AS BANKS FOCUS ON COST EFFICIENCY TO GROW PROFITABILITY, UBA MAY HAVE AN EDGE

As regulatory pressures continue to undermine Banks’ earnings potential, Nigerian lenders have renewed focus on cost efficiency, to grow profitability and overall return to shareholders. Notably, there is a consensus on the use of alternative low cost channels in serving the growing customer base; particularly as such cost efficiency initiative aligns with the cashless policy of the Central Bank of Nigeria (CBN), which is also aimed at reducing the cost associated to cash management in the banking sector.  

Of the tier-1 Nigerian banks covered in this report, only Access Bank had a double digit growth in operating expenses in the first quarter of the year, as its peers had a good hold on operating cost, which grew in single digit below inflation rate. Notably, United Bank for Africa (UBA) Plc had the best hold on its cost in the first three months of the year, with barely 4% YoY growth in operating expenses; Zenith Bank Plc (Zenith) and First Bank of Nigeria Plc (FirstBank) also managed their operating cost well, with moderate 5% and 7% YoY growth respectively. Even so, GTBank had historically been the most cost efficient Bank, its operating cost rose by 10% YoY, due partly to the low base of its cost structure, changing mix of its staff force with more middle and senior staff, increasing customer base and branch footprint and relatively lower headroom for cost saving. 

Interestingly, whilst UBA has the second highest number of branch footprints (605 branches) and customer base (over 8.6 million), its operating cost was lower than that of Zenith and Access in the first three months of the year; whilst UBA incurred N32.5 billion in running its business across 22 countries (19 African countries, the United States, the United Kingdom, and Paris), Access and Zenith reported N33.6 billion and N39.4 billion in operating expenses in the period, despite having lower customer base, fewer branches and less number of country presence. 

Headline	Operating Expenses (N'Million)		YoY Growth
	2015Q1	2014Q1
FirstBank	53,123	49,508	7.3%
Zenith Bank	39,350	37,563	4.8%
Access	33,574	27,148	23.7%
UBA	32,530	31,427	3.5%
GTBank	26,183	23,867	9.7%

Looking behind the figures, it is noteworthy that UBA has the lowest cost per staff; an average of N10 million. Within the universe of peers, Access has the highest cost per staff of N49 million. FirstBank, GTBank and Zenith have almost same cost per staff structure, at N21 million, N21 million and N22 million respectively. This analysis reveals certain salient facts on the current and future profitability of the Banks. UBA may gain the most from improved staff productivity in the banking industry, especially as human capital becomes increasing mobile in the financial services sector, with most people being relatively indifferent in working for any of these tier-one lenders. 

Interestingly, the basic remuneration of the tier-1 banks are relatively aligned, thus suggesting that UBA’s edge in terms of having the lowest cost per staff may be largely due to the hierarchical demographics of its work force; a “tight pyramid structure”, with most staff being in the middle and lower management cadre, as against being top-heavy. Whilst there is a question of whether UBA’s cost per staff will tend towards FirstBank, GTBank and Zenith, which seems as the industry equilibrium, the competitive edge of UBA in this regard seems to be the benefit of scale economies, given its geographic spread and staff headcount. More so, UBA may incur lower cost in some countries, which has a relatively business friendly environment, with lower human capital cost and lower infrastructure-related expense. Thus, UBA may sustain its lower than industry cost per staff over the medium term, if it remains focus on its resourcing strategy and scale efficiency. Access Bank has the headroom to moderate its relatively higher cost per staff as it continually gains scale. 

Headline	Staff Count	Cost Per Staff	Branches	Cost Per Branch
		(N'Million)		(N'Million)
FirstBank	10,000	21	892	238
Zenith Bank	7,278	22	500	315
Access	2,721	49	300	448
UBA	12,699	10	605	215
GTBank	4,929	21	231	453

It is pertinent to take another look at operating cost structure, with a focus on cost per branch, especially as banks spend a notable percentage of operating expense on branch maintenance. Notably, the relatively high cost of running branches has been a major reason why international banks like Standard Chartered and Citi have been somewhat shy of “commercial and retail” banking in the country, with a focus on treasury play and corporate banking model. UBA also came up to be the most efficient, with the least cost per branch of N215 million, as against the average of N364 million for its peers. Whilst it may be somewhat right to conclude that GTBank has the highest cost per branch of N453 million because of its relatively fewer branches (does not enjoy economies of scale like UBA), FirstBank which has the highest number of branches, has a higher cost per branch of N238 million, trailing UBA from an efficiency perspective. No doubt, the high cost of doing business in Nigeria, in the form of high security cost and poor infrastructure like power is a major burden, weighing down the profitability of Nigerian banks. 

In the peak of the Niger Delta insurgence, many banks had to use aircrafts for cash management in the volatile locations, just as banks now incur notable cost in reinforcing security around their operations in the North East part of the country. Whilst banks in some other African countries like South Africa, Kenya, Ghana etc rely largely on cheaper energy source from the National Grid, Nigerian banks rely largely on self generated power for their operations, with each branch having at least two self power generator sets, which run on diesel, the price of which has been fully deregulated. 

Apparently, Nigerian banks have the potential to improve on their profitability if the structural challenges of doing business in Nigeria ease. In addition, Nigerian banks have been hit with a host of regulatory induced cost in the last five years, ranging from an extremely high cash reserve ratio, which now stands at 31%, as against less than 10% in most frontier and emerging countries, including African peers. The banking sector resolution levy of 0.5% of preceding year’s total asset, which is paid to the Asset Management Corporation (AMCON) is another peculiar but notable cost for Nigerian banks. Undoubtedly, when all these cost pressures normalize; Nigerian lenders will apparently be ahead of African peers from a profitability perspective. Interestingly, despite the pressure, Nigerian banks are still more profitable than South African banks, with an average Return on Equity of c.20%.