Two weeks ago, the Managing Director of Union Bank, Mrs Funke Osibodu, who was drafted for a two-year rescue mission to Union Bank, one of the eight rescued banks, had an interactive session with business editors in her office. Below are excerpts of the session.
At the last MPC meeting, the CBN Governor commended the recovery effort in Union Bank, even as he noted that the bank has bounced back to profitability. How do you react to this and as the chief architect of this impressive turnaround, what strategies made this daunting task possible?
Between the time we joined and end of December last year, we have done what is called ‘close the tap.’ In other words, clean up the books of the bank and wind down what I would call the ‘old things’ that took us to where we were as of August and then reposition the bank for growth as from January. And in repositioning the bank for growth, there were two strategies.
The first one was to turn the bank into profitability within the first quarter, by end of March 2010, and then the second was the commencement of the medium and strategic renewal plan for sustainable growth as from April.
Well, I am happy to say that in terms of both closing the tap and repositioning in terms of profitability, we were able to do what we wanted to do. By the end of March, as you can see from the numbers, the bank has turned into making profits and so this year, we labelled it ‘the new Union Bank’ or ‘Union Bank Reloaded.’
This strategy is very important because anything you have that is un-reconciled, you never know what is hidden inside, whether it is fraud or something funny; so it is important to have it as low as possible.Then you have the income audit team headed by Mr. Ade Shonubi and theirs is to block all leakages – both income and expenses side – and also make sure that new transactions are properly done. There is still a lot of work to be done on that side, we still receive a lot of letters from customers saying: look, you have not charged us properly, this is wrong, reverse it. Often, it is because we are not doing things on time and not doing it properly and they are old issues, but we are addressing all of that. Things are improving.
So, in closing the tap, you saw a huge amount of loss-where did it come from?
It was because we had to first of all classify all our loans properly. So loans that were not on the balance sheet, we brought them back to the balance sheet and if they were not performing, we made sure that by prudential guidelines, we classify them properly and by so doing, it brought out all the cobwebs, thus seeing the bank as it was.
That was basically it. Then, we also went on an aggressive loan recovery drive. We set up a six-tier structure where there is a structure to focus on loan recovery because as you know, loans go through a life cycle, and they are all at different stages. We decided to break the strategy into six stages so that we can be specifics- focussed and have a key senior personnel drive each aspect.The first beat was remedial stage, where the loans that were due were followed up to ensure that they did not get worse, and the customer gets properly notified and you work with him to ensure that the necessary repayments are made to keep the loan performing.
Then we moved to the loan workout recovery stage where basically, the loans have been bad for some time: it was either it has entered the first 90 days, passed due or it was just at the brink of this stage. We engaged the customer, find out his plan for repaying and in some instances, we made a formal demand at this stage and once that did not achieve the desired results, we engaged legal practitioners to now do the first stage of demanding for repayment.
We moved beyond this stage to what we called the legal and the EFCC process. As you are aware, the EFCC has been very supportive of the banks in the loan recovery efforts. So at this stage, we pursued the EFCC process to a point where we achieved recovery and where that did not happen, we moved into legal recovery machinery full blast. And then the next stage was the debt collection/police process because basically, debtors are in different modes.
Beyond this stage, we went into turnaround and or receiver management stage, which is where basically nothing more can be done except taking over the company for the purpose of doing turnaround management.So for the first quarter of 2010, we wanted to turn the bank into profitability. And you can see from the result of the first quarter that profit-before-tax was N 3.5 billion for the Group and for the Bank, N2.5 billion. I daresay it could have been better but we had some of the spill over impact of last year, so if you look at our run rates now, it is much more better.
Having turned by March into profitability, the key focus going forward is what we call the ‘medium term renewal’ and sustainable growth plan – and these were the key things that we have been doing: we are focusing first on the large customers to sort out their issues. I have called on many of the customers but not as many as I would have loved to because there were so many things to take care of at the time but they are beginning to see that across the board, we are all accessible.
