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Big Firms, Financials Disconnect From Main Street Pain

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The biggest Nigerian firms have managed to decouple from sluggish growth in the real economy and the pain ravaging the man on the street as they declare bumper profits for 2020, even as GDP growth turned negative, unemployment soared and consumer prices rose last year.

The state of affairs is earning a warning from some members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), who caution about the seeming disconnect between big Nigerian firms and the real sector.

“The Nigerian economy has continued to grapple with serious challenges. Out of the four major sectors, only the financial sector seems to be doing reasonably well against the backdrop of the regulatory forbearance granted the banking industry since the outbreak of the coronavirus pandemic,” said Obadan, Mike Idiahi, a member of the MPC of the Central Bank, in his personal statements released last week, following the MPC meeting held in January 2021.

“Even then, there seems to be a disconnect between the financial sector and the real sector. The stock market seems to be booming and the banking industry is reporting profits while the real sector is highly challenged and the economy is in recession.”

The Nigerian economy that just emerged from the negative effects of the 2016 recession (GDP contracted by 1.52% annually) and dollar shortages, was again hit hard last year from the fallout of the health and economic crisis induced by the coronavirus pandemic.

While growth contracted by1.92 percent in 2020 (the second contraction in 4 years), the largest firms tracked by MoneyCentral which have released full year 2020 results grew profits cumulatively by 8.87 percent.

Big Firms, Banks are doing well

Nine major firms have released financials for the full year 2020 period as at the time of going to press, and the results analysed by MoneyCentral shows all but one reporting lower profits from a year ago.

The firms include MTN Nigeria which grew profits to N205.2 billion in 2020, FBN Holdings profits of N79.71 billion, Zenith Bank N230.7 billion in profits, Dangote Sugar N45.62 billion, Nestle Nigeria N39.21 billion, BUA Cement N70.52 billion, Stanbic IBTC Holdings profits of N83.2 billion, Okomu Oil N7.38 billion and Presco N7.03 billion.

The list includes 3 financials, 1 Telco, 2 consumer goods firms, 1 industrial and 2 agriculture firms.

The financials (Stanbic IBTC, FBN Holdings and Zenith Bank) have been able to navigate the tough real economy by investing in government securities which are largely tax free, pulling back on risky growth while relying on CBN intervention funds to boost loan books, and cutting costs where possible, MoneyCentral’s analysis of their books show.

The Telecommunications firms have had more exposure to the work-from-home trends that have accelerated during the pandemic, and thrived as people moved to remote working and used more data and voice to hold meetings.

This meant the likes of MTN Nigeria benefited from the trend.

MTN Nigeria Full Year 2020 audited financial statements showed an 8.5 percent increase in operating profits to N426.73 billion, while data revenues surged by 51 percent to N332.37 billion.

For the consumer goods firms (Dangote Sugar and Nestle Nigeria), it was a tale of ability to pass on costs to their customers. While Dangote Sugar was able to push higher imported raw sugar prices on to its customers, Nestle Nigeria had to cope with a real economy where consumers had much lower spending power.

This meant that Dangote Sugar was able to grow after tax profits by 53 percent to N45.62 billion in 2020, while Nestle reported a profit of N39.21 billion, albeit 14.1 percent lower than the 2019 levels.

BUA Cement (industrial goods), had pricing power and high demand for its products which enabled it to report profit growth of 16.3 percent to N70.52 billion for 2020.

Okomu Oil and Presco for their part benefitted from the land border closure of the Nigerian government which reduced smuggling but increased domestic prices of their products.

Main Street Pain

The disconnect between the large firm’s ability to generate bumper profits amid an economy in recession for most parts of 2020 is stark.

Inflation at 15.75 percent and unemployment at 27 percent hit the highest levels in some 2 years last year as growth slumped to negative levels between the second and fourth quarters of 2020.

The cost cutting undertaken by the firms to help juice profits meant that very little job growth took place last year, amid the positive corporate results.

Large firms are also able to borrow funds much cheaper than smaller firms or individuals, making it easier for them to refinance higher yielding debt last year as interest rates fell.

Nigerian corporate organisations are employing various strategies to navigate the 2020 recession and dollar shortages in the domestic economy.

