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UBA's Staff Layoff; Understanding The Shifting Dynamics Of Banking's Future

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Monday, January 20, 2020 / 09.10PM / Managing Editor, Teslim Shitta-Bey, with Adesola Borokinni, Economist, Proshare research Header Image Credit: @NigeriaGov

Banks in Nigeria have started to scale back their operating expenses as they begin to "right-size" their staffing needs to remain competitive and protect business margins. A clear example of the emerging shift in industry strategy occurred in January 2020 when the United Bank of Africa (UBA), one of Nigeria's oldest top-tier banks, disengaged hundreds of its staff. Investigations by Proshare indicate that the bank carried out the exercise to lean into a more competitive workforce demography and streamline salary compensation along with broad industry standards.

Apart from reducing the average age of its workers, the bank also needed to change the internal compensation arrangements. Unlike other banks that did not have a service scale that separately recognized graduates from institutions of technology, UBA had over the years maintained such a scale and the bank needed to correct this anomaly against competitive demand for newer employees. In this regard, the bank also squeezed its graduate trainee programme from a two (2) year period to a six (6) month Executive graduate programme. The implication would be to fast track the movement of graduates that can pass through a more rigorous six months of financial training Bootcamp.

The recent UBA staff layoff represents a shift in the strategic deployment of human resources industry-wide. In 2019 Ecobank Nigeria Plc equally laid off staff that were considered not "fit-for-purpose" and were replaced by younger staff that had passed through their rigorous training school programme. The disengagement led to spirited protests by the disengaged staff and even saw the labour union get involved, but the reality of ensuring corporate sustainability has led local banks to adopt human capital strategies that build with an eye on a forward-looking generation of customers. Against this background, further layoffs across the banking system may occur in 2020 as more banks work out the right staff-type and business strategy that protects competitiveness.

The battle to retain market share has become one of the burnings of bridges, where there is no retreat and no surrender. Keeping customers satisfied and keying into the new service journey experience of users of bank services will separate the dying from the living; it is that simple and dire. The managing director of GT Bank, Mr. Segun Agbaje, in a recent interview emphasized the new shape of competition coming from unlikely sources such as Telcos, Fast-Moving Consumer Goods (FMCGs) digital platforms and sports betting companies. The competitive knife may strike from the least expected quarters.

Deposit money institutions (DMBs) have come to realize that the customer experience journeys have started changing and that to meet emerging expectations, a new service delivery template was evolving that required fresh thinking and, more importantly, new technology. The combination of changes in the requirements of customer service delivery and customer demography has led to slimmer and more flexible corporate structures. The once vilified term, "Rightsizing," has become a respectable corporate expression.

Indeed, immediately after New Year greetings and Christmas festivities between December 25^th, 2019 and January 1^st, 2020, the management of UBA sent letters to affected staff that their services in the bank were no longer required. In other words, their appointments had come to an abrupt end. The measure sliced-off a chunky size of workers from across different departments and cadre. A top manager who requested for anonymity noted that "the action was painful as some good friends had to go, but the bank had to do this, the productivity ratios needed to improve from a strategic perspective; improved technology naturally required a reinvention of the business architecture and that in turn meant the streamlining of financial operations."

For example, with the introduction of the bank's artificial intelligence cypher, "Leo," its ability to respond quickly and efficiently to customer complaints and enquiries has grown exponentially; therefore, the jobs of traditional customer relationship officers (CROs) had to be reappraised and streamlined. Besides, the automation of many back-office functions meant that the bank's need for particular types of skills would necessitate reassessment and actioning. According to one insider, "it was a matter business good sense over social empathy. A bank is a for-profit organization and is responsible to equity owners, and for these sets of stakeholders, emotional credit does not count for much."

A Global Race To Scaling Banking Operations

Bank lay-offs were a prominent feature of 2019 as banks initiated major human capital streamlining as they reworked their business models and operational activities. For example, Deutsche Bank of Germany announced that it would lay off 18,000 of its staff mostly in the United Kingdom by 2022 as it prepares for the consequences of a British exit from the European Union (EU) in 2020. Deutsche said the layoffs would reduce annual costs by 6bn Euros until 2022. The bank would also scrap its global equities business and wind down investment banking activities. In May, the bank's Chief Executive Officer, Christian Sewing, reassured investors at the bank's annual general meeting (AGM) that management was "prepared for tough cutbacks" and that he would "speed up the transformation" by focusing on "profitable and growing areas."