In order to be clear on how we are making progress, there are actually two ends we are focusing on in the short term – the corporate customers and the retail. The reasons why the individuals and SMEs are not in the immediate focus is that through the corporate, you will capture them because in the corporate, we say we will follow the value chain. So whoever is dealing with a particular large customer will try and follow that chain so as to capture them but we are not looking for new customers but to make the ones that are with us happy; yet, if any new customer strays in, we would capture them.But first of all, we would want the ones that are there to be better served and I am glad we are beginning to see some results. There is also the human resources management system which makes the life of the Human Resources Manager easier but more importantly, even persons in remote places can send information online. That way, you are closer to the centre and information that is captured on everybody is more correct. We have mentioned how we were attacking our bad loans but you also have to make sure the good ones are handled properly. The risk management enterprise framework is what everybody is using and we have gone far in implementing that. One of our discoveries is that a lot of the subsidiaries were as good as standing alone, there are about 15 subsidiaries that were not communicating with each other. So the bank was not even trying to save cost by using a good scale. You have a situation where those at the head office were buying computers cheaper than those in the subsidiaries.
Recently, some ex-staff protested at your head office and it was widely publicised. Have you resolved the issues?
There were two main issues that the protest has raised. Those involved in the protest were made up of a group of people who left the bank dating back to 2000, one of the major contentions was that they claim that the bank did not pay them the right rates – that they were under-paid.
And then the other key issue was the one that has to do with the share ownership scheme -productivity scheme which the bank introduced sometime ago. In those key issues, some interested parties have already gone to court and our position still remains that the issues are before the court and we will wait until the court resolves the issues.
There were other issues that were raised by the protesters, one has to do with the transfer of pensions contributions to their respective PFAs. You know the Pensions Reforms Act of 2004, brought about the issue of contributory pensions scheme and there were some who retired from January 2006 to date, which was when the bank commenced the transfer of remittance of contributions and we had actually communicated with the pensioners association to let their members know that those whose contributions have not been transferred should let us know their selected PFAs because we cannot transfer contributions until we know the PFAs of the individuals.
And before and after the protests, we again contacted the pensions association and we are of course remitting as we get the information. I think it is an ongoing dialogue. Some of those issues arose as a result of communication gap but even when we tell them it is in court, the areas we know there is communication gap, we tell them and those things are being sorted out but until the court process rules on the issues, you cannot do anything. We are not the ones that went to court, it is the staff that went to court.
There is a transition from macro to niche banking. Would you say this phase of banking is in the interest of Nigeria compared to what is happening in South Africa, Ghana and other parts of the world?
I think it is good because the capital requirement for a small bank is different from the capital requirement of a large bank; if you decide that you want to be a regional bank and not a national bank or you just want to operate in a particular area, you have the freedom to do so, there are various initiatives like what is called ‘shared services’, that is, you can go to a location and you will find ten banks occupying a premises (in a hall), the essence is to share the facilities in that building and it reduces the cost and you are able to pass that cost to the customer in reduced cost and you probably will get more business through that process than awaiting until you have your own big office.
The size of such banks in terms of the space they occupy is smaller because they do things more using technology. The import of this is that there will be a lot of room to have a lot more branches and until we start focussing on this, not the way we were doing it before, and maybe this regionalisation will assist because the regional guy will say I want to populate this area: he is different from the national and international guy, I think the public will benefit more from it. It will assist in more rapid development.
Currently, the deposit rate is about one to two per cent while the lending rate is about 22 per cent. As a banker and an entrepreneur, are you comfortable with this or is it good for the economy, given the fact that there’ll be no incentives for deposits and savings?
It is true that lending rates are not going down as fast but they have gone down a lot, before the reduction, you had loan rates ranging from may be 17 to 28 per cent depending on the type of customer. Today, you have loan rates ranging from eight and a half (8.5) and the highest I have seen so far is about 21 per cent.
So everything has moved down by about 7 – 8 per cent. People generally look at the high one but there will always be a difference. And the difference represents the risk involved. You find out that the ones you are not comfortable with or you find out that there are more risks, they are higher but it is true that it can go down even further, and it will.
Normally, what happens is that as you know that there is stability in the deposit rates at a lower rate, you move the lending rates down to match it, so it is an ongoing process. And sometimes, it is the customers that are not demanding for it. Sometimes, it requires you demanding for it, depending on the bank, some banks will go ahead and advice you that I have revised rates downward. Some will do it selectively but it is going down.
