only job I have done apart from my National Youth Service Corp (NYSC) days is banking. So when I retired from UBA, I felt I had gathered substantial experience in the banking industry both in Nigeria and abroad.  I just felt it was important that I share and impart this knowledge in others because today one of the biggest challenges we have in the country and in the industry is talent. We have a lot of people, but not so many people have the requisite experience and expertise needed to provide world class services or products. So, I just felt having spent almost 30 years in the banking industry, I should not allow that knowledge go to waste. The other option that was available to me was to go to the university to teach. But I felt that would be too much of a theoretical exercise and it would hamper my desire to transfer practical knowledge and collaborate at a broad business level. So, I eventually came to the decision of teaming up with others to grow the banking value chain both nationally and possibly continentally. The whole idea is to grow a crop of people who are talented, motivated and equipped to make a difference.

Merchant banking is the one aspect of the banking business that is involved in the development of an economy involving long term lending, asset management, and advisory services and so on. Looking at Nigeria, and assessing where we are today, I just felt merchant banking is going to contribute a lot more than retail banking to the development of the country’s economy. That was one of the major reasons I decided to go into merchant banking. If you look at it, prior to the consolidation of 2005 and prior to the emergence of commercial banking, we had merchant banks that were very successful. At a particular time, one of the merchant banks was the most profitable bank in the country. We are not focused on size, but we are very focused on providing financial solutions. So, for us in Nova, our vision is to be Africa’s preferred financial solutions provider. And our mission is to always create superior value in markets where we operate. We believe that banking has stagnated in Nigeria for some time. Therefore, we want to introduce something new, driven by innovation and innovative services. We want to create innovative services and solutions for our customers, because the digital migration is not a mirage but a firm and visible reality. A lot of banks have not been able to make that transition. So, we want to move with along the digital technology curve.

But really why go back to the banking trenches again when existing banks are still struggling to survive the present environment like?  

 This is a brand new banking license.  We don’t have any legacy issues (meaning we do not have a truckload of bad debts to restructure or write off). Nigeria has gone through a very challenging period in recent times, from currency devaluation to things like falling fiscal revenues, rising inflation, lower manufacturing output and tight monetary policy. We just felt this is the right time to come in. We feel that what tough situations require is unique solutions, bright and creative approaches to old problems and a willingness to make the recommended strategy or tactics work. We see ourselves as financial solution providers, not service peddlers. We take your business, look at it and tell you the things that need to be done. That is where the advisory part of our business comes in. We should be able to intermediate in long term financing from abroad, especially in respect of long term assets in Nigeria. As you must have noticed the predominant banking activity in Nigeria is a clutch of retail and corporate banking businesses that deal mainly with the short end of the financial spectrum; we have decided to buck this trend by working at the medium to long term end of the spectrum. We believe that to drive infrastructural development, grow the oil and gas sector, buffer the solid minerals industry, and deepen telecommunications offerings in the country long term finance is crucial. People have stayed focused on short term financing, but this is designed to satisfy the needs of working capital and perhaps trade finance but to grow enduring industrial value chains we must work out financing structures that are of a longer term and more stable nature. So, Nova wants to build a very sustainable long term banking business and we see ourselves being around for a very long time. We want to provide long term financing as against the very short term funds available in the market today.

How are you going to avoid a situation where you look back and say this merchant banking business is not going too well so we need  a new direction, a commercial banking direction?!

First, it was not as a result of the shortcomings of merchant banks that you saw everybody going into commercial banking. It was as a result of regulation. What regulation did at that particular period was to remove the glass walls between merchant and commercial banks. By the year 2000 if you were a universal bank (as every bank was by legislation); you had to do both merchant and commercial banking. However, in 2013, after the financial crisis of 2009, the regulator tried to separate the activities of banks again. So, if you want to be a merchant bank you can be a merchant bank and if you want to be a commercial bank you can be a commercial bank. If you are commercial bank, you won’t do merchant banking and if you are a merchant bank, you won’t do commercial banking. Merchant banks were very successful before 1999. One of them at that time was lean, trim but exceptionally efficient; indeed it was the most profitable bank in Nigeria. The second point is that when the glass barricade got smashed by the new banking laws, merchant banks started engaging in commercial banking transactions; while commercial banks started engaging in merchant banking businesses. The result was a medley of corporate errors as proficiency got murdered on the altar of competition. As a result many banks failed, because they didn’t have the competence required to carry out both unique banking activities. From day one, we started building the competences needed to drive a merchant bank. If the central bank wakes up and says tomorrow it is universal banking world all over again and removes the new demarcation, I do not think we will cross over to commercial banking. We will remain a merchant bank, focusing on wholesale and investment banking. The previously mentioned successful merchant bank that got in the universal banking cross fire regretted that they had to go down the retail banking route because it actually diluted the value they were creating in the system and it made them struggle. And when I talked with the original people they say, “We wish we had remained a merchant bank.”

