Beyond Its Corporate Governance Issue , Raising Concern is Its Weak Strategic Capability
To some observers ,the key challenge currently facing First Bank Nigerian Holdings,FBNH,is the uncertainty surrounding the quality of its corporate governance. But that is not the only issue its stakeholders are unsettled about . A challenge of equal degree is the bank’s weak strategic capability that keeps it behind its rivals and makes it the worst tier 1 bank today in some critical areas of its corporate health ..
Truly ,corporate governance is the bedrock of all modern corporations ; how well a company survives lies in the quality of its board of directors as well as their understanding and preparedness to pursue a defined corporate purpose. And where the goal is unclear, the company sees itself drifting into crisis.
Weak Strategic Capability.
But , even where clarity of purpose exists,a weakness of executive commitment and capability to implement set of objectives inevitably bludgeons the company into despair and possibly disaster .This is where strategic capability that is underpinned by the resources available to an organisation since it is resources that are deployed into the activities of an organization to create competencies. Consequently , the adequacy and suitability of resources and competences, required for an organisation to survive and prosper are imperative .
Currently , FBNH is yet to find the mastery of any of these to outperform its rivals and reclaim its industry leadership.And the results of this laxity are palpable:In the financial year 2023 , converting every N100 made at the top line to a meager N19.40k at the bottom line and the worst earnings per share at N8 .59b are the dark spots that confirm FBNH is yet to vacate its laggard status.
No doubt, FBNH had competitive financial resources for decades .Its physical , human and intellectual resources driven by its financial resources that were acquired for decades used to be among the best in the industry .
Leveraging its experience in the industry, FBNH had deployed those resources to generate and display competences in strategic areas for decades. In other words , its strategic capability had helped it to dominate the industry and enabled it to reign supreme for decades.But that was before .
Compounded by its weak corporate governance, in the last one decade , the bank has failed to gain competitive advantages in critical areas and consequently unable to outperform any of the Tier 1 banks simply because of its equally weak strategic capability.
The weak strategic position of FBNH may not be farfetched. When its total assets put at N16.94 trillions as at the end of 2023 financial year were juxtaposed with any of its peers this fact is confirmed . Its physical , human and intellectual resources show the bank has lost its industry leadership it had for decades ; it has been overtaken by United Bank for Africa,Access Holding and Zenith Bank going by their assets
For a bank to outperform its rivals , it needs unique resources as well as core competencies to deploy such unique resources in some critical areas in the business of financial intermediation called banking. In this business, it needs core competencies through the deployment of its resources to achieve relevant critical success factors , particularly in the capability of a player to lend safely and profitably . In other words, risk management and unmatched proficiency in cost optimization are of critical importance for a player to outperform and what its shareholders particularly valued over others expectations. So , it needs to deploy unique resources to generate core competencies to critical success factors to outperform competition.
This may not be farfetched. Unique resources and core competences underpin competitive advantages, help a player to sustain ability to provide values ,to be better than those of the competitors and are difficult to imitate. They provide the basis to outperform competition or demonstrably provide better value for money . Sometimes, unique resources may be particularly talented individuals. Not only resources, core competencies are needed to generate superior values through risk and cost management.
For decades, FBN enjoyed size advantage by its asset position and deployed that position to outperform its rivals in those decades .However, what helped it more to gain industry leadership then was its disproportionate size advantage as opposed to core competences.
The first it lost was its resource size advantage. Apart from losing its size advantage, in the past few years , the successive leaders of FBNH had forgotten that possession of resources are not enough without the capability to deploy them and generate core competencies in critical areas of performance is a joker that delivers leadership.
That is why the difference in performance between organisations in the same market is rarely explainable by differences in their resource base since resources are usually imitated or tradable. Moreover, today , the rules of engagement have changed,more to the battle for competencies than resource advantage.
