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Agusto & Co. Assigns an “A-” Rating to Linkage Assurance Plc

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Nigeria’s first credit Rating Agency and a pan African leader in credit reports, Agusto & Co. limited whose strong credibility presence and ratings are globally accepted in Nigeria and across the globe has just assigned an ‘A-‘ rating to Linkage Assurance Plc.

The rating assigned to Linkage Assurance Plc (“Linkage” or “the Insurer”) is reflective of an insurer with good financial condition and strong capacity to meet its obligations as and when they fall due.

The rating is underpinned by good capitalisation, good investment return and good liquidity profile. Linkage’s investment in Stanbic IBTC Pensions Limited (the largest pension fund administrator) which accounted for 50% of its investment portfolio has supported the Insurer’s performance and liquidity position.

The rating is however constrained by elevated underwriting expenses, sub-par risk management, concentration in the investment portfolio & investment income, sub-par underwriting performance and the fragile state of the economy.

As at 31 December 2017, Linkage’s shareholders’ funds stood at ₦20 billion, significantly above the regulatory minimum for non-life insurers. Retained earnings also swung to positive territory on account of high profit retention rate. This should pave the way for dividend payment and strengthen relationship with shareholders.

The Insurer prioritises liquid assets in its investment management in a bid to maintain strong ability to meet obligations as and when they fall due. As a result, money market securities which are highly liquid represented about 45.5% of the investment portfolio as at 31 December 2017.

As at the same date, liquid assets accounted for 39.5% of total assets and covered outstanding claims 9.6 times. We consider the Insurer’s liquidity to be adequate for current business risks.

During the financial year ended 31 December 2017, Linkage’s performance in the core insurance business was constrained by high underwriting expenses.

As a result, underwriting profit margin plummeted to 0.1% from 14% in the prior year. The Insurer’s investment income which was bolstered by dividend from Stanbic IBTC Pensions Limited (accrued over two years), augmented the impact of the high underwriting expenses on profitability.

In FY 2017, Linkage recorded post-tax return on average assets (ROA) and post-tax return on average equity (ROE) of 13.3% and 15.8% respectively. While we consider the Insurer’s profitability ratios to be good by industry standard, we are concerned about the vulnerability of income to dividend from an investee company. In the same vein, weak underwriting income remains a rating negative.

The Nigerian Insurance industry has contended with multiple challenges which has been aggravated by the lingering macroeconomic slowdown. As a result, the insurance penetration ratio is below 0.5% and premium per capita is one of the lowest in Africa, according to the Agusto & Co 2018 insurance Industry report.

In spite of growing confidence in insurance products, the appetite of Nigerians for insurance remains abysmal. Nonetheless, potentials for the industry remain strong. Nigeria’s vast economy and population (the largest in Africa) if harnessed could support the insurance industry.

Although the tier- based capitalisation policy has been cancelled, the capital raising exercise by some insurers will increase risk underwriting capacity and spur initiatives to deepen insurance in Nigeria.

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E-Financial

NIA Seeks Tougher Sanctions for Insurance Defaulters

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Nigerian Insurance Association (NIA) has canvassed for a complete enforcement of penalties for insurance defaulters, especially, those who violate the Builders’ Liability Insurance and the Occupiers’ Liability Insurance.

 

Mrs Yetunde Ilori, director-general of NIA, said that penalising defaulters who subscribe to the two classes of insurances will send a strong warning to stakeholders in the construction sector.

 

She was while reacting to the buildings that collapsed at Ita-Faaji on Lagos Island last Wednesday, March 13 and in Ibadan, Oyo-state, on Friday, March 15 respectively.

 

NAN reported that several people were confirmed dead in the Lagos building collapse that accommodated a nursery and primary school.

 

However, no casualties were recorded in the Ibadan building collapse.

 

The D-G also said that the action would enhance sanity in the sector as the contractors would force to abide by quality

 

 

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E-Financial

UBA Earnings Hits N494Bn, Records Profit of N106.8Bn

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United Bank for Africa Plc, Pan-African financial institution, has announced its Audited 2018 Financial Results with impressive growths achieved across major financial lines.

 

According to the 2018 financials filed at the Nigerian Stock Exchange on Tuesday, the Africa’s global bank’s gross earnings grew by 7.0 percent to N494.0 billion, compared to N461.6 billion recorded in the corresponding period of 2017.

 

The Bank’s total assets also grew significantly by 19.7 percent to an unprecedented N4.9 trillion for the year under review.

 

These results, according to financial analysts largely demonstrates the benefits of the Group’s Pan-African footprints with continued growth in market share in key countries of operation across Africa.

