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By Chinwendu Obienyi
Although year 2020 witnessed the COVID-19 pandemic and ENDSARS protests, it can also be seen as a year when some banks opted to restructure their operations to diversify revenue base and remain competitive in the midst of other financial services providers.
Having prioritised their core banking services for nearly a decade, some commercial banks started adopting the Holding Company (HoldCo) structure.
It is not as if this was a new adoption as it dates back to 2011 when the Central Bank of Nigeria (CBN) forced banks to give up their non-banking businesses or restructure into a holding company structure.
The model allows banks to retain non-core banking businesses by evolving into a non-operating HoldCo structure. The regulator, like its peers globally, believed that it was an important risk management strategy to separate lenders from other financial services like insurance or investments banking acitivities.
According to the CBN, this arrangement seeks to ring-fence depositors’ funds from risks inherent in non-core banking businesses.
Following that regulation in 2011, several banks including— UBA Group, First City Monument Bank (FCMB), Stanbic IBTC Bank and First Bank — adopted the holding company structure. The decision was simple if the other businesses represented a sizable percentage of the bank’s revenue.
Other banks such as Access Holdings Plc, GTCO in 2020 also joined in the bandwagon by securing regulatory approvals. This actually caused a stir as analysts assumed that these banks were preparing to compete against fintechs and also shrugging off traditional barriers that may have held them back for such a long time.
Recently, Zenith Bank Plc, in a notification sent to the Nigerian Exchange Limited (NGX) and the investing public, said it has received approval-in-principle from the CBN to convert its present operational structure to a holding company.
According to the notification, once substantive authorisation is received, the bank gets a license to veer into other businesses within financial services including pensions, insurance, asset management and fintech.
The notification also read, “Furthermore, the CBN approved Jim Ovia as the chairman of Zenith HoldCo Plc (in-formation) and for Ovia to also continue as the chairman of Zenith Bank Plc until the commencement of Zenith Holdco Plc. Further details in respect of this will be communicated to the market in due course”
It has been suggested that adopting the HoldCo structure allows long standing bank MDs and CEOs to remain in power even after exceeding their tenure limits. However, section 6.1 of the CBN’s recent revised guideline for licensing and regulating Financial Holding Companies in Nigeria requires that the HoldCo is a separate legal entity from its subsidiaries and that boards of directors of the subsidiaries are independent and autonomous.
Furthermore, the CEO and other management key positions in the subsidiaries must be separate from those of the HoldCo. Therefore it is crucial to ensure that there is an adequate oversight and governance set in place to prevent abuse of power and ensure the holdco structure is used for its intended purpose of promoting financial stability, diversification and compliance with regulatory requirements.
Hence, the question is what does the holdco structure offer banks?
According to analysts at Nairametrics, the structure allows banks to separate their core banking operations from their non-core banking businesses such as insurance, asset management and other financial services.
They added that this helps to mitigate risks associated with these non-core businesses as losses in one subsidiary will not affect the core banking operations of HoldCo.
“Additionally, the HoldCo structure allows banks to raise capital by selling shares in their subsidiaries or spinning off subsidiaries into stand-alone entities which can then raise capital independently. This enables the bank to expand its operations without straining its balance sheet.
It also allows for more efficient management of the banks’ assets and liabilities. Since holdco is responsible for managing the equity investments in its subsidiaries, it can easily monitor their performance and make decisions that will enhance the profitability of the entire group”, they said.
Also speaking, Head, Research at United Capital, Wale Olusi, while stating that more banks would be adopting holdco structure, said, “I think they are trying to move in line with changes in the sector. Most of them want to do fintech, asset management, among others. The CBN regulation is a lot and so they are trying to get other businesses that can help them weather the storm. They have the option and some of them have taken it. They can also decide not to do it again in the future.”
For his part, the Head of Financial Institutions Ratings, Agusto & Co, Ayokunle Olubunmi, alluded that the present tight monetary policy regime has clearly pushed banks to consider the Holdco option while adding that there are lots of opportunities in the financial system and the banks have the resources to operate.
“I see more banks scaling some of their subsidiaries and going into holdco in the medium term. Even if you look at the global banks, a lot of them are gradually diversifying into non-core banking business,” Olubunmi said.