Its leadership seemed to be asleep at the switch and woke up too late . While its leadership continued to grow its assets size it had forgotten the above conventional wisdom. It was unable to manage the change heralded by 21st century.
It was unable to live up to the strategic challenges of the new century that involved rapid change , the need to foster and integrate knowledge as well as exploitation of modern communication techniques and forces of globalization.
For its negligence or ignorance of its leadership, the reality that confronted FBN was clear enough : size advantage exploited by FBN to dominate the market had become threshold as others grew and even surpassed it by their assets. Also , competencies at threshold level are not enough to gain the industry leadership as core competencies are the activities and processes that underpin an organisation’s competitive advantage.
Those are activities that create and sustain the ability to meet the critical success factors of particular customers groups than other providers in ways that are difficult to imitate, activities or processes that fundamentally underpin the value in the product or service and lead to level of performance that make one company to be significantly better than competitors .
Unlike FBN , however , smart corporate leaders of smaller and younger banks in Nigeria knew that superior performance is feasible with the capability to change the rules of the game. They exploited the dictates of the challenges of the 21st century and took over the leadership of the industry in critical areas. They equally acknowledged the fact that superior performance is also determined by the ways in which resources are deployed to create competencies in an organization activities to achieve industry leadership.
The fact is that possession of core competencies is now the ultimate rather than resources which have become a threshold factor . This is the battleground where FBN lost its its industry leadership to the younger but dynamic players . FBNH’s performance in net profit margin, earnings per share ,cost to income ratio and cost risk ratio as well ROE and ROA confirmed its loss leadership to the relatively younger banks of Tier 1 rank. Even its price earnings ratio and price to book ratio which indicate its undervalued position are believed to be a result of poor fundamentals .
Achieving the above core competencies is not for the dillitantes. In last one decade,FBNH has failed to live up to the above challenges and consequently, it has remained the worst Tier 1 bank in Nigeria, at least where it matters most.
Deceptive Performance Figures For the Naive
Its unfortunate performance or weaker industry position may not be clear to the naive or unsuspecting investors or observers . To these naive observers , the 2023 financial year results of First Bank Nigeria Holdings ,FBNH., are nothing but fantastic and phenomenal. This belief is anchored on the supersonic growth recorded in some of its financial indicators at the end of that year relative to the previous year. For instance, its Gross earnings which grew from N815.2b to N1,595.3b by 95.7% ,Profit Before Tax from ₦’157.7billion to N358.9b by 127.3% y-o-y , cost to income down to 49.%1 from 61.7% and profit after tax that grew to N309.89b from ₦136.17b, by 127.6% are all inspiring.
Also , its NPL ratio fell below 5% at 4.7% ; its total assets grew from ₦10.578trn to N16.938 trn , up by 60.1% ; Loans and Advances from ₦3,78trn to N6,359trn , up by 67.8%; operating Income from ₦600.3 to N1,149.8, up by 91.5% ; Net-Interest Income ₦’363.2 to₦548.9 by 51.1%. and Non-Interest Income grew from ₦237.2 to ₦601.7 , up by 153.6% .All these are enough to boost that belief.
For the above positions,the management of the bank itself was equally effusive about the performance . To it , while the growth in its gross earnings was underpinned by strong business fundamentals; the decline in its cost to income,according to the bank, demonstrated the successful implementation of its cost containment strategies .
Better Prism That Exposes FBNH True Competitive Position.
But while the above declarations may be true to some extent , it is absolutely disingenuous to claim that the bank has returned ; it is merely a ruse .The issue is that, while some naive investors focused on historical data to assess the performance of FBNH , smart investors look beyond bench marking the performance of an organization in relation to previous years in order to identify any significant changes and to form their opinions on the health of any organization. They know the danger in it : it could lead to complacency on the part of the management. Moreover, it is the rate of improvement compared with that of competitors that is important. They know some valuable insights about performance standards could be gleaned by looking at the comparative perspective with other organisations in the same industry or sector .
