‘Many companies will turn to debt capital market this year’
United Capital Plc is a leading African investment banking group providing capital and financing solutions to African governments, companies and individuals. Its Group Chief Executive Officer, Peter Ashade speaks to Iheanyi Nwachukwu in this interview. Ex
Now that Covid-19 has changed the IPO ecosystem, what is your outlook on that?
Like its global counterparts, Nigeria’s financial markets have been hit hard by the novel COVID- 19 pandemic. Notably, majority of the stocks listed on the Nigerian Stock Exchange plunged by more than 20percent since the outbreak of the virus which was exacerbated by crude oil price crashed. With the sharp drop in share prices vis-à-vis market volatility, poor outlook for growth amid serious supply chain disruption, corporates are unlikely to approach the capital market for IPOS or equity capital this year. However, many companies will turn to debt capital market this year, encouraged by the low interest rate environment, especially at the short end of the yield curve. Clearly, the Covid-19 shock has created a need for corporates to raise short term capital to plug their unanticipated shortfall in liquidity. Accordingly, we have seen series of activities at the commercial paper (CP) segment. Also, we have seen further activities at both the sovereign and corporate bond segment. Notably, companies like ours, Dangote, Nigerian Breweries, LAPO Microfinance, Union Bank, Sterling Bank, Flour Mills, are recently in the market to raise either CP or bonds. Also, the targeted liquidity injections by the CBN to sectors such as Healthcare and Agriculture, are likely to further dampen the prospects any fresh equity capital for operators in the space.
Securities dealers are leveraging technology in trading remotely because of the pandemic. What lessons can operators and regulators learn from this new normal?
The outbreak of COVID- 19 has passed a major message to all capital market stakeholders, which is the ability to adjust processes from rigid/ manual to flexible/ automated/ remote processes, thanks to technology. No doubt, operators and regulators need to review previous processes, embrace innovation, and adopt a new business models to thrive within the context of today’s realities.
Many fundamentally sound stocks are trading at their record lows as Covid-19 ravages markets. What sectors are your stock picks in?
It is true that many fundamentally sound stocks are trading at a record low particularly because the country risk factor is high now. However, we believe some stocks will continue to benefit from a near term rebound in global economic activities. In our opinion, the companies that are likely to come out strong includes those in the Telecommunications space, we think the tier 1 Banks will remain resilient, also corporates with huge margins and low leverage such as the major players in the Cement and Consumer goods sector will be fine due to their high level of cost efficiency and finally, the Agric players.
As crude oil price decline is forcing Federal Government to further review its budget benchmark price, what’s your take on the impact on markets, economy and businesses?
With oil prices hovering around $30/barrel, its lowest since 2015/2016, the FGN has increased its need for deficit financing, as the decline in oil revenues bits harder into the initial budget estimates. We have also seen huge capital flow reversals and less foreign participation in Nigeria’s financial markets. Recall that the CBN also had to adjust the local currency. Accordingly, the impact is negative on both the economy and businesses regardless of how you look at it. On one hand, pressure on consumer spending due to naira adjustment will hurt revenue, on the other hand higher cost of production which is not fully passed on to consumers will hurt operating margins. However, with the OPEC+ crude oil production cuts underway and the start of mild recovery in world economies, the price of crude oil is beginning to tick up gradually, with positive implications for Nigeria.
What is your outlook on FX?
Our outlook for the FX market remains dependent on what is happening in the oil market, which broadly reflects the strength of the Nigerian economy. Our belief is that the recent IMF loan of circa $3.4billion will improve the CBN’ ability to continue to defend the naira over the next 1-3 months. And this is supported by the recent improvement observed in the parallel market were rates moved from N450/$ to N424/$ after the CBN resumed FX sales to BDCS. Also, we think the external reserves at over $33billion will support this over the next few months. However, if the situation in the external environment does not improve over the next 1-3 months, the local unit may be further pressured.
As a listed company, what strategies do you have in place to mitigate the challenges economic slowdown throws up on your business?
Nigeria GDP growth has weakened since 2014 averaging circa 2percent annually compared to average circa 6percent annual growth in the five years preceding 2014. The current slowdown in economic activity is driven by the same events that culminated in 2016 recession being the slump in global oil prices primarily, but this time, induced by
COVID-19 pandemic which has also crippled sectors such as Aviation and Hospitality to mention a few. Notwithstanding, It is not all doom and gloom. The Group has remained resilient even in the face of COVID-19 crisis as evidenced in our strong financial performance thus far in 2020 financial year. We expect that the current economic slowdown will throw up new opportunities in terms of wealth redistribution and capital formation and we are positioned to exploit them. Our Regional businesses are key to executing our growth strategy in the domestic market by reaching new client segments. We are deepening our relationships with commercial banks, DFIS and governments in sub-sahara Africa countries where we see opportunities towards providing bespoke solutions in the African market within our risk appetite. We are strengthening our digital business capabilities to extend our growing bouquet of financial and investment service offerings to reach more clients.
What is your medium-to-long term cost containment strategy as Covid-19 ravages many sources of corporate earnings?
As a financial institution, we strive to be operationally efficient through effective resource allocation to maximize value creation. The COVID-19 pandemic necessitated that we activate a virtual operating model, also partly in response to Government lockdown directives. This has eliminated certain cost elements such as travel and office supplies but may require investments in areas such as technology infrastructure to be sustainably effective. Our cost-income-ratio guidance hovered around circa 40percent in the last few years but we will be targeting circa 35percent in the near term by sweating our existing resources to drive revenue growth.
What are your Business continuity plans post Covid-19?
We commenced complete virtual operations across all business locations on March 24 with minimal disruption to our service delivery to our clients and our workplace interactions have been seamless most times. Our digital platforms Investnow (mobile and web) and Kashnow platforms (USSD & web) are available 24/7 to serve customers with our bouquet of product offerings. Other back-end solutions used by key functions have remained poweredup to ensure uninterrupted service delivery. Our service professionals and client advisors across our businesses and regional offices are in constant interaction with clients towards meeting clients’ respective financial goals amid the lockdown. The last few months have not been easy as we had to adjust to a new operational model, but we are encouraged by the fact that we are building a more resilient organisation.
What is the future of Investment Banking in a slowing economy.
Typically, in a slowing economy, the performance of investment banks come under pressure in line with the rest of the economy. However, economic slowdowns do not last forever, and they are usually a precursor to economic expansion. The current COVID-19 pandemic on the other hand is a different type of economic downturn and the recovery process provides a huge number of opportunities. The pandemic has revealed the liquidity and capital adequacy weaknesses of companies around the world and these companies will be looking at fixing those problems once the economy begins to pick up steam. There is going to be a huge market for restructuring, working capital needs, M&AS, financial advisory and capital raises. The opportunities are limitless and we as a company are working actively not to be just an investment bank but to be a business solution provider.
What sectors will you rather not play big in 2020, and what sectors are you still bullish?
No doubt, we are very weary of operators in the Oil & Gas, Aviation and Hospitality sectors, they are clearly the worst hit sectors. The outbreak has eroded not just their profitability but also their revenues by more the 60 percent on average. However, we believe rebound will be sharp ones normalcy is restored across the globe. Also, we have some level of concern for the banks, due to their credit exposure to these sectors. But as mentioned above, the pandemic has provided more opportunities for Telecommunications, Consumer essentials & personal hygiene, Healthcare services and medical supplies, as well as Internet service providers, due to the growing demand for their key products and services. Furthermore, we see a lot of prospects in the agriculture sector, e-commerce, digital marketing and logistics