The remodelling and rethinking of the banking business is a global phenomenon as the changing parts of international business, and competition put pressure on margins, market share and human resources. The previous year saw a list of top-rated global bank brands shedding staff (see table 1 below).

Views From "The Inside Man"

However, the UBA insider noted that to take care of the inconvenience and socioeconomic displacement caused by a job loss at the beginning of the year, "we had to take immediate proactive steps to soften the adverse impact of the loss of income. We paid between eight- and twelve-months salaries in advance to provide workers with money to remodel and refocus their finances". According to him, "we believe that most of the disengaged workers can become entrepreneurs and create successful businesses that the bank would be very willing to support subject to the normal risk asset evaluation criteria and credit appraisal procedures. Indeed, some of the laid-off staff are already serving as consultants to the bank in specialized areas of the business."

The officer noted that UBA had one of the largest workforces in the banking industry and that the labour size was no longer consistent with the bank's overall business strategy, "we had a staff strength of 13,000 people which placed us second only to FBNH with a staff strength of about 15,000 in 2018. Based on numbers, we were carrying a staff burden that was surplus to requirements in the light of a technology-driven business canvass".

It was also subtly inferred that demography was an important sub-theme, "the bank has increasingly built credibility and attractiveness for a younger population of customers, and the interface between the bank and its service-users in generation Z and the Millennials has deepened and grown," said the manager. UBA appears to have decided to change the strategic nature of its intervention in financial service delivery to create a pocket of contestable market space where it is competitively advantaged. The bank appears to be deliberately changing its customer profile and its customer experience journey by way of advanced technology and a fresher and younger personal interface (see illustration 1 below)

Illustration 1 The New Approach To Customer Experience Journey

The changing demography of bank users has become a theme that most deposit money banks (DMBs) have had to address head-on over the last five years. The younger age and more complex expectations of the new average bank customer have required revised strategies and new marketing and service delivery templates to meet the vaulting expectations, flexible loyalty, and technology-savvy idiosyncrasies of these new bank patrons.

Method Over Purpose

For those irked by UBA's 2020 staff layoffs, part of the problem was with the method of relieving staff of their jobs than the reason for asking staff to go. A few people interviewed by Proshare insisted that the timing was insensitive and that the process was cold and impersonal. There was also the allegation that most of the staff asked to leave the institution where holders of the Higher National Diploma (HND). The accusation about the discriminatory laying off of HND holders was not verified as no document is available (at the moment) establishing such criteria. Past HND employees of the bank, however, said that they were paid lower than university graduates despite having stayed longer on the job. The matter appears tied to UBA having a cadre of staff that had no equivalence in other Tier 1 competitors. The lack of an equivalent UBA-scale in other banks resulted in a "UBA trap" where several HND holders found it difficult to get jobs in other banks that could not reconcile their entry scale with prevailing administrative structures in the new bank. One HND respondent noted that "it was difficult to leave UBA because other banks were not clear about the equivalent organizational scale or level. In other words, we found that if we wanted to leave the bank, we were damned and if we did not want to leave, we were equally in jeopardy. We represented the original meaning of catch-22", the former bank staffer said.

On the less bitter side, the bank paid all disengaged staff their entitlements and equally allowed to provide other services to the bank as external consultants or contractors.

A look At The Numbers

UBA's financials between 2014 and 2018 show that the bank has done well in squeezing gross and pre-tax earnings from its staffers. The bank's pre-tax earnings per staff rose from N4.43m per staff in 2014 to N5.37m per staff in 2015. In 2016 (at the onset of the first local economic recession in twenty years) earnings per staff rose by +37.06% to N7.36m and grew even further in 2017 to N8.83m or what amounted to additional growth of +19.97%. By 2018, however, pre-tax earnings per staff started to dip, falling by -6.34% to N8.27m (see chart 1 below).

