Ecobank’s Ade Ayeyemi: The application of science to banking

Ecobank Group CEO Ade Ayeyemi talks to African Banker about the bank's performance and the implications of the digital revolution for banking


Ecobank Group CEO Ade Ayeyemi talks to African Banker about the bank’s performance and the implications of the digital revolution for banking

Ecobank announced record profits when it released its results in March this year. This is a remarkable turnaround for an institution that had taken impairment charges of $864m in 2016. Insiders attribute this largely to the sterling leadership of Group CEO, Ade Ayeyemi.

Ayeyemi, regarded in the industry as a pure banker due to his affection for facts, figures and other statistics, is also a stickler for fine detail.

The way he approached this interview reveals his Cartesian thinking, He dissects a problem like a surgeon and qualifies his answers with a rational explanation, often within an economic context. He shows cause and effect, how outcomes can be affected by which lever you choose to pull.

Ayeyemi joined the bank four years ago, at a time when it had gone through turmoil due to internal leadership issues with the acrimonious departure of a former CEO, Thierry Tanoh.

Taking over from Albert Essien – a veteran at the bank who had been promoted to steady the ship – in 2015 Ayeyemi also had to navigate a downturn in Africa’s economic fortunes.

Two of Africa’s largest economies, Nigeria and South Africa, had both entered their first recessions in two decades.

In 2016 the bank, after the impairment charges, posted a loss. The charges related to bad legacy loans incurred as a result of poor management in some subsidiaries. Ayeyemi quickly but quietly replaced those culpable.

He managed to restore the bank to profitability the following year and set challenging targets – increasing profitability and also, introducing a breathtakingly ambitious digital roll-out aimed at nothing less than a goal of securing 100m digital clients by 2020. 20m clients have signed up so far, but the momentum should bring many others quickly.

At the helm of a bank present in 36 countries in Africa, Ade Ayeyemi has a unique vantage point, not only overlooking the continent’s different economies, but also the banking sector as a whole. In this exclusive interview with Omar Ben Yedder, he provides fascinating insights into the workings of African economies as well as operations at Ecobank.

How happy are you with the way the bank is performing and where it’s heading?

We’re happy with the 2018 results. They’re the outcome of a lot of effort by our people. This confirms the strategy of the firm in terms of identifying the issues we need to work on, working on those issues and then being able to start delivering results that demonstrate the potential that the firm has.

Is your cost-income ratio at around the 60% mark, not too high compared to some of your competitors?

The cost-income ratio should be in the mid-50s, but it’s not something that will happen instantly; that’s the direction that we’re going in. We also believe that it’s not just a cost matter, it’s also a matter of income so we need to start growing income.

To survive and thrive the firm needs to use resources efficiently. The resources that need to be used efficiently are both our cost resources, in terms of our capital, as well as our human capital resources. Therefore, in allocating the assets of the firm, we will try and be as efficient as we can.

How would you best describe your time at the bank?

I think the underlying thrust is securing the foundation of the firm. That’s what we said in 2015 – we want to secure the foundation of the firm to make sure that when it starts growing, that growth is sustainable into the future.

How did the market receive your $500m Eurobonds and are you happy with the yield that you got on those?

We’re happy with the reception of the market to the instrument we put in place. It was done when the market was volatile and it was very supportive so we’re pretty happy with where we are. We then did a tap for [an additional] $50m and we’re also happy with the level of subscription.

We were able to do the tap within a range much lower than when we did the primary issue, so that confirms that the market continues to look at the story of the firm positively.

Regarding the 2018 results, did it come as a surprise that the operations in Zimbabwe were so successful?

The way we look at it is that there are opportunities in many African countries – it is important for one to be discerning enough to take advantage of an opportunity and for us to prepare for the risk that is embedded in some of those countries.

Our on-the-ground knowledge of the country and our association with the country is what ensures that we are able to do that. Our success is not just in Zimbabwe, I think it’s across a number of our other countries.