The corporates are dealing with lower oil prices, an economy entering its second recession in 4 years and the coronavirus pandemic.

Firms in the wider Nigerian economy and the oil and gas, Telecommunications and Tower companies in particular face a wide range of issues, according to Omega Collocott, Director, Corporate Ratings at Standard and Poor’s (S&P) Global Ratings.

“Firms are cutting capital expenditure and localizing those they are able to localize,” said Omega Collocott, Director, Corporate Ratings at Standard and Poor’s (S&P) Global Ratings.

“Firms with foreign holding companies (HoldCos) have been helped to accumulate FX offshore to offset domestic dollar shortage,” Collocot said.

The recovery in the equity market between October and December 2020 also spurred financial market activities even in the midst of struggling output levels, economists said.

This surge in market capitalization has ensured continued access to finance for listed firms despite several market uncertainties.

“The recovery in bank profitability between October and December 2020, even in the midst of recession, shows further resilience in the industry. Loan defaults are yet to surge in the industry, even though the nonperforming loans ratio of banks increased marginally between October and December 2020. While the bank balance sheets still look strong at this time, the loan forbearance policy may somehow be masking some rising vulnerabilities,” Asogwa, Robert Chikwendu, another member of the MPC of the Central Bank of Nigeria (CBN) said in his statements.

Bridging the divergence between Big firms and Main Street

Throughout the economic turbulence of 2020, the Nigerian banking system was generally resilient, with major financial soundness indicators staying in comfortable territory.

Industry capital adequacy ratio closed the year at 15.1 per cent, against 15.0 per cent regulatory threshold.

Similarly, the industry liquidity ratio, at 44.5 per cent in December 2020, was above the regulatory threshold of 30.0 per cent.

Growth in asset and deposit was sustained all through the year, and measures of profitability in 2020 remained above 2019 levels.

Notably, the banking sector has been able to take more advantage of measures by the CBN to support the economy and enhance financial system stability.

Much of the stimulus directed at households and small firms by the Central Bank and channeled through the banking system seems to have benefitted the banks more than the targeted firms.

Total disbursements as at January 2021 by the CBN amounted to N2.0 trillion.

The CBN said it has disbursed N192.64 billion to 426,016 beneficiaries under the COVID-19 Targeted Credit Facility (TCF) meant for household and small businesses.

The apex bank has also disbursed N106.96 billion to 27,956 beneficiaries under the Agri-Business Small and Medium Enterprises Investment Scheme (AGSMEIS), while in the Health Care Support Intervention Facility, N72.96 billion has been disbursed to 73 project that comprise 26 pharmaceutical projects and 47 Hospitals and Health Care Services Project in the country.

To support the provision of employment opportunities for the Nigerian youth, the Central Bank of Nigeria also provided financial support through the Creative Industry Financing Initiative and Nigerian Youth Investment Fund amounting to N3.12 billion with 320 beneficiaries and N268 million with 395 beneficiaries, respectively.

On enhancing power supply, the Bank has provided N18.58 billion for the procurement of 347,853 electricity reading meters to Discos in support of the National Mass Metering Programme.

While the interventions may have helped the economy eke out marginal positive growth of 0.11 percent in the fourth quarter of 2020, a majority of Nigerians and by extension main street have not felt the impact of these interventions trickling down to their own bottom-lines.

For Nigerians still lucky enough to have jobs, real wages are falling or frozen for many as higher inflation takes its toll on disposable income.

The disconnect between the real economy and financial markets was also laid bare as Nigerian stocks raced to a world beating 50 percent in gains last year, even as the broader economy languished.

Another reason for the growing divergence is that the Nigerian economy is increasingly weighted to services like retail, restaurants, buying and selling goods or trade, while the earnings profile of the NSE- 30 Index is more heavily weighted towards Financials, Telco’s and cement makers.

Analysts say the Nigerian government should undertake efforts to close the gap between big firms and the rest of the country through designing new recovery plans that target inclusive and sustainable growth.
Private sector companies can also increase their social responsibility efforts, not just on relief efforts such as donations to hospitals, but also in developing training programs for young people to learn new skills for a different jobs market that is emerging on the other side of the coronavirus pandemic.

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