Chart 1 UBA Profit per Staff 2014-2018

Source: UBA Audited Financial Statements 2014-2018

The Gross Earnings Play

In terms of gross earnings of the bank per staff, the pattern was similar to that of the pattern established with the bank's pre-tax profits. Gross earning per staff was N22.84m in 2014 and N24.70m in 2015. In 2016 the bank saw gross earnings per staff rise to N31.17m and grew by a further +24.29% to N38.74m in 2018 before slumping to N38.27m in 2018. On a compound annual basis, gross earnings per staff of UBA has risen by +13.77% (see chart 2 below).

Chart 2 UBA Gross Earnings per Staff 2014-2018

Source: UBA Audited Financial Statements 2014-2018

Bad Debts Per Staff- Sharing The Pain

Bad debts are still a challenge across banks, but most of them have a firm handle on the problem and are tackling them sustainably. An indication of the poor loan asset quality of banks is the size of their impairment charges. With the new International Financial Reporting Standards Rule 9 (IFRS9) requiring banks to report impairments on an anticipatory bad loans' basis (as against the past practice of laying impairment charges on loans that had already gone bad), the impairment charge on a bank's profit and loss account becomes a strong index of a banks' loan troubles.

The impairment charge to the bank staff ratio provides some insight into the loan management efficiency of a bank. If the ratio rises, it indicates that on a per staff basis the bank has a worsening portfolio of loan assets and since a large chunk of revenue (by way of interest income) comes from loans the higher this ratio, the greater the expectation that a bank will let staff go to reduce its operating expense-to-income ratio.

For UBA, the ratio has declined over the years (making it difficult to justify cutting down on staff strength on this basis) and underscores the loan recovery and high credit compliance standards of the bank (see chart 3 below).

Impairments per staff rose from N2.48m in 2014 to N21.86m in 2015 (a time analysts would have expected a review of staffing strength) and then on to N24.44m in 2016. The years 2015 and 2016 were the "eyes" of Nigeria's first major economic recession in two decades. The bank's worsening loan asset quality reflected the dwindling fortunes of the economy; indeed, in the two years, gross domestic product (GDP) growth rose to +2.65% in 2015 (as against +6.31% in 2014) and fell to -1.62% in 2016.

By 2017 UBA's impairment charges-to-staff ratio had started descending, falling to N17.20m in 2017 and N5.78m in 2018 (see chart 3 below). The improvement in staff to impairment ratio would normally suggest restraint in the bank's decision on staff disengagement. The January 2020 exercise was, therefore, difficult to explain in terms of operating performance per staff.

Chart 3 UBA Impairment Charges per Staff 2014-2018

Source: UBA Audited Financial Statements 2014-2018

The best explanation for UBA's decision to reduce staff numbers include, but may not be limited to, the following:

The need to change the age demographics of the bank (the bank recruited 4,000 younger people in December 2019)
The increasing contribution of Artificial Intelligence (AI) to customer service delivery (including the creation of a customer fulfilment centre (CFC))
The strategic desire to increase the bank's profit before tax per staff metric (to sustain the momentum of the profit per staff numbers posted in the three years before 2017)
The desire to reduce operating costs (this is difficult to ascertain from the outside as the bank promoted 5,000 staff and increased staff salaries by +170% in January 2020)
Resetting the "S-Curve" of the corporate growth cycle (most large Nigerian DMBs as of December 2019 had entered the 'maturity' phases of their business life cycles and faced the threat of organic decline). To avoid secular business weakening, a few banks have opted to redefine their purpose for corporate existence while crafting new strategies to breathe 'life' into ageing business models characterized by high operating free cash flows, declining earnings growth and shrinking market share.

Loans and Advances per staff-Growing The Business With Numbers

The higher the loans and advances of a bank per staff, the higher the income per staff metrics. UBA's loans to staff ratio fell steadily between 2015 and 2018. The bank's Loan-per staff numbers fell from N332.83m in 2015 to N225.32 in 2016 and N228.82m in 2017. The number dropped further to N111.97m in 2018 (see chart 4 below).

The descending loan per staff figures indicate a squeeze on underlying profitability per staff and could partly explain why the bank had to tinker with its staff strength and demography.

Chart 4 UBA Loans and Advances per Staff 2014-2018

Source: UBA Audited Financial Statements 2014-2018

The Industry Detour-Keeping Competition At Bay, hopefully

The banking industry has broadly squared up to operating challenges caused by high domestic interest rates, slow GDP growth and growing operating expenses. The combination of these factors has put downward pressure on business profitability and challenged corporate sustainability.