I do not want my colleagues in Ghana to hear, for example, that they are not successful, or my colleagues in Francophone West Africa to hear they are not successful. What we have done in Cameroon or South Sudan can be characterised as a very good job.
I think as an institution our understanding of the market, our taking risk very prudently, has meant that we have been able to extract opportunities out of the market.

What is the current environment across the markets you are operating in?

The current market environment I would say is getting better. We’re not at the end of the cycle yet but we are not seeing the recession we experienced a couple of years ago.

Ultimately when you’re speaking to investors – foreign investors – one of the main issues is managing the foreign exchange risk.

You used the NAFEX rate to reinstate your Nigerian results as opposed to the Central Bank exchange rate. Can you explain your rationale there?

We did not reinstate our results because that’s a technical accounting term, which could mean the results were incorrect and you have to reinstate them. We did not reinstate results.

When we convert currencies to US dollars – the reporting currency of the Group – we use the official exchange rates that we can find and transact in the market.

In the Nigeria situation, the only market that existed for a long time – that you could call official – was the Central Bank of Nigeria rate. In the course of 2018, the NAFEX became an official rate on Bloomberg and transactions were being done at that rate.

We then made the choice, in 2018, to use the NAFEX rate because it’s a market rate, and one recognised by the Central Bank of Nigeria and quoted on Bloomberg.

[The Nafex at the time of going to print was N360 to the dollar whilst the official rate was N305 to the dollar; converting at the Nafex rate is therefore more prudent – Editor.]

You raised a broader question on how we manage exchange rate risk that is embedded in the businesses across Africa where we operate.

What we do is to manage our businesses in a way such that the return on equity is greater than the cost of equity. Since the equity in the various countries is held in local currency, ultimately the inflation that is the driver of the position of currency is embedded in the interest rates and therefore the cost of capital.

Once you use that, once you’re measuring your operations around that to cater for the depreciation in the currency, then over time you would be able to immunise your business to currency fluctuation.

We don’t hedge because there are not enough hedge instruments with enough depth in the market. If you look at a place like Nigeria for example, the way the exchange rate moves is in step function and therefore any hedging that one does will be just throwing money away.

The best way to hedge against exchange rate [risk] in most of our countries is to actually manage your business so that your return on equity is much greater than the cost of equity.

Do you believe we should just liberalise exchange rates and let the market decide or do you believe in controlling them within certain bands?

The monetary authorities have numerous objectives – that of price stability, and they also have the objective of ensuring that the economy grows in a smooth and predictable way.

The authorities, through the monetary policy community, have a lot of information and data, more than what the private sector economic agents like myself will have access to. On the basis of that, they make choices and decisions and trade-offs that allow them to determine the path of exchange rates and the path of interest rates.

Having said that, I’m always an advocate of what is predictable and that predictability means that you apply economic science to the data and therefore can predict the direction of the exchange rate.

That direction is the function of inflation between two currencies – inflation in US dollars and inflation in the country where you have predicted. If that inflation in the local currency is higher than the inflation in the US, it means that inevitably, the currency will depreciate to the extent of that inflation differentiator. That is standard economic science.

Now whether the outcome is exactly that is something that happens over time but I can’t tell the central bank or the monetary policy authorities what to do – they have their own objective. I can manage my business and make sure that whatever happens is not detrimental to my shareholders.

There was a time when there was a bit of uncertainty in the boardroom amongst Ecobank shareholders: PIC, IFC, Nedbank and QNB. There was talk that QNB wanted to take over the bank. Is that all settled, and are the shareholders happy from where you stand?

I can respond to facts. Since I joined the organisation, the shareholders have been very collegiate amongst themselves and have been very supportive with what the firm is trying to do.

I cannot respond to market rumours, but I have direct contact with all the shareholders across PIC, IFC, QNB, Nedbank, and they’ve been working together in a very co-operative way.

That’s what I see, because we transact with them. In some of those transactions, Nedbank is a participant, QNB is a participant and I don’t sense animosity among the shareholders.

