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Phew! What a year! Given the polycrisis (a new term in the analyst's lingo) of 2022, Proshare spent the year intervening in off-the-beaten-road issues that had a major but subtle impact on the country’s corporate and public fortunes. The analysts decided that the not-so-obvious but massively important issues shaping corporate growth and development as well as the public sector wallet were worth examing. The investigations threw up a piping hot stew of issues that required urgent resolution as these pains unresolved would provide no gains. The researchers decided that the various challenges under-reported or unobserved were problems that should not go to waste.
The reports below represent original Proshare reports for the year 2022 that were evidence-based subject matter interventions designed to stimulate conversation and trigger private and public sector action. The reports were granular, gripping and unashamedly gritty.
1. Between NDIC and AMCON: Recalibrating Regulatory Roadmaps
While banking regulators were bothered about monetary policy and price stability (reflected in cash reserve requirement (CRR) debits (at an effective rate of roughly 60% of deposits)), they also appeared to have smothered banking sector growth in 2022. This report noted that the Nigerian Deposit Insurance Corporation (NDIC) charged banks deposit premiums (based on a differential rate system amounting typically to between 0.3 and 0.5% of insurable deposits), at the same time as the Asset Management Company of Nigeria (AMCON), an asset resolution company, charged banks 0.5% of their assets that settles in a loan asset resolution sinking fund.
In this report sponsored and supported by the Bank Directors Association of Nigeria (BDAN) in partnership with Proshare, it was noted that these two charges serve the same purpose and amounted to double charging. For this reason, local banks have created less credit, recorded lower earnings, and have fallen short of their profit potential. Nigerian banks trade below their book value due chiefly to their low returns on Assets. The researchers found that both charges were equivalent of 17.25% of operating expenses, 36.4% of Profit After Tax, and almost one-half of personnel expenses and raised their effective tax rate from 30% to 58%. The two charges deprived depositors of up to N390bn in additional interest payment (see illustration 1 below).
Illustration 1
Building on digital advances, global capital markets are navigating ways to improve investor journey experience using digital blockchains through distributed ledger technologies or DLTs. A distributed digital ledger is a decentralised set of servers that handle different aspects of digital databases from separate locations to enable faster processing and more precise analytical interpretation of the data flow.
In this report, Proshare analysts noted that DLT will be a significant breakthrough technology in helping African investors improve their investment returns by trading various assets or debts across broader continental markets. Online, equity and debt trading would equally benefit from the adoption of DLT. Asset Brokers would have undeletable mirror images of booked transactions on multiple nodes or servers, ensuring that each transaction has a permanent digital footprint. In a DLT world, a few ethically-challenged practices of trade brokers would have been inconceivable. If DLT had been used in the payment and settlement systems of the 1990s and mid-2020s, a few gory tales of states losing money because of broker misapplication of funds would not have occurred (see illustration 2 below).
Illustration 2
3. CEO Remuneration 2022 Report: CEOs in a Post-Covid Era - What Matters Most
The CEO's job has recently become more complex, with headwinds pressing in from different fronts. However, while old challenges fester and remain essential, the new challenges of retaining talent, adopting new technology, and the rising cost of worker giftedness become critical. Further, high labour mobility, new work dynamics (virtual vs physical), and changing consumer fulfilment requirements make the CEO's job as pliable as a calisthenic guru; flexibility and agility become essential talents.
In this report, it was noted that the top ten highest-paid CEOs were dominated by executives of companies in the Industrial sector, the Banking sector, and the Energy sector showing the dominance of traditional sectors. While MTN and Airtel represent the Tech sector, this marks a departure from the trend in Europe and US. Of the top ten remunerated CEOs, the most efficient CEOs were those of Zenith Bank, MTN, and Dangote. For each Naira received as remuneration, the CEO of Zenith Bank generated Pre-tax Earnings of N3112, and the CEO of MTN generated Pre-tax Earnings of N1186.67. The CEO of Dangote generated Pre-tax Earnings of N1013, while the CEO of Seplat generated N149.53, Julius Berger's CEO generated N34.67, and Lafarge's CEO N215 (see illustration 3 below).
Illustration 3
4. Nigerian Capital Market Report Q3 2022
This report reviewed the performance of the Nigerian Capital Market, covering equity and debt markets, in the third quarter of 2022. The Nigerian Equities Market closed the month of July 2022 in the red to open Q3 2022 on a bearish note as market sentiment remained negative against the -2.21% decline recorded in June 2022. The NGX ASI dipped further by -1.06% in August 2022, while the benchmark indicator declined by -1.63% in September 2022. Quarter-on-Quarter, the NGX ASI declined by -5.39% in Q3 2022 against +6.10% growth in Q3 2021.
Table 1
Proshare analysts noted that the currently low market capitalisation to GDP ratio is a reflection that the Nigerian capital market is not representative of the Nigerian economy.