 

The contributions of ex-Nigeria subsidiaries at 40 percent, again confirms the strong footing of the Group’s franchise in Africa.

 

Despite the challenging business environments in Nigeria and across key markets in Africa, the Bank’s Profit Before Tax was quite impressive at N106.8 billion, a 2.4 percent growth, compared to N104.2 billion in 2017 financial year.

 

In same vein, the Profit After Tax rose by 1.4 percent to N78.6 billion, compared to N77.5 billion recorded in 2017.

 

Due to lower foreign exchange trading income, Operating Expenses grew by 4.1 percent to N197.3 billion, compared to N189.7 billion in 2017

 

Reflecting the modest appetite of the Bank in the year under review as well as impact of IFRS 9 implementation, net loans recorded a prudent 3.9 percent growth to N1.72 trillion while Customer Deposits increased by a remarkable 22.5 percent to N3.3 trillion, compared to N2.7 trillion recorded in the corresponding period of 2017, reflecting increased customer confidence and enhanced service channels.

 

Furthermore, Shareholders’ Funds decreased marginally by 4.8 percent to N502.6 billion, reflecting the impact of International Financial Reporting Standards 9 (IFRS 9) implementation.

Kennedy Uzoka

Commenting on the result, Kennedy Uzoka, group managing director/CEO, noted that the year 2018 was important for the Group, as it gained further market share in many countries of operation.

 

More so, the CEO was excited at strategic achievements made in the year, including the start of wholesale banking operations in London, as it seeks to leverage the Group’s unique network across Africa. UBA also opened its 20th African operation.

 

“Defying the relatively weak economic growth in Africa, earnings were positive and we grew our balance sheet by 20 percent, driven by the 23 percent growth in our deposit funding. In a period of economic uncertainty, we have focused on retail deposit mobilization, with exciting results. We recorded a 48 percent year-on-year growth in retail deposits and improved our CASA ratio to 77 percent, optimizing our funding mix, which will enhance our net interest margin (NIM), over the medium term,” Uzoka said.

 

Uzoka remained confident that the Bank’s performance would be even stronger in the years ahead and shareholders would enjoy even greater dividends, as the Group is well positioned to take advantage of imminent fiscal reforms across many economies in Africa, a positive outlook which should stimulate new opportunities in infrastructure, manufacturing, agriculture and resource sectors.

 

He continued: “Our operations in the United Kingdom now offer end-to-end trade, treasury, structured finance, wholesale deposit taking and ancillary services. With this development, we are better positioned to fulfill our aspiration of deepening trade and capital flows between Europe and Africa. We are also pleased with the market acceptance of our new operation in Mali”.

 

“Having said this, I am excited by the profitability of our ex-Nigeria subsidiaries, which now contributes an impressive 40 percent earnings to the Group. At the moment, our Nigerian business is benefiting from our product and operational focus, gaining market share – most importantly, the increasing penetration of our retail offerings is reassuring, as this fundamental progress aligns with our strategy of focusing on sustainable growth”.

 

“With great optimism, we look forward to a more rewarding 2019 for our shareholders, as we further sweat our resources and optimize productivity towards delivering superior returns,” he concluded.

 

Also speaking on the performance, Ugo Nwaghodoh, group CFO, said that the improving mix of the Bank’s funding base and asset pricing, reinforce a positive outlook on Net Interest Margin(NIM) and broader balance sheet efficiency.

 

“Whilst considerable investment in people, digital transformation and channel enhancement masked cost efficiency gains within the year, with cost-to-income ratio at 64 percent, we are convinced that our diligent execution of new initiatives will ensure the reduction of Cost to Income Ratio(CIR) towards our medium-term target. Our balance sheet is being positioned to take full advantage of market swings and our strong 25 percent capital adequacy ratio provides headroom for growth, even under a BASEL III scenario. As it stands, UBA has started the year on a good note and should sustain the momentum, as we work towards improving our Return on Average Equity (RoAE),” Nwaghodoh said.

 

United Bank for Africa Plc is a leading pan-African financial services group, operating in 20 African countries, as well as the United Kingdom, the United States of America and with presence in France.

 

UBA was incorporated in Nigeria as a limited liability company after taking over the assets of the British and French Bank Limited who had been operating in Nigeria since 1949.

 

The United Bank for Africa merged with Standard Trust Bank in 2005 and from a single country operation founded in 1949 in Nigeria – Africa’s largest economy – UBA has become one of the leading providers of banking and other financial services on the African continent.