This observation is true .When its performance is juxtaposed with its rivals particularly among Tier 1 banks, FBNH remains the least efficient bank. FBNH still remains the worst tier 1 bank in Nigeria for a smart investor targeting better and competitive value for money, . It only delivered miserable results in that financial year of 2023 , at least relativelyto its rivals. .
The reason may not be far to seek .In that financial year, all its boasting management could do was to convert every N100 made at the top line to N19.40k , the worst among the tier 1 banks in Nigeria.More precisely, it achieved 19.4% as its net profit margin . That is what it means when its total revenue of N1.595trn is analyzed relative to its net profit of N309.89b
To see its disgusting performance clearer just compare it with GTCO , another Tier 1 bank ,with a total revenue of N1.187trn and 9the least gross earnings when compared with rivals . GTCO ,out of the lowest earnings figure, made N540b profit after tax from a very much lower total revenue .That profit nearly double that miserable profit delivered by FBNH from a very much bigger revenue .
This has become its tradition unnoticed by some careless investors of FBNH . Moreover, the total assets of GTCO is almost half of FBNH’s , demostrating it is merely big but with poor brain .This is nothing but outrageous on the part of FBNH.
The signal from the above is that while it has bigger resources and made bigger revenue its key difficulty is cost optimization or inefficient operations . GTCO does not only possess a labor productivity advantage, its overhead costs has also been less as a percentage of total costs than those of its rivals .In fact , FBNH is the worst among the tier 1 banks in this aspect and this is demonstrated with its 49 percent cost to income ratio relative to the industry best at 29%..
Apart from its cost to income ratio regarded as miserable , another indicator that exposes it is its Earnings per share (EPS) , a measure of a company’s profitability, calculated by dividing quarterly or annual income (minus dividends) by the number of outstanding stock shares. This indicator, which demostrates the higher , the greater the profit and value perceived by investors ,shows FBNH made only N8.35k per share while the highest made by one of its was N21.55k per share .
Its return on equity,and return on assets are also very revealing compared to its rivals with its 22.60% and 2.30 % respectively .Though these figures showed some improvements compared to its previous year figures ,however, when juxtaposed with the industry best in class figures of 44.82% and 6.69%, the so-called improvements may be too cold for comfort . Apart from that , those two figures are the least as indicated by the table below.
Its unimpressive competitive position also comes up in its valuation ratios .One of the most popular valuation metrics is the price-to-earnings ratio (P/E), which measures the share price of a stock as a multiple of its earnings. The closer this figure is to one or below one, the cheaper the stock.
GTCO fundamental valuation of price-to-book value and price-to-earnings at 0.96x and 2.31x while First Bank holding’s figures were 0.44x and 1.78x, respectively.
Comparing those two banks’ P/E figures of 2.3x and 1.78x to the banking sector average of 2.91x suggest that the FBNH”s stock is relatively undervalued compared to that of GTCO . Not only to that of GTCO’s but also to those of its tier 1 banks , indicating that investors are paying lesser value for each unit of its earnings relative to other banks.
This could be seen as an opportunity for investors if they believe that FBNH ’s earnings will continue to grow. However, that depends on its fundamentals. Currently, its fundamentals remain the worst in relative terms .
Additionally, the group’s strong capital assets appear to be reflected in its higher price-to-book ratio of 0.96x compared to the banking sector average of 0.63.This suggests that investors value each unit of GTCO’s book value more highly than that of its peers, possibly due to perceived higher asset quality or expectations of better future profitability. For FBNH, it is other way round with its price to book ratio of 0.44x as it fell below the banking sector average of 0.63.
GTCO’s valuation metrics, including a low P/E ratio, and a reasonable price to book ratio suggest that it might be an attractive investment, especially for those looking for growth opportunities at a reasonable price.This implies that GTCO’s market value reflected its underlying book value and earnings more than FBNH .FBNH is complete mirror image of GTCO.