Is it a disincentive to savings?
I do not think savings rate has changed. Deposit rates have changed but we have all kept savings rate where it is while deposit rate is lower. It might be in the short run because you look at it and say if I am earning five per cent, let me just use the money for something else. But the truth is also that if we want to grow this economy, there must be a conducive environment for interest rates where anybody that is in business can make profit. Interest cost is a large component of it and what is more important is having real interest rates, you will see that inflation has also been coming down.
Banks are no longer lending to customers: what are you doing to attract more customers to your bank?
Let us start from a general perspective. Banks are not lending generally because first of all, banks need to be sure of the kind of risk they are taking. Over time we have seen that banks have to make a lot of provisions, a lot of write-offs because of the quality of loans they have written before. Because of that, banks have to be very careful in the kinds of loans they will be booking going forward and because of that, banks have to be very careful.
Most now say, let us restrain ourselves, let’s re-examine the kinds of loans we are booking but by and large, banks are still lending money. I do know that banks are still lending money but maybe they are careful or prudent in this manner and very organised.
Union Bank is lending, we never stopped lending but once bitten twice shy. We are still the leaders in agricultural lending, in fact, we have been increasing our agric loan, we are lending more: what we approved this year in small scale agric was N10 billion and that is increasing. Remember I said we are concentrating on two sectors – retail and the chain of the corporate. When it comes to corporate lending, we are careful about the sectors, the sectors that are over our limit and we are overstretched.
Part of the reasons why we landed where we found ourselves in Union Bank was that loans to oil trading businesses were very large and so when things changed course, we just had a huge amount of bad loans in our books.So, to that sector, we are very selective in lending now and it is because we want to reduce our risk factor and spread out more in these areas. To answer your question directly, we are lending and all banks are lending but they are much more careful in lending.
What is your view on the Sovereign Bonds recently introduced to oil and petroleum marketers and traders?
It is very good because part of their problems was getting the differential on time and sometimes it used to take more than six months and their business has very low margin. By introducing that process and sovereign bonds being paid on time, so far the feeling I get is that, if it is being paid on time, it will assist in improving that sector.
One of the things introduced by the Central Bank that is useful also even though we are supposed to comply over a certain period of time, is that for each sector, CBN has given us guidelines to say look, for any sector, do not lend by more than X to that sector. I think it is 20 or 25, if you do, you are over exposing yourself because if anything happens to that sector, you are in trouble.So, go and look at your portfolio, where you have more than that, go and find a way of reducing on that side and increasing on other side so that your risk management process is better balanced.
Several banks are going through that phase now where we are readjusting. Part of why the banks shied away from lending was also because of the inadequacy of capital because MPLs affected the banks’ ability to lend. So once the banks are freed of that burden, you will see lending activities increasing but we at Union Bank, as well as the other strong banks, have continued to lend.
In all the key sectors that support the economy, Union Bank has remained and continued to lend in that regard. In addition, we are also lending to individuals, civil servants, and very low income people and we are doing that across board.
If we can solve our power problem, cost will go down so much. If you look at the impact these mobile phones have made on us, and the employment it has created, power/electricity will create a lot more.
On our own part as a bank, we have recruited about 50 senior people in different places. We have recruited 700 graduates. We are about to finish a process of recruiting 150 accountants and the first batch would probably start their training by end of July. We try to recruit in batches of 150 and it is an ongoing process so that between when we started at end of last year and end of this year, we could say that we have recruited at least 1,000 staff in our whole process.In recruiting also, we are making sure those who are not doing things properly know that there is a price to pay it.
So far, up to 500 people have faced the disciplinary committee, even when we discovered that some staff have done things properly we also commend them, which was never the case. We have issued 21 commendation letters, this aspect of re-aligning is a major thrust.
Most people are what we call the back office people, they sit and do not attend to customers but we are changing it to more people in the front office and less in back office. The intention is to achieve 70 per cent front office and 30 per cent back office. You will be seeing more senior people attending to you and attempting to solve your problems and hopefully, through that way, we would be able to improve on the quality of output in the branches.
There is also the performance management software that we have started using and the essence is that everybody knows what is expected of him and you are able to see it at a glance how you are performing in terms of what is expected of you. What it does is that it introduces transparency.