When we spoke a couple of years ago, the big pivot was setting a target of 100m digital customers by 2020. Are you happy with the progress that you’re making?

I’m happy with the progress that we’re making. During the period of ‘fix and foundation’ we got our customer base to 20m. I’m sure you’re familiar with the maths of compounding and the way it works, it grows incrementally.

I’m very proud of the work that our team has done, both in terms of people who are front-facing, the product guys, as well as the people in the back offices trying to ensure that we strengthen the foundation of the firm, and we are now leveraging that to go forward, working with the key technology partners and providers.

Do you see the whole industry being transformed by the technological shifts such as Alipay or WeChat?

I think the idea of making a payment for a transaction has been there since the Venetian times. What technology has enabled is that the exchange of goods and the banking of the money happen simultaneously. That’s the only thing that has changed.

Whether people use mobile phones to make a payment, that’s just a channel, whether people use cards to make a payment, that’s just a channel. The fundamental that has happened is that the payment and the banking of the money happens simultaneously.

What has happened is that transactions that historically happened in the various ledgers of the merchants, now happen directly in the accounts of the bank – so the transactions get miniaturised and you have thousands and [thousands] of transactions. That’s the first thing.

The second is the growth of logistics that enable people to order, buy and get products delivered to them in their various locations. That now enables people to buy as needed. People no longer buy in bulk because you can order what you like on a just-in-time basis.

The fact that the banking environment now allows you to settle that purchase instantly through technology means that people can actually get that done instantly. The current level of technology means you can send payments remittances from anywhere to anywhere, again instantly – without the need to aggregate amounts.

And kids can now go for lunch, dinner and share the bill. Again, instead of one transaction, you have multiple transactions hitting their bank accounts.

But one threat is that they may bypass the banking system.

If you go back to my original economic premise, the exchange of goods and services for money has not changed. It’s the channel that has essentially changed. Therefore, somebody still needs to bank the money.

You use the word bypass, I don’t know what that means: people that use mobile money, is that the bypass? Mobile money is a conduit through which the money gets into the bank account. The mobile money doesn’t have a banking licence and therefore does not keep the money.

Mobile money is a replacement for the cash that people used to keep in their pockets. It’s a replacement for the bullion van carrying the cash to the bank.

I think about it in terms of partnership: there are things that we can do best as a bank, there are things that other people can do in a collaborative way to enable us to get a better product to society.

From what you’re saying, the number of transactions is going to increase, so that can only be beneficial for an institution such as yours, or people offering those channels?

The number of transactions is going to increase, is going to be beneficial to  the economy and society as a whole, because people can actually do more.
In addition, that data then forms the basis of analytical work. More data enables more planning to be done and more planning enables better coordination and management of the economy.

Is regulation changing fast enough from your perspective, to enable you to do what you want to do?

The simple answer is yes. I’m one of those people at the ground level of economics that believes that regulation is a good thing because it provides confidence to the public that the market will not fail. The function of the regulation is to inspire confidence and ensure that market participants behave properly.

What is your opinion about the current rates of saving in Africa? Should they be higher?

The savings rate [in a country] has to be sufficient to support the investment that is required in the overall economy and for the future. When you use the word ‘high’, that is a nominative value statement I wouldn’t normally use.

Savings on a global level is sufficient for the global investment that needs to happen – the issue then is whether that savings is efficiently allocated among countries.

Let me give you a very specific example. If you go to the African countries today, you will see plenty that needs to be done – hospitals, roads, etc. that need to be built.

When you go to the developed world, you see a surplus – malls that are empty, parking lots where there are no cars there, you see less and less of infrastructure that needs to be built.

That means the demand for investment is lower, therefore your return on savings in those countries will be lower. Then in the places where a lot of those things need to be done, that means that the demand for investment is high and it could be higher than the savings rate of those countries. To even that out involves the process of global reallocation of savings. Therefore, I’m a supporter of the various international bond markets that the various African countries have been coming to.

The level of savings in some of our countries is not high enough. It needs to be higher but at the global level, the level of savings is sufficient for the investment that needs to happen.

