Introduction
Guaranty Trust Bank (GTB Plc.) is one of the top financial institutions in sub-Sahara Africa with its head-office in Lagos, Nigeria. It started operation in 1991 as a commercial bank but metamorphose to universal banking in 2002. It is listed jointly in the Nigerian Stock Exchange and the London Stock Exchange. GTB Plc is in strategic partnership with Morgan Stanley and BNP Paribas to enable international business. (Wikipedia, GTbank Plc)
GTB from inception, focused on customer service as the bedrock of its business, targeting the growing middle-class and corporate market. GTB is one of the major financiers of major private initiated infrastructure upgrade in Lagos Metropolis area i.e. Eko Atlantic City, New Lekki-Epe expressway, Ibadan -Lagos Expressway etc.
GTB unlike most mega-banks in Nigeria, do not seek government deposits and businesses actively but focuses a lot on the private market.
GTB is one of the first financial institutions that initiated intensive pre-employment training and accreditations in order to achieve their desired vision.
GTB prides itself as a work hard and play hard organisation.
Vulnerability and Cost
Due to GTB's drive for expansion as stated in their strategy, fixed cost associated with retail banking business has increased considerably (GTBank P. ). These fixed Costs include different cost associated with starting and maintaining the new retail network i.e. Real Estate Cost, Tool of trade acquisition cost (Motor Vehicles etc.) and the cost associated with relocation and retention of experienced and highly skilled staffs in the competitive environment. In the quest for highly skilled staff retention and motivation in the highly competitive market; compensation and benefits have been on the increase in the sector. Also in order to differentiate itself and maintain the new generation banking outlook; highly skilled and experienced change agents are employed and retained; this comes with an increase quasi cost because bulk of this sub-set are well educated and experienced.
Competitors like Union Bank, which was established in 1925 and due to previous Government ownership, have created a vast network of branches in the 80s'. Therefore, have no need for a new branch expansion drive in recent years due to their existing large retail network thus does not incur huge significant cost associated with the expansion. Been one of the oldest financial institution in all regards; Union bank has been branded as a bank that engages in old banking practise and usually labelled conservative. Union Bank's size and history have made Union Bank less flexible and slow to respond to market forces, this might have lead to its non adoption of new banking strategies and methodologies unlike GTB. Thus, in today terms, Union Bank has a work force that is less skilled and knowledgeable about present day banking realities than GTB for example.
Type 2 Vulnerabilities; as GTB pursue it growth strategies and branch expansions in the Nigerian market where power supply is epileptic and non-existence in some regions. GTB had to provide and maintain appropriate power generating platform for each new branch and existing location. All this generating platforms run on diesel fuel. In Nigeria, diesel is not state-subsidized unlike other fuel products. Thus, the diesel prices are influenced by the global oil prices and Oil prices were high between 2007 and 2009. (IMF)
Another operational cost; is the communication cost. Since the telecommunication market hasn't reach maturity or saturation in Nigeria and general lack of basic communication infrastructure. Communication Cost is high across the retail network. Communication between the branches is core to their operations and as GTB roll out more locations; this cost has a multiplier effect. Evidence for this is GTB drastic raising capital expenditure costing.
Unlike GTB, Union Bank already have made capital investments in power generation and no new cost is incurred in acquiring generating plants for the branches since they already exist . The years Union Bank created its vast branch network, modern communication infrastructure where not available therefore they relied on logistics systems, which are not real time. Union Bank banking processes over the years have been designed with this communication delay in mind and in that last couple of years, Union Bank have been on an Information Technology development drive. The multiple complexities in the structure and change in market in which they operate have lead to a substantial high cost (operational expenses) of doing business.
Figure 1 and 2 below depicts these. These explains the high Union Bank's Fee and commission expenses and the relatively low and stable GTB's fee and commission expenses.
Figure 1 : GTB Core Expenses
Source: GTbank Financial Statement 2009
Figure 2: Union Bank Core Expenses
Source: Union Bank Financial Statement 2009
Micro Economic Exposure
This section focuses on how market forces influences how customers select GTB financial services and as a producer of financial services. The Financial Services market in Nigeria is highly competitive market where product substitution practically means producer change.