Despite the high-interest rate environment, GTCO had a 1.80% cost of funds, which was extremely lower than that of FBNH at 3.7%, the worst among its peers . It’s important to understand that the difference between the cost of funds and the interest rate charged to borrowers is one of the main sources of profit for most banks. This has a big drawback on the profitability of FBNH and a fulcrum driving and given GTCO an edge over its rivals .
Cost of risk
The cost of risk ,the ratio of provisions recognized by an entity over a given period (annualized) to the average volume of the loan portfolio during that period, usually expressed in basis points, is a critical success factor in the business of financial transformation . FBNH’s cost of risk stood at 3.30% compared to Access Bank’s 1.00% . Like coverage, cost of risk is an indicator of expected losses, and measures the effort an entity makes over a given period to protect itself against estimated future losses in its loan portfolio.
Besides valuation dynamics, unlike FBN, GTCO is known for its dividend payouts. In 2023, it paid a dividend per share of N3.2, marking a 3.23% increase from the previous year. The stock currently has a dividend yield of 6% based on its current share price, and this could likely increase as we expect the bank to raise its dividend payout ratio.Continuing this trend, the bank is expected to declare an interim dividend for the recently ended half-year, enhancing its appeal as an investment, especially for income-oriented investors. FBNH’s dividend pay out and yield is the worst in the industry.
The Genesis of FBNH’s Trouble
When a company fails to antipate the future it is certain that such will remain on the treadmill. FBNH’s was its inability to anticipate the futuee ahead of its rival .
WHY IT LOST THE INDUSTRY LEADERSHIP.
Younger banks could be excused for having failed to anticipate the success of the above challenger like GTCO ,but what about the industry incumbents like FBNH? .What excuse does it have for being unpleasantly surprised by the more vital and aggressive younger banks? The problem is that some incumbents tend to dismiss competitors with meager resource endowments to the extent that challengers even register on the radar screens of leaders as small blips .
Only a brainless organisation displays this trait . Or what else could have been responsible for this uninspiring performance or what excuse does FBN have ? Tier 1 banks are not created for fun. They are expected to have strong reputations, technological riches, and deep pockets relative to other tiers of banks . With these resources at their disposal ,they could hire the most talented people in their industry, they have potential for sizable market shares, and, in most cases, could have a worldwide distribution presence.
Pro big analysts believe they have a capacity to match the resources and global distribution of large competitors that brings advantages .First , large companies tend to devote a disproportionate share of their resources to training and education and their potentials open the door to many of tomorrow’s mega-opportunities .
FBNH is not resource handicap . In its battle for leadership, its much more real and much more substantial enemies range from lethargy, convention, myopia, to elitism . The bank miserable performance has confirmed that bigness without stretch and leverage is obesity just as smallness without stretch and leverage is impotence .
One conclusion to be drawn from the endless shift of competitive fortunes from FBNH to the younger banks is that the starting resource positions are very poor predictors of future industry leadership. A firm can sit atop mountains of cash and command legions of talented people, and still lose its preeminent position. Likewise, a firm can sometimes overcome enormous resource handicaps and successfully scale the heights of industry leadership. Getting to the future first is more a function of resourcefulness than resources.
FBNH’S CEO HAS MANY THINGS TO LEARN
The new CEO of FBN has many things to learn from his rivals to make the difference from his predecessors and regain the bank’s industry leadership for his bank. The Bank needs a better brain .But the brain is not the brain of the CEO .Instead , it is the amalgamation of the collective intelligence and imagination of its managers and employees throughout the company who must possess an enlarged view of what it means to be strategic.
This will help the bank regain access to the leadership position by reinventing the future or by changing the rules of the game to get disproportionate portion of the market and profit.
In the past ,FBNH instead of achieving this had suffered dangerous casualties ; it crashed into the future as its top management was asleep at the switch, a situation that gave its few younger rivals to overtake it and snatch the industry leadership from it .It would have been long forgotten if not for the regulatory authorities that rescued it.