Do you as a bank see the fruits of a pro-industrialisation policy in different countries?

The level of industrialisation needs to increase. Africa has self-sufficiency in the primary products, both in terms of agriculture as well as mineral resources, but is deficient in terms of the finished goods.

We’re exporting cocoa seeds and importing chocolate. It’s just not the right way to do things – especially because the technical knowledge and the thinking process that is then required among the youth of the countries is then lost.

That to me is a very long answer to your question about industrialisation, but I see a lot that we need to do and we need to do it quickly.

Is the private sector taking enough risks and how does this work in terms of lending?

The question is not lending because lending itself is just a consequence of a project that is bankable. What we need to do more of is to create bankable projects to be able to supply what is required in our countries. Lending is just one of the consequences of that. You don’t give money to somebody and then say, “Go and find a project”, that’s the best way to throw money away.

When you look at the African private sector and also the private sectors from elsewhere, would you say that we are bold enough and take enough risks? You hear people like Dangote saying, “We need to think bigger and bolder.” I speak to people in the power sector for example, who tell me a lot of the risk is borne by government as opposed to by the private sector investor, which is not the right way of doing things.

Your question is whether people are taking enough risks and the short answer to that question is no. When you go to a place and there’s a queue, that is a physical manifestation of shortage. When you go to want to park in a shopping mall and there’s no place to park, that’s a physical manifestation of shortage.

Whenever there’s a physical manifestation of shortage, economic science tells us that this is a signal to the producer to bring more goods to the market. When the producer is not bringing more goods to the market to alleviate that shortage, it means that the producer is not doing enough – and that’s my definition of risk: that you’re not doing enough to solve and satisfy that demand.

The question of power is a different question. Take Nigeria. The aggregate production of power in Nigeria today in the official domain is about 2,500MW, sometimes 5,000MW. That power production in Nigeria today is about the same amount of power production in Bradford in the UK.

Now, is that the total power consumption in Nigeria? No, because individuals use generators to produce power independently in their houses. And power production from generators is about 10 times what the public utility is charging.

To scale up the public utilities therefore, we have to have a proper price mechanism that is cost-reflective and allows the utilities to supply power in a place like Nigeria at a profit. Wherever a supplier cannot supply at a profit, they will reduce the supply to the barest minimum.

What does the African Continental Free Trade Agreement mean from a banking perspective?

Dr Kwame Nkrumah understood that for as long as we are fragmented and cannot act in unison, we cannot be taken seriously by the rest of the world.
‘Taken seriously’, in the global context, means our markets are large enough to excite manufacturers of goods and services and current technologies.

When those markets are fragmented, they are going to say: “What is the size of Togo? 7.5m is not good enough. What’s the size of Ghana? 25m, that is more. What is the size of Côte d’Ivoire? 25 million, that’s more. What’s the size of Nigeria? 200m, but they are poor. What is the size of Cameroon? 20-something million, yes.” But when you put all of that together, what is the size of Africa? 1.2bn! That is a lot.

That’s why India attracts more investment than Africa. The size of the economy is the same, the size of the population is the same. Africa’s resources, in terms of land mass, are 10 times India, but India attracts more, has more say in the global economy. It is one economy, Africa has 54 separate ones.

There’s no difference between California and Mexico, they are next-door neighbours. Why is one poor and one rich? Because California is within the umbrella of the United States. That market size is important and that is what the Continental Free Trade Agreement is seeking to address. A large common market is what we should seek for the continent. That’s one of the ways of solving the problem of poverty.

In terms of the policy makers focusing on the nitty-gritty, in terms of making it happen, is there a message from the private sector?

The message from the private sector is that this needs to be done. Again, if you ask me not as a banker but as an African, I would rather people migrate from Lagos to Accra or from Accra to Calabar than have the young kids of Africa who see no hope in their situation, having to migrate across the Sahara and becoming food for fishes in the Mediterranean. It’s not right. We all have to be very clear that this is the problem we’re trying to solve. 

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