5. The Anatomy of Crude Oil Theft in Nigeria: Understanding the Graft, Impact, and Implication
The prominent role of non-state actors in crude oil market disruption will not end by the finer points of financial economics alone. It would require the political firmness and commitment of the federal government to take on the illegal local oil cartels. Unfortunately, this outcome is farfetched. Oil pirates and their political associates are pod partners. Rich oil vandals support the funding of election campaigns of politicians who would be remiss in supporting any decisive government action that would adversely affect the interests of their electoral piggy banks. The complex relationship between politicians, illegal oil bunkers, and local oil communities makes a firm resolution of the problem more improbable than impossible.
With the objective of contributing and elevating the national discourse on addressing the fiscal conundrum occasioned by crude oil theft, Proshare presents a detail report on the Anatomy of crude oil theft in Nigeria. In this report, Proshare analysts noted that curbing oil theft would require political will, which is in short supply. With political will, the country would have seen geospatial technology, high-impact drones, and sweeping ground forces combine to create a canopy of forceful correction. The orchestrated interplay between technology and troops would have translated into higher official oil output, higher fiscal earnings, and more considerable private-sector investment. The elite conspiracy to allow oil theft to breed and flourish reflects the integrity gap in governance at all levels (see illustration 4 below).
Illustration 4
6. Rethinking the Market Relevance of the 10-Year Bank CEO Tenure Rule
The executive succession pattern in Nigerian banks has established that pioneer chief executives or co-promoters of banks transmute into either the Chairperson of the financial institution (in the absence of a Holdco structure) or move upstairs as chief executives of their Holding companies. What is essential is that in both scenarios, the circumference of effective managerial control remains with the banks' senior (or pioneer) executives. At the same time, daily operational supervision is ceded to a carefully chosen team of acolytes. Does this matter? Certainly, it does.
This report disclosed that the problem is not with the continued influence of pioneer bank executives over their companies but with the continued retention of banking governance laws with minimal, if any, usefulness (see table below).
Table 2
7. Nigeria’s Banking Industry: The Case for Redefining Tier 1 Banks
Nigeria's Central Bank (CBN) does not openly classify domestic banks into tier 1 and tier 11. Nevertheless, there is a broadly accepted notion of banks' systemic importance, riskiness, and rating. Prospective Investors in local Nigerian banks use this perception of tier 1 banks previously best reflected by the acronym FUGAZE (FBNH, UBA, Access Holdings, Zenith Bank, and ETI) to make critical investment decisions. In this report, the Proshare research and review of the basis of the use of FUGAZE as tier 1 banks question the validity of the acronym as a shorthand for Nigeria's top tier banks.
This Proshare report argued for adopting a Bank Strength Index (PBSI), which provides an objective basis for the classification of banks and enables market stakeholders to understand the fundamentals of tier 1 and 2 descriptions for local Nigerian deposit money banks (DMBs). The Proshare Index goes beyond simple operational numbers and attempts to use proxies for the quality of management and board oversight. Proshare's research suggests the need for a broad industry consensus which would include the CBN, the banks, the Chartered Institute of Bankers (CIBN), the Bank Directors Association of Nigeria (BDAN), the Nigerian Deposit Insurance Corporation (NDIC), and the Asset Management Company of Nigeria (AMCON). The consensus would agree on the criteria for classifying banks into tiers 1 and 2 and establish the framework for the periodic review of the criteria using Proshare's research as a baseline (see table 3 below).
Table 3
End Note
The year 2022 was a mélange of activities that tugged at the stability of the country. Proshare took on the big issues that did not appear or were mildly reviewed by the popular media. The emphasis was to provide context, steer the conversation and promote private and public sector action. For example, the Oil Theft report highlighted the challenges of the sector (which worsened after the report was written and published, but received greater government attention).
Nigeria’s oil output has gone back up from less than one million barrels per day in October 2022 to roughly 1.6m barrels per day with condensate production. The rise in output by December was a testimony to the more forceful options adopted by the government to reduce crude oil vandalism and theft. The rise in crude oil sales should improve foreign revenue flows and lead to a gradual improvement in the country’s US$37bn foreign reserves.
The private sector also saw off-the-main-track issues addressed. For example, the Proshare research team took a look at the decade-old tier-1 bank classification in Nigeria, initially defined by premier Investment outfit, Afrinvest, in 2013. The team decided that as good as the classification was at the time, it had become outmoded. Proshare’s new classification is based on a basket of indices that capture liquidity, riskiness, and management quality. The Proshare Bank Strength Index (PBSI), developed from the analysis will be upgraded in 2023 with refinements for not only asset quality but also asset size. The refinements would be expected to result in a better reclassification of banks into tier 1 and tier 2 institutions. Banks with negative shareholders funds would be classified as tier 3.
With economies tightening and an outlook of a recession looming over Europe, the role of the chief executive officer (CEO) becomes increasingly important. CEOs will need to justify their pay cheques and perks. In Nigeria, things are no different. C-suite executives will be put under greater pressure to improve corporate bottom lines and returns on investor equity.
If 2022 was hard, 2023 will be harsh. The slowing down of the global economy and business activities will require CEOs to pull up their socks and think through the service value propositions they offer to sustain customers' buy interest. The customer pain points and resolution would be central to corporate sustainability in 2023 (see illustration 5 below).
Illustration 5
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