One of the banes of the Nigerian economy is that we have been playing for too long in the short end of the market. What should we expect from Nova in the coming months?

For Nova, we see ourselves as a true merchant bank and we will remain so. One of the things you are going to expect from us is raising long term funds and financing long term assets for manufacturers, people in the agriculture sector, public and private infrastructure, oil and gas sector, telecoms and the entire economic value chain that may require long term funding.  You are going to get advisory services. Our investment banking function is being shaped and tooled to play along these specific lines. So, we intend to sit with clients and look at their businesses and offer appropriately tailored advice. We will also be involved in asset management and mutual funds. We are going to be involved in project financing, debt and equity packaging. These areas will be our focus on the side of investment banking. On the side of corporate banking, we will be involved in collections and technology solutions for clients.

The Nigerian capital market has gotten to almost N16 trillion. What is your take on the market?

This is not only a Nigerian phenomenon. If you look at the Dow Jones, which is at its peak, if you look at the S&P, the Argentine Merval , the Hong Kong Hang Seng the story runs a common thread. I think over time you will see the stock market gain steam. The issue is being able to sustain the steam. And when you look globally, and you look at the Nigerian environment, the macroeconomic parameters look very bright. We think in the case of Nigeria, we should start taking seriously the diversification of the economy. We have started seeing this happening through the Anchor Borrowers Scheme that the Central Bank has championed. We have been told that in a very short time we are going to be self-sufficient in rice production, which has been gulping a very significant amount of foreign exchange. I believe if we diversify our economy and venture into other areas, it would reduce the dependence on oil. So that when there is volatility in oil prices or production output, we will not be as severely affected as in the past. The Central Bank is also trying to ensure there is stable policy. Foreign investors will continue to come. And as they come, you will see that the capital market will become increasingly predictable and favourable to investment and investors. I think it’s excellent that the government continues with certain policies in order to sustain growth.

Do we see Nova bring new equities to the market any time soon?

Definitely! That is one of our major roles in the capital market side. We are going to be involved in IPOs. We are going to work with a lot of indigenous companies and take them to the market. We will advise them and work with them and bring them to the market.

We haven’t we seen any M&A’s happening recently. What is the problem? 

Part of the problem has to do with culture where people want to keep ownership to themselves. People don’t want to lose control. People don’t know that 10 per cent of 100 is bigger that one per cent of 10. 10 per cent of 100 is equally larger than 50 per cent of nothing. I guess that this is where coaching and working together with them comes in. To let them know that enterprise value is going to increase significantly. We have also seen in the case of Nigeria that one generation builds wealth, another destroys it. We think we should start talking to them about professionalizing their businesses. You don’t lose anything but you gain much more by introducing some professionals into your business. And the good thing is that Nigeria has people who can be groomed into that role. It is part of the advisory role that we will be playing. We will be very active in the market. We believe that we will contribute significantly to the growth of the economy.

Are you likely going to have a stockbroking subsidiary?

Definitely we are going to have that. That already is being put in place. We are just at the administrative stage of processing approvals for asset management and other stock market mandates. The stockbroking arm is going to be very active. It is going to be under our investment banking platform.

Risk hedging- futures and forwards. Where is Nova going to be in that part of the business universe?

It is also part of the services we are going to render. In terms of futures, in terms of proactive hedges, people don’t know that on the whole, you are better off. It helps you manage the risk better. It costs more but it also gives you peace of mind. It takes away the volatility; it takes away the vulnerability that you have.  So, we are also hiring experts that will help us drive that side of the banks offering.

On the average, non-performing loan is above the central bank benchmark of 5 per cent. And now Nova is going to provide long term loans. Are you not worried about the volatility of the environment and the tendency for serial loan defaults?

One of the things that drive non-performing loans is the fact that the loans may not be properly structured. Secondly, the monitoring may be very weak. When you look at it from another perceptive, maybe because of the large numbers of loans outstanding in terms of volume, not size, it may be quite a challenge for commercial banks in particular to monitor. Now as a merchant bank, we are not having branches all over the landscape, therefore, we are not having millions of customers. We have our focus group. We are a niche player as such we make high valued loans and the numbers are not as high as the commercial banks. We believe that monitoring which is very critical in this business is going to be top notch. And we have built a very strong risk management framework. In fact, the managing director has a risk management background. He was actually an executive director in charge of risk management in Citi Bank. Something like risk management is going to be at its tip top peak in this place. Secondly, for us loan balancing is going to be strategically critical. We have built a very strong management structure from the board committees to the management committees. Each one ensures that there is appropriate control, checks and balances, to sure that non-performing assets (NPLs) are kept to a tolerable minimum. We see ourselves as being in a better position to control our wholesale activities and ensure that our NPLs do not get out of hand.

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