To reinvent the industry, this bank needs a leader with a better power of foresight than its past leaders .This is imperative for many reasons .It will help it to gain deep and new insight into trends in lifestyles, technology, demographics, and geopolitics .
The power of industry foresight essentially helps to establish one’s company as the intellectual leader in terms of influence over the direction and shape of industry transformation.;it helps managers answer three critical questions regarding what new types of customer benefit it should seek to provide in the future , what new competencies it will need to build or acquire to offer those benefits to customers and how it will need to reconfigure the customer interface over the next several year.
However ,foresight isn’t enough, a leader must avoid executional blunders. Industry foresight doesn’t guarantee competitive success. The most foresightful firms aren’t always the most profitable. Gather all the foresight in the world, if not matched by a capacity to execute, it counts for little.On the other hand, terrific executional ability, in the absence of industry foresight, is not enough to guarantee future success. In other words, creating industry foresight and achieving operational excellence are equally challenging tasks.
The point is that the future must not only be imagined with the power of foresight, it must be built. For this , it needs a new strategic architecture that represents the map of the future .
No doubt about it , First Bank needs an architect as it leader who must be capable of producing a blueprint for how to turn the dream or foresight into reality , not only maintenance engineers who had been controlling its destiny. ; it needs an architect driven by high powered strategic intent because building a strategic architecture may point the way to the future, it’s an ambitious and compelling strategic intent that provides the emotional and intellectual energy for the journey.
This is more so because resourcefulness stems not from an elegantly structured strategic architecture, but from a deeply felt sense of purpose, a broadly shared dream, a truly seductive view of tomorrow’s opportunity or strategic intent .
First Bank needs a leader with stretch and the creativity it engenders that are the engine and fuel for corporate growth and vitality. For this ,the bank’s strategy process must be a purposefully created misfit between where the firm is and where it wants to be.
This is the initiative that delivered the industry leadership to some younger generation banks while the leadership of FBNH was asleep at the switch. The leadership of these younger banks knew their current capabilities and resources were manifestly insufficient to the task , avoided the traditional view of strategy that focuses on the “fit” between existing resources and emerging opportunities and went for strategic intent which creates, by design, a substantial “misfit” between resources and aspirations . They knew where fit is achieved by simply paring down ambitions, there would no spur for such ingenuity and much of the firm’s strategic potential would remain dormant..
They did not only create such misfits between their resources and aspirations they ultimately,closed the gap between resources and aspirations that strategic intent opened up . They closed this gap by leveraging resources, by traveling the maximum distance down the road to leadership, using the least possible amount of fuel.
However , unlike its smarter rivals ,FBNH’s way to close this gap is by downsizing or restructuring as well core process redesign or reengineering. These were the only options and the price to be paid for its inability to imagine and create the future ahead of its rivals was the loss of the industry leadership. Sequel to this , its organizational ,strategic and competitive paradigms are now believed to be obsolete by some analysts relative its smarter rivals.
Despite the fact that voices calling for a new organizational paradigm of leaner ,flatter , virtual, modular etc have been numerous and vocal, this bank organisational paradigm is believed by some analysts to be out of date and toxic as it remains highly bureaucratic .
Although bureaucracy and its control over capital spending, financial rewards, planning, procedural guidelines, and organizational design is supposed to prevent people from turning left and turning right and supposed to be a system of checks and balances that prevents individuals from pursuing idiosyncratic and competing objective, without a point of view provided by strategic intent about corporate direction, bureaucracy is likely to be little more than an enforcer of corporate orthodoxies .
Bureaucracy blocks initiative and creativity at every turn. Bureaucracy constrains the range of available tactics, but generally leaves open the question of ultimate goals. Hence, in many companies it is the means that are constrained rather than the ends. These are the issues drawing FBNH backward . .