Relative Gross Earnings per Staff

In the last five years, UBA has had one of the lowest gross earnings per staff numbers for the sector compared to the likes of FBNH, GT Bank, and Access Bank. For example, in 2014, UBA's metrics were N22.84m against FBNH's N46.04m, Access Bank's N70.02m and GT Banks N83.39m. In 2018 the relative values were not much different; UBA's value was N38.28m, FBNH was N38.80m, Access Bank N127.65m and GT Bank N128.08m (see chart 5 below).

Chart 5 UBA Gross Earnings per Staff Vs. Tier 1 Banks 2014-2018

Source: Various Financial Statements of Tier 1 Banks 2014-2018

Loans and Advances per Staff And Competition

Compared to its front-line competitors, UBA's loans and advances grew modestly between 2014 and 2018 and were relatively lower despite its larger workforce. In 2018 UBA had a labour size of 15,000, while GT Bank had a labour size of 3,389, partly explaining GT Bank superior performance ratios per worker (see chart 6 below).

Chart 6 UBA Loans and Advances per Staff vs Tier 1 Competition 2014-2018

Source: Various Financial Statements of Tier 1 Banks 2014-2018

Impairments and the pleasant side of per staff numbers

UBA has had a decent run with its loan impairment numbers on an industry basis. The bank has had one of the lowest impairments to staff figures consistently over the last five (5) years, despite employing one of the largest numbers of bankers in the sector.

FBNH seems to have had the highest ratio of impairments to staff despite its large workforce (which should normally have dragged the metric down). Taking a time series perspective, Nigeria's first-tier banks, including FBNH, have seen an improvement (decline) in the metrics, thereby restoring confidence in the quality of loan assets sitting on their books (see chart 7 below).

Chart 7 UBA Impairments per Staff vs Tier 1 Competition 2014-2018

Source: Various Financial Statements of Tier 1 Banks 2014-2018

The UBA SWOT

UBA has done a decent job growing its business organically. The bank has grown across the African continent smartly and with an eye on efficiency and profitability. The bank's African foray has been largely successful, and its AI application has improved service delivery quality that had, in the past, been a flaw of the bank. The bank's gross earnings and profit numbers have been going up, especially in 2019. The bank has also seen its cost to income numbers fall from 62.55% in 9 months of 2018 to 60.80% in 9 months of 2019.

However, in the last year 2019, the bank saw sluggish customer deposit and risk asset growth, which potentially could hurt its bottom line as interest income could fall and deposit costs rise (this would have to be confirmed when the bank releases its audited financial statements for 2019). The downward push on interest income and upward pull of deposit costs would cause the bank trip over slower-growing operating income (see illustration 2 below for a UBA SWOT analysis).

Illustration 2 UBA's 9 Months 2019 SWOT Analysis

Market Talk

Despite the rightsizing of its workforce, the market has kept an optimistic view of the bank and its operating performance. The bank's share price has risen from N7.10 at the end of December 2019 to N8.25 on January 15, 2020, but only after peaking to N9.00 on January 9, 2020, and N8.90 on January 16, 2020. On January 17, 2020, the stock's price closed at N8.80.

Chart 8 UBA Share Price Movement Dec 31, 2019

Source: Nigeria Stock Exchange (NSE)

Investors seem comfortable with UBA's recent restructuring and have nudged the bank's market price up as they expect the redesigning of its business model to improve earnings, operational efficiency and effectiveness and domestic market share. The full impact of the recent measures at UBA may not be evident in 2019, but investors would be keen on marking the effects on its 2020-year end financials.

In his book, The Living Company, about companies that have defied agedness, Arie De Gues, noted that "all of these brain-rich companies cannot be managed in the old asset-oriented style. Their managers have had to shift their priorities, from running companies to optimize capital to running companies to optimize people. In these companies, people are the carriers of knowledge and, therefore, the source of competitive advantage". Given De Geus's insights after 38 years in planning and strategy at Royal Dutch/Shell, maybe UBA in shuffling its staff mix is onto something after all.

Chart 9 UBA's One Year Share Price Movement (Jan 2019-Jan. 2020)