Financial Services provider's income is primarily from interest, fees and commissions it charges on loans and on transactions. The margin on the income is dependent on the cost of funds or present cost of money and the size of the transaction. The more funds or money the financial Service provider have in it care, the cheaper the cost of money.
In GTB, 41% of the funds or deposits are from its retail banking unit which is majorly a Business to customer unit and 53% of the loans and funds are given to the institutional banking unit customers which is majorly business to business transaction. (GTBank)
If GTB reduces the interest it pays on funds in it care from retail banking customers (whom are predominately individuals and Small Companies in a developing country like Nigeria); they might seek either other financial product and services with higher interest on their money, change financial provider or channel their funds into streams that can provide higher interest on their money due to sensitive of the market to price changes. In theory, DEMAND for the financial services that call for deposits will reduce. The reverse happens with an increase in the interest it pays on the deposits.
In order to determine the sensitivity of the relationship between price of interest GTB pays and demand for deposits; Price Elasticity of Demand was calculated using the following; (Bullentin)
% change in quantity demanded = % change in deposits demanded
% change in price % change in interests paid on deposits
= Price Elasticity of Demand (PED)
(GTBank)
Since the PED is < -1, the PED is price elastic, or "demand will fall faster than price increases" (Knight, 2009). Some of the reasons for the price elasticity are the fact that a major component of interest rate is determined by the regulatory body (Central Bank of Nigeria) and very little difference between available financial service providers (i.e. GTB and Union Bank) in terms of deposit products and services, the lack of clear differences in the financial products and service between the financial providers (Knight, 2009)
Interest, commission and fees income are generally sourced from loan and advance services. Nigerian Banks focus on providing short-terms and GTB isn't an exception. Knowing that demand doesn't really affect the elasticity of funds in the short run (Knight, 2009) but if prices remain high as it has been in Nigeria. External factors like government and regulatory bodies might intervene by creating or inventing a substitute or competing product to private funding in a bid to reduce the prices or cost of funds in the economy for the general good of the population.
The demands for the loans are influenced by their availability in the first instance. GTB is focus on a conservative and organic growth with strong foundation and less risk. The loans are demanded for to finance investment and other productive activities, that is usually triggered by other market demands.
Demand for the goods is directly links to income elasticity of demand. This in turn is links to cycles to GDP (Knight, 2009)
The demand for the loans by customers is equal to the supply of GTB. In order to determine the sensitivity of the supply of these loans and advances. We will be determine the Price elasticity of supply. (Bullentin)
% change in quantity supplied = % change in loans/advances supplied
% change in price % change in interests on loans
= Price Elasticity of Supply (PES)
Since the PES is < 1, we can infer it is inelastic. With inelastic supply it is expected that funds available for loans and advances will not change aggressively with a change in the interest. This is a desired elasticity for supply for most businesses (Knight, 2009).
Market Exposure Protection
In order to provide some form of protection for itself from type 1 vulnerability GTB have embraced Information technology to transfer the changes, new methodologies and experiences of their foreign trained and experience staffs into automated processes and thereafter into the business IT systems. And staffs that are not highly skilled that are required for the bank expansion are engaged as contract staffs; thereby reducing extra cost attached to been permanent staffs.
GTB have tried to address this vulnerability by outsourcing the maintenance and running of the generators to contractors and using Delphi method to determine the prices of fuel in the contracts.
In connectivity, they put Service Providers against each other and engaging them on a short-term basis. This is done, in order to terminate the contract for a cheaper and more efficient vendor when it is discovered. They have also tried to build an independent connectivity systems in locations with high density branches i.e. Lagos, Abuja etc.
In order to combat other vulnerabilities GTB has focus on differentiating itself from other (GTB). They have a renowned induction program that ensures that banks vision, strategy and customer service goals are hardcoded into the minds of the staffs. And this is a continuous process. And have branded itself further by the architecture of its building, GTB have tried to be radical in their design approach and a complete shift from the banking architecture. All geared towards corporate branding and customer service. Unlike their competitors, their management is less flamboyant and GTB as a brand get all the flamboyancy.
