The Polaris Bank Story

The Polaris Bank Story On January 2, 2019, Tokunbo Abiru, Group Managing Director of Polaris Bank sent an email to all staff…in the over three years Abiru had been invited by the Central Bank of Nigeria (CBN) to rescue the troubled institution which had its license withdrawn before Polaris Bank was established, he had paid a lot of attention to internal communication with all the employees and stakeholders in the bank. This particular email however appeared somewhat more significant as it outlined the aspirations and desired future trajectory of the emerging Polaris… “…Welcome to 2019. The year 2018 was pivotal in the life of the bank with the transition from Skye to Polaris Bank Limited. 2019 however, is even more important as we commence the journey of truly building a bank and brand we will all be proud of in years to come…” In the rest of that “pivotal” email, Adetokunbo M. Abiru known to everyone as “Tokunbo Abiru” outlined the new bank’s corporate transformation agenda and revealed his ambitions for “accelerated growth” and financial services industry leadership anchored on investments in information technology architecture, redefining strategy, brand development and digital transformation. In managing the bank’s human capital, Abiru emphasized “consequence management” based on rewards for success and sanctions for non-performance while the bank seeks enhanced profitability and efficiency. By the end of 2019 and as Polaris Bank settled into a new financial year early in 2020, it was evident that the bank had achieved Abiru’s objectives for that critical financial year and was primed to consolidate on that good start in 2020. The 2019 financial accounts of the bank reflected very strong and positive outcomes. In that first full year of operations, Polaris Bank recorded strong earnings with a Profit before Tax of N27.8Billion, very good return ratios and a modest operating expense ratio. It was early days yet, but the financial and performance portents for the bank appeared quite promising. All income lines-net interest, fees and commission, and investment/other income had performed creditably especially in the context of Polaris Bank’s birth and transition. At N1.143Trillion, the bank’s balance sheet for 1 its inaugural year was strong reflecting strong liquidity and improving capitalisation. On January 2, 2020 Abiru sent out a “Welcome to 2020” email to all staff. Understandably the mail was in part celebratory-“…I am confident to state that our Bank has indeed stabilized and is now headed towards our purpose which is to become a “Top Retail Bank” in Nigeria. This was demonstrated by our collective and sustained performance trajectory in 2019…” he proclaimed. He proceeded to lay out his basis for optimism, “…our prudential ratios-capital adequacy and liquidity ratios are now in full compliance with stipulated regulatory requirements. We returned to profitability on a month-on-month basis throughout 2019; our Cost-to-Income ratio is also in line with industry average--- we aggressively pursued our IT infrastructure refresh with a view to replacing and upgrading the aged, obsolete and sub-optimal performance IT equipment. The impact on efficiency, effectiveness, transactions and customers’ experience will become noticeable from the end of the first quarter of Year 2020…” He however went beyond celebrating the 2019 performance and thanking the work force for their contributions. He laid out strategic initiatives for future growth including the commencement of the Digital Transformation journey with recruitment of professionals and set up of structures and systems; launch of Polaris Bank’s agency banking platform “Sure Padi”, which is designed to provide banking services to the unbanked and underbanked as well as in locations in which the bank is not present; introduction of the PAYDAY loan product which booked over N1billion in loans in just four months; efforts to increase business volumes and activity, as well as lower costs; approval of a comprehensive performance incentive scheme in the form of PAY-FOR-PERFORMANCE and execution of the bank’s Corporate Transformation Plan. 2019 Financial Performance See Appendix By all objective standards, the results are impressive especially given the legacy constraints under which the institution was birthed. 2 The Annual Financial Statements ending December 31, 2019 show gross earnings of over N150billion, Profit before Tax of N27.83billion and Profit after Tax of N27.35billion showing very strong profitability and profit potential going forward. The bank’s deposits from customers was N857.8billion with Total Assets in excess of N1.14Trillion confirming that Polaris Bank remains a systemically important bank within the Nigerian financial system. The bank’s capital is multiples of the regulatory minimum of N25billion at N82.9billion with a Capital Adequacy Ratio of 14% providing sufficient capital buffers to customers and other counterparties. Apart from strong capital adequacy, the bank’s other ratios are equally impressive- Return on Assets (ROA) at 2%, Return on Equity (ROE) is 33%, Return on Sales (ROS) is 18%, and Liquidity Ratio at 81%. These ratios demonstrate operating efficiency, strong inherent capacity for profitability and returns to stakeholders, very comfortable liquidity and asset efficiency. The bank’s Cost to Income ratio of 59% is well in line with industry averages and further reinforces the institution’s underlying reality of operational and cost efficiencies, which is a significant achievