WHY FIRST BANK IS LOSING OUT IN THE BATTLE FOR INDUSTRY LEADERSHIP
The battle for leadership in the Nigerian Banking industry among the CEOs of each player is, no doubt, tough ,’fierce and full of intrigues. Though not as discernible as in politics .the battle is very real.
One common denominator among the five tier 1 banks is the volume of the resources at the disposal of their management .They have strong reputations, technological riches, and deep pockets. They could hire the most talented people in their industry, have sizable market shares, and, in most cases, have a worldwide distribution presence. In short, they have resources.
.Zenith Bank is holding tightly to its profitability,as the most profitable bank with largest profit ; GTCO remains the most cost-efficient while Access Holding is biggest by asset and deposit. UBA and FBNH have been condemned to catch-up mode for a long .But FBNH is staying far away even as catch-up player as UBA exploited currency revaluation gain to shine beyond analysts imagination in 2023 financial year .
Competitor Analysis:
The banking industry players saw gross earnings and profitability climb to a record high, benefitting from MPR hikes and naira devaluation. Among the tier 1 banks, Access Holding had the highest gross earnings at N2.59trn, and GTCO had the lowest at N1.19trn, but Zenith Bank took the lead in terms of profit at N795.96bn, ahead of UBA (N757.68bn) and Access Holding (N729.00bn).
The bank’s high earnings made the earnings per share grow to a double-digit, with Zenith Bank taking the lead at N21.55k while Access Holding had the lowest at N17.23bn. This implies that Access Holding incurred high operating costs, eating deep into the profit compared to Zenith Bank. However, Access Holding retained its position as the highest customer depositor at N15.32trn ahead of UBA and Zenith, while GTCO had the lowest at N7.41trn.
Similarly, the banks’ financial ratios had a positive outcome, with GTCO having the highest net interest margin, return on equity, and return on assets. Also, GTCO was the most cost-efficient, with the lowest cost-to-income ratio of 29.10%, while Access Holding was the least efficient at 44.69%. The fundamental valuation of the banks showed that GTCO had the highest price-to-book value and price-to-earnings at 0.96x and 2.31x, while Access holding had the least at 0.39x and 1.39x, respectively.
This implies that GTCO’s market value reflected its underlying book value and earnings more than the remaining banks. Despite the high-interest rate environment, GTCO had a 1.80% cost of funds, which was extremely lower than its peers, with access holding at 5.40%. GTCO seems to have better financial health than others based on the financial ratios despite having the lowest gross earnings, profit, and asset sizeHow Far Can the New CEO Go?
.Whether FBNH could regain its leadership position,some analysts believed ,depends on the capability of its new CEO to reverse the bank’s current strategic drift ..No doubt ,FBN needs some review of its strategic ,organisational and competitive paradigms ,all of which are still very much obsolete.
Poor Strategic Paradigm
The leadership’s strategic and organisational paradigms are considered obsolete in the sense that they fail to capture the dynamic of competence building and ultimately on its leaders ability to develop a prescient, well grounded point of view about the future and make it happen .
For a new view of its strategy, FBN needs a unique point of view about the industry foresight and a blueprint for getting to the future ahead of its rivals . This is only possible if the management could rewrite the rules of the game to displace the younger and dynamic banks now ahead of it . This lacuna is no doubt very dangerous as every company needs a new perspective on what it means to be strategic and not just the old one that lay too much emphasis on how to maximize share and profits in today’s businesses or protecting the past .
The reason for this warning may not be far to seek .World class organisations know ahead who they wanted to be in the future and prepare for it , how they can reshape this industry to their own advantage ,what new functionalities they want to create for customers and .what new core competence should they will be building now .
Its inability to live up to the above new strategic view has ,no doubt, led to FBNH’s current uninspiring strategic position relative to its close rivals in the last two decades. This was particularly due to its leadership’s failure to provoke deeper debates about who it wanted to in the future. .
According to some analysts this lacuna is observable when a company’s strategy seldoms illuminates new white space opportunities ,uncovers the unarticulated needs of customers ,,provides insight into how to rewrite the industry rules, stretches to encompass the threats from non traditional competitors or forces managers to confront their potentially out of date conventions .The fact is that when a strategy starts with what is and seldom with what could be , a company is unlikely to add much value .They still believed FBNH is still an embodiment of the above unimpressive corporate identities. .
The above attitudes ,some analysts noted, could only work well when the foundations or assumptions of a plan remain unshaken . However , this is believed to be unusual as old assumptions and foundations upon which a company’s old plan are based are often usually shaken by new competitors ,like Zenith, GTCO and few others , who have no much stake in the past or decided not to do so ,or by seismic shifts in technology, demographics and the regulatory environment as in the Nigerian Banking industry in the last two decade , making them unable to work .That is the reason why some younger banks that adopted new paradigm of strategy and by-passed a bank like FBN that failed to adopt a new view of strategy.
Moreover , where most of the past CEOs are believed to be fiscally conservative person and pursuing draconian budgetary constraints as well as hyper efficient operations, derricking , financial hari-kari , extrapolation of the past practices or being held hostage to the orthodoxies of the past ,as in FBN, such leaders might be unlikely to gain the courage to commit to undisputed world leadership.
Only a CEO with a – point of view about industry evolution and how to shape it , with a stretching aspiration that is derisked through tools of resource leverage as well as -intellectual and emotional commitment that ensures consistency and constancy can return the past glory of this bank . .Unfortunately, none of this bank’s leadership has lived up to those expectations.
Out of Date Organization Paradigm
Another thing that is equally working against the competitiveness of FBNH is its wrong organizational paradigm. Despite the fact that the voices calling for a new organizational paradigm (leaner, flatter, virtual, modular, etc.) have been numerous and vocal ,no doubt , the way a bank like FBNH is organized is still believed to be out of date and toxic. The bank is still largely living in the past with its highly centralized ,overly bureaucratic control oriented , big brain ,technology led organizational archetypes of the 1960s and 70s .
Thinking differently about organizatio is imperative for First Bank recovery .This is because mobilizing employees at all levels around a strategic intent , leveraging resources across organizational boundaries ,finding and exploiting white space opportunities , redeploying core competencies, consistently amazing customers , exploiting new competitive space through expeditionary marketing ,and building banner brands all require new ways of thinking about the organization .
Bureaucracy and rigid sense of hierarchy are the poison in the operation of First Bank; they kill initiatives and creativity and this is responsible for its relatively poor service delivery. In bureaucratic , hierarchical orgs employees are often like sheep . they mill around but no sense of purpose.
Moreover, its hierarchical behavior that avoids active multilevel dialogue on critical issues and uses power to settle issues rather than broad base debate and high quality analysis is another drawback..
Even in many cases, cutting layers as the bank has been doing , regarded as antidote to bureaucracy and needless centralization ,is already regarded as toxic as the poison it is seeking counteract because this is not same thing as reducing dysfunctional consequences of hierarchical behavior.
Wrong Competitive Perspective of FBNH
As regards its competitive paradigm, a situation where the management thinks too much about size advantage and not much about how to leverage resources to gain competitive advantages must be reversed. These are the challenges to be confronted by Olusegun Alebiosu , the bank’s new CEO .and the they are to be tackled upfront for a new FBN
Another strategic error that led to the travails of FBNH in the last two decades is its management wrong perspective on competitiveness particularly its excessive pro-big assumption at expense of efficiency or resourcefulness.
Though big size brings some advantages some companies as tbey could devote a disproportionate share of their resources to training and education, have a capacity to match the resources and global distribution of large competitors open the door to many of tomorrow’s mega-opportunities and make them significant employers ,notwithstanding just as bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence
BEYOND DEVELOPING FORESIGHT
However , developing foresight ahead of its rivals is not enough for Alebiosu to change the current leadership equations that turn FBNH a mere a catch-up player in the industry where it once reigned supreme because foresight without execution is just like execution without foresight that led to its current unspiring status.
The above observation is a confirmation of the fact that the travail of FBNH is not limited to its leadership’s poor foresight . Just as it has lost its intellectual leadership for its lack of foresight, its inability to accumulate necessary competencies , overcome certain technical hurdles , to get alternate product and service concepts tested and proved out , to attract coalition partners who have critical complementary resources , to construct product or service delivery infrastructure and to get agreement around standards equally made it difficult for it to outperform its rivals as the industry leadership’s battle shifted to the competition for market share and market position within fairly well-defined parameters of value, cost, price, and service because the bank forgot that the race for industry leadership is for competencies and not for market share.
To outperform competition and gain better market share , innovation is expected to be focused on product line extensions, efficiency improvement, and what are usually marginal gains in product or service differentiation . However ,just as without a deeper understanding than competitors of the trends and discontinuities—technological, demographic, regulatory, or lifestyle—that could be used to transform industry boundaries and create new competitive space gained , it is difficult to outperform. It is even more so without necessary competencies accumulated, technical hurdles overcome , alternate product and service concepts tested and proved out, coalition partners who have critical complementary resources attracted , product or service delivery infrastructure constructed and agreement around standards gotten .Those difficulties could be pinned down to the poor quality of FBNH s at the helm of its affairs .
POOR LEADERSHIP
Unless there is a a complete transformation, there will be no significant change in the organisation culture of FBNH. The leadership had failed in the race for industry leadership with their preference to live in the past in a fast changing environment with weak strategic capability . Instead of gaining strong foresight to create the future ,the management was devoting too much energy to preserving the past and not enough to creating the future ; building size advantage at expense of leveraging resources and competences to provide competitive advantage and or yield new opportunities. More annoying were the simmering tensions between them , a battle royale that was self-centered as the insiders became trapped in a web of splintering camps and splitting loyalties that culminated in the welcoming posture of the CBN as an undertaker.
Though everything is calmed down now with Femi Otedola as the Board Chairman and with the CEO allegedly nominated by Obafremi Otudeko., some people saw a reenactment of the old squabbles with the new CEO serving the interst the influential stakeholders. But that will be disastrous for the bank since corporate governance is the bedrock of all modern corporations and how well a company survives lies in the quality of its board of directors.
Inability to resolve this crisis in past and the abuse of insider loans were the twin-evil that nearly ended its going concern as this financial elephant inelegantly dropped to its knees with its profit engine in bad shape ..
FBNH failed to pass the litmus test of the core banking business of lending money safely and profitably mostly due to its poor corporate governance,poor judgment and lack of technical savvy for credit and interest rate risk management.
Sequel to the above managerial ineptitude, its past success got eroded or destroyed by the tides of technological, demographic, and regulatory change and order-of-magnitude productivity and quality gains made by nontraditional competitors. . This was as the foundations of its past success were shaken and fractured as the industrial terrain changed shape faster than its top management could refashion its basic beliefs and assumptions about which markets to serve, which technologies to master, which customers to serve, and how to get the best out of employees
Buffeted by the above forces, the bank lost the control of its destiny and resorted to surviving with restructuring and reengineering as its survival strategy under CBN forbearance ..
That became inevitable as the bank was confronted with serious competitive problems of stagnant growth.xxx The competitive problems were the negative impacts of its leadership lack of as foresight indicated above .
The most annoying is that FBNH became a bystander than a driver on the road to the future and the results were the structure, values, and skills that became progressively less attuned to an ever-changing industry reality. Such a discrepancy between the pace of change in the industry environment and the pace of change in the internal environment of the bank spawned the daunting task of organizational transformation.
Restructuring ,Re engineering that Fail to Yield Industry Leadership .
In the absence of a leadership that could not create the future or rewrite the rules of the game , its leadership had to pick up the knife and began the brutal work of restructuring and re engineering . The goal of this was to carve away layers of corporate fat, jettison under performing businesses, and raise asset productivity.
But why the issue of downsizing and core process redesign are legitimate and important tasks, they have more to do with shoring up today’s businesses than creating tomorrow’s industries. Neither is a substitute for imagining and creating the future. ; neither will ensure continued success if a company fails to regenerate its core strategies. Any company that succeeds at restructuring and re engineering, but fails to create the markets of the future, will find itself on a treadmill, trying to keep one step ahead of the steadily declining margins and profits of yesterday’s businesses. That exactly was the fate of FBNH.
A look at the bank”sl books showed in the last decade, FBNH has found itself in all sorts of corporate pickles. It has had a roller coaster ride over the last two decades with the conglomerate surviving some disastrous loan binges that almost cost it its soul between 2011 and 2018. The swirl of corporate governance missteps over the period saw the Financial Holding Company (HoldCo) swoon between 2018 and 2020. From having a board of directors disrupted by regulatory oversight concerns to coping with a regulator-imposed debt accommodation of weaker banks the HoldCo was forcing itself through a gale of hard choices.
Indeed, since 2016 Adeduntan, FBN’s chief executive officer (CEO) has had to steer past very turbulent financial weather as the 130 year institution recovered from large dodgy loans booked by past boards.
The period between 2018 and 2020 was not just cold, but icy. The deposit money bank (DMB) saw itself punched into a squared corner, as board infighting, rising operating expenses, and fragile insider-related loan conditions (as reported by the CBN) created a perfect storm.
However , while the elephant is waking up from its slumber as indicated by its financial indices , its profit engine is still less inspiring and this has made its profitability less competitive in spite competitive revenues . A look into its financials in the past few years confirmed this assertion.
Gross Earnings
In the past 8 years, HoldCo has grown its gross earnings from N505.2bn in FY 2015 to N805.1bn in FY 2022, leveraging the robust retail presence and digital banking. The group’s had the highest growth rate in 2021 at 30.7% using the transaction-led approach (other operating income) and the least growth in 2017 at +2.3%. Meanwhile, the gross earnings fell in 2018 and 2020 by -2.0% and 7.5% to N583.5bn and N579.4bn, respectively, triggered by the lower interest income and covid-19
Profitability
The HoldCo’s profit has shuffled modestly in the same direction as its gross earnings. Profit before tax (PBT) and profit after tax (PAT) grew from N21.51bn and N15.15bn in 2015 to N166.7bn and N151.1bn in 2021. However, swelling operating costs leaned into profit in 2022, slashing PBT and PAT to N157.7bn and N136.1bn respectively .
Cost-to-income ratio (CIR)
FBNH has battled high operating costs since 2015; the lender’s cost-to-income ratio (CIR) has hovered between 55% and 70%. The group’s cost minimization strategy in 2016 knocked the CIR to 47% from 61.40% in FY 2015 but was not sustainable as the group’s CIR floated back up in 2017, rising steadily to a peak of 70% in 2019. The moderation of the HoldCo’s CIR in 2021 to 56.40% rebounded to 61.70% in FY 2022, suggesting the need for the group to keep a tighter rein on costs .
Deposits
As the oldest bank in Nigeria, strong customer confidence has supported significant deposit growth over the last thirteen decades. The HoldCo’s deposit has increased from N3.12trn in 2015 to N8.18trn in 2022, one of the largest year-on-year (Y-o-Y) growth in the industry. The large deposit has fueled the increase in loan disbursement, loan & advances, growing to N5.01trn in FY 2022 from N2.20trn in FY 2015
Asset Base
FBNH’s asset base has grown to N10.58trn in FY 2022 from N4.17trn in FY 2015, driven by the continuous acquisition of investment securities, Loans & Advances, and other assets. Access Bank has the highest asset base in the industry at N14.99trn, followed by ETI at N13.37trn, while FBNH came in at the fifth position, behind Zenith and UBA
Loan & Advances
The notable growth in loan disbursement has been a primary driver of the financial Holdco’s income over the years. The loans and advances have increased from N2.2trn in 2015 to N5.01trn in FY 2022, steadily improving interest income relative to interest expense. The group’s loan disbursement buckled slightly in 2018 to N2.56trn from N2.74trn in 2017. Despite the growth in loans and advances, the HoldCo has been able to trim its poor-performing loan assets to below the statutory requirement of 5%, implying strong quality loan portfolios
Non-Performing Loan
Since 2019, the group has steadily scaled back its non-performing loans from double digits between 2015 and 2018. The non-performing loan ratio (NPLR) has slid to 4.30% in FY 2022, suggesting improved asset quality. The group’s exposure to the oil sector has fallen significantly, with the exposure now concentrated in real estate and agriculture at 44.4% and 17.0%, respectively, followed by general commerce at 9.5% in FY 2022
Return on Equity (RoE)
As the group’s profit improved, its return on equity (RoE) glided up, rising from 2.70% in 2015 to 18.40% in FY 2021. However, the drop in profit in FY 2022 and the increase in shareholder funds dragged back the ROE to 14.50%, or 2.5% below the industry average of 17%. The group’s ROE compares with other lower tier 2 rather than tier 1 banks with RoEs shuttling between 17% and 20%
Capital Strength
Despite its internal governance and operating challenges, FBNH’s capital has remained within the regulatory limits over the past eight years, hovering around 17%. In 2019, the group had the lowest sector capital adequacy ratio (CAR) of 15.5% for any large, listed bank on the NGX, it was close to breaching the regulatory limit but rebounded in 2020 to 17% and 17.4% in 2021. The Ghana debt restructuring exposure slightly bruised its CAR bringing it to 16.8% in 2022. The Holdco’s liquidity ratio became a bit of a worry, trending downwards from 58.6% in 2015 to 31.7% in 2022. The fall exposes the group to increased operational risk
Despite the above improvements registered in the two years ,its strategic position is still believed to be less encouraging .
organization
The bank needs to become leaner and flatter .But ,no matter how lean and fit an organization ,a new organizational paradigm might be , it still needs a brain. But not the brain of the CEO or strategic planner but an amalgamation of the collective intelligence and imagination of managers and employees throughout the company who must possess an enlarged view of what it means to be “strategic on how to build and apply that new view of strategy and how to get to the future first.
FBNH’s leadership must unlearn much of its past before it can find the future, recognize it is not enough to optimally position a company within existing markets by piercing the fog of uncertainty and develop great foresight into the whereabouts of tomorrow’s markets, recognize the need for more than an incrementalist, annual planning rain dance by building a strategic architecture that provides a blueprint for building the competencies needed to dominate future markets ;.It must less concerned with ensuring a tight fit between goals and resources but more concerned with creating stretch goals that challenge employees to accomplish the seemingly impossible, know that it is more than the allocation of scarce resources across competing projects but a quest to overcome resource constraints through a creative and unending pursuit of better resource leverage,.must recognize that the bank is not only competing within the boundaries of existing industries but competing to shape the structure of future banking industry.
FBNH needs to recognize that competition for core competence leadership precedes competition for product or service leadership, and to conceive the bank as a portfolio of competencies as well as a portfolio of businesses ; it must know that competition often takes place within and between coalitions of companies, and not only between individual businesses and also recognize that product failures are often inevitable, but nevertheless provide the opportunity to learn more about just where the mother lode of future demand may lie.; to capitalize on foresight and core competence leadership, the bank must ultimately preempt competitors in critical global markets; that the issue is not so much time to market, but time to global preemption.
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