Their foreign partnership also gives them strategic access to cheaper funds.
In Nigeria, the bankers committee agreed to NGN25bn minimum deposits in order to get banking licenses and this lead to a drastic reduction in the number of banks for 100s to 24 banks (Wikipedia) This agreement reduces drastically the number of players in the banking market therefore reducing producers and providers of loans/advances (supply).
Strategic HELL?
It can be concluded that GTB is not in a strategic hell nor naked in the marketplace and they are not a price-taker and actively have control over their pricing strategies.
They have been successful in avoiding the strategy hell with the distinct differentiation, thus creating a niche market for itself in a commodity market.
Macro Economic Exposure
Figure 3: GDP/Inflation/Expenditure
In the years leading to 2007 and 2008, due to the slowdown in the global economy a gloomy picture was expected for the Nigerian economy. Nigerian economy is majorly dependent on oil export. And an economic slowdown or meltdown of global economy, especially of its major trade partner (US) should translate to a slowdown in Nigeria. Fortunately for Nigeria, just like other developing and emerging economies. The economy did not experience the same drastic melt-down witnessed in the developed world. Some of issues faced around this period was a drastic reduction in Foreign investment due to credit crunch, reduction in oil prices thus revenue etc. These indictors should lead to a slowdown or meltdown but data from IMF and Nigerian Bureau of Statistics (NBS) states otherwise as shown in the table and diagrams above. GDP have steady grown by +1% yearly. This is due to the reduction of the contribution of oil exports to GDP. In the years leading to year of observation; they have been gradual increase in unrest in the Niger delta leading to reduction in oil production, though an amnesty was agreed up in 2009 which improve production. Drastic reduction in foreign investment put massive pressure on the foreign exchange market, this lead to serious cash problems for most of the corporate clients. Since, Nigeria relies on imports for most of the economy to keep going and most of these imports were ordered before drastic changes. These losses directly, affected GTB and other banks; creating a massive flood of bad loans and advances in its books.
The CBN and the Nigerian Government noticing this decided to increase the Aggregate Supply (Money). This can be seen in the increase in Government expenditure, this lead to the increase in Inflation starting 2008.
In the quest to stimulate the economy and avoid it going into recession; the foreign exchange reserves where drawn down from $53bn in 2008 to $46.54bn (Wikipedia, Economy Of Nigeria).
Table 1: Nigerian GDP details
Nigeria Macro Economic Indicators
Country
Subject Descriptor
Units
Scale
2005
2006
2007
2008
2009
2010
2011
Estimates Start After
Nigeria
Gross domestic product, constant prices
National currency
Billions
7,951.01
8,444.85
9,033.60
9,574.14
10,240.48
10,998.03
11,816.71
2009
Nigeria
Gross domestic product, constant prices
Percent change
5.393
6.211
6.972
5.984
6.96
7.398
7.444
2009
Nigeria
Gross domestic product, current prices
U.S. dollars
Billions
112.248
145.43
165.921
207.116
168.843
206.664
232.969
2009
Nigeria
Inflation, average consumer prices
Index
143.615
155.431
163.812
182.787
205.375
229.827
252.301
2009
Nigeria
Inflation, average consumer prices
Percent change
17.856
8.227
5.392
11.583
12.358
11.906
9.778
2009
Nigeria
Inflation, end of period consumer prices
Percent change
11.565
8.549
6.577
15.054
11.942
11.2
8.5
2009
Nigeria
Unemployment rate
Percent of total labor force
4.5
4.5
4.5
4.5
4.5
4.5
4.5
Nigeria
Population
Persons
Millions
136.253
140.004
143.854
147.81
151.874
156.051
160.342
2006
Nigeria
General government revenue
National currency
Billions
5,591.83
6,336.35
5,926.05
8,063.36
5,003.19
8,000.78
9,399.72
2009
Nigeria
General government revenue
Percent of GDP
37.948
33.866
28.389
32.841
19.931
25.825
26.021
2009
Nigeria
General government total expenditure
National currency
Billions
4,226.43
5,034.39
6,203.25
7,198.63
7,593.88
10,458.19
10,942.25
2009
Nigeria
General government total expenditure
Percent of GDP
28.682
26.908
29.717
29.319
30.252
33.757
30.292
2009
Nigeria
General government net debt
National currency
Billions
2,995.49
-1,167.99
1,035.02
15.757
2,316.53
3,823.36
4,679.78
2009
Nigeria
General government net debt
Percent of GDP
20.329
-6.243
4.958
0.064
9.228
12.341
12.955
2009
Nigeria
Current account balance
U.S. dollars
Billions
7.406
38.57
31.094
32.603
23.776
26.969
27.537
2009
Nigeria
Current account balance
Percent of GDP
6.598
26.521
18.74
15.742
14.082
13.05
11.82
2009
Table 2 : Nigeria Economic Statistic (IMF)
Marco-Economic Protection
In order to protect itself from macro-economic shocks; GTB adheres to strict risk management policies. As shown below the risk management matrix of GTB. (GTbank)
Figure 4: Risk management matrix
GTB have executed their risk management systems with transparent corporate government approach thereby identifying and reducing risk associated with Macro-Economics and other non-economic macro exposures. This was evident in the recent bank stress test conducted where GTB came out clean and strong while Union Bank was found wanting.