 

The Bank which was awarded the Best Digital Bank in Africa by the Euromoney awards in 2018, provides services to over 17 million customers globally, through one of the most diverse service channels in sub-Saharan Africa, with over 1,000 branches and customer touch points and robust online and mobile banking platforms.

 

The shares of UBA are publicly traded on the Nigerian Stock Exchange and the Bank has a well-diversified shareholder base, which includes foreign and local institutional investors, as well as individual shareholders.

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Payment Service Banks in Nigeria, Lessons from the Past

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By Emmanuel   Okoegwale

Ten years ago, there was great optimism that the licensing of mobile money providers will usher in a new era in the drive for greater financial inclusion and fill the vacuum that the banks failed to fill for many years.

Ten Years after, the country has recorded some decent incremental improvements in the financial services sector through the mobile money operators but not the expected transformational leap, we had hope for. On the march again, the country has created a new category of financial services providers to be called, Payment service Banks.

The CBN in furtherance of its mandate to deepen financial inclusion in Nigeria is actively seeking to license Payment Service Banks in Nigeria which had been similarly deployed in other jurisdictions such as India.

Both countries are similar in areas of regulation that excluded mobile networks from mobile money and Banks that are cannot fill in the gaps, in serving the hard to reach places.

What’s difference between PSB and mobilemoney?

Permissible services for both in Nigeria are similar with few advantages for the PSB such as ability to mobilize deposits from individuals and small businesses, issue debit and pre-paid cards, invest in FGN bonds while both cannot give out loans, provide insurance underwriting and trade on foreign exchange market. No cap was mentioned in the framework on deposits mobilization allowed for PSBs.

Many reasons had been raised for the slow uptake of mobile money in Nigeria from low capitalized operations, fragmented agency network, exclusion of mobile network operators and some underlying bottlenecks like extensive delays in granting mass access channels like USSD and Sim tool kit channels to mobile money operators, were major hindrances to early take off and adoption.

The operational levers to drive a successful deployment are network effects, lack of financial access points in many rural areas, available mass market access channels, heavy marketing, channel leverage and incentives to drive last mile operations.

These are domain areas of mobile networks and these are some of the levers that mobile money operators lacked in India and Nigeria because they are non-Telcos however some of them, still managed to keep their heads, above the waters.

The Indian story so far

In 2015, 11 organizations were approved to commence payment service Bank services in India however three dropped out even before launch, with one of them citing, increased competition and time to recover profit on investments.

Some of the operators had been clamped by the regulator, due to inappropriate Know-you-customer implementation and some of the providers struggle to convert their huge subscriber base as envisaged to bank customers, the license also excluded the providers from lending.

Due to its limited offering, the commercial viability was no longer appealing to providers hence they struggle to stay afloat.

Shape of things to come in Nigeria

As Africa’s most populous nation, prepares to soften the ground for mobile network operators to participate in the financial services sector which had predominantly been the turf of the banks, it will be interesting to see how they will successfully convert their network assets to serve the large unbanked population in the country.

With MTN Nigeria woes seeming to be coming to an end over tax dispute with the Central bank of Nigeria and a planned listing on the Nigerian Stock Exchange later this year and armed with an approval -in-principle to launch payment service Bank, it will be the honey on the cookie pie for local and international stock investors.

The challenge non-telco operators of PSB will face, will be similar and may even be more than what the mobile money operators faced with them in the early days and even till date.

Why will the mobile network operator give equal-footing access to a competitor? What will the regulator do to enforce fair competition? What are the risk of granting non-telcos PSB licenses only for them to face similar challenges faced by licensed mobile money operators for ten years?

Some recommendations

The regulator may consider to upgrade some of the mobile money operator’s license to PSB if they have proven ability, maybe on a regional basis so that they don’t have spread themselves very thin to compete with what will be a significant competition (mobile networks) with lower paid-up capital requirements to compensate for their investment as frontier providers.

Addition of   retail and low value lending approval to their license while they isolate the customer deposit pool if possible or allow only for a small percentage of the deposit pool for retail lending.

A proper assessment of non-telco and non-mobile money applicants for the PSB license to ensure they have compelling business cases, well capitalized and ability to overcome the challenges that almost muscled the mobile money operators in the last ten years.

In view of many initiatives in the market place that are driven largely by industry associations and regulations, innovations should be allowed to rather drive these initiatives, fair completion are enforced by the regulator for all technology access channels from telcos and access to government standard setting agencies for BVN, National ID for robust KYC and risk management purposes.

Emmanuel Okoegwale is Principal Associate, MobileMoneyAfrica

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