Conclusion
GTB is well positioned strategically and economically in the Nigeria market. They have been able to create a brand and a structure that seeks to influence its market and environment in every way they can.
When compared with other financial institutions, GTB gained market share in the global recession and larger customer base due to their forward thinking protective strategies. GTB's profit grew almost 60% in this period while competitors like Union Bank were almost distress.
What are the implications for business strategy in 2011 of the US and global recovery in 2010?
In the US, the recovery is driven via fiscal policy using the American Recovery and Reinvestment Act of 2009 passed by President Barack Obama in 2009. It aims primarily to increase aggregate demand by increasing public spending and give tax incentives thereby leading to a direct increase in income, increase in production thus GDP and reduction in unemployment in the US. Most countries in the world have followed this approach in the recovery drive and have created different forms of stimulus package (Keynesian Economics).
In 2010 based on OECD statistics, the following have been observed. The market has begun to recover with the gradual increase in GDP in the USA and EA13. Unemployment has steady and has shown potential to reduce from IMF data. This is close to the expected outcome of the stimulus.
Figure 5: US and EA13 GDP % Changes
Figure 6: US and EA13 Unemployment rate % Change
The stimulus should increase aggregate demand (push the AD curve to the left) therefore leading to increase in inflation rate
Figure 7: US Statistics IMF
The US also stimulated it economy further by investing massively in capital expenditure. This has created demand across various sectors; Notably the construction, health care, renewable energy, education and security sector and the dependant sectors i.e. Steel, Building materials, mining, defence companies, HMOs etc.
Businesses that are in these sectors will enjoy a massive increase in demand and strategies have to be focus on production and capacity increase in order to meet the demand.
Due to Government intervention, opportunity to make income available to the populace will increase potentially leading to increase in demand of goods and services. Government created the incentive for businesses to employ more, produce more and invest for growth. The implication to Business strategy is that, they have to position to take advantage of this potential increase in demand of their goods and services by increasing production and capacity. Due to the increase in flow of money, inflation should increase (reducing the real value of wages). As a result, Business will be unwilling to substitute existing human capital for cash capital because of the increasing inflation.
How will this be affected if the recovery falters in 2011?
If the recovery slows down or falters; businesses strategies should be dependent on the perceive reasons behind the slow down. In the US, the Federal Reserve chairman promises to step in, if the US economy veers back towards recession (Allen). In Europe, austerity measures are the driving factor. Most of the euro government will impose more austerity measures if allowed while the US will likely increase spending and tax cuts. For businesses in the US, they have to put strategies in place to protect themselves against potential crowding-out due to the excessive government spending financed with debts. While in the euro-zone, businesses should be prudent in investment and seek to drive cost down. In general, businesses will be sceptical and conscious; thereby reducing or maintaining production levels or delaying further investment until a later time.
Businesses will therefore tailor their strategies to supply or production reduction mode and downsizing in order to shift their demand curve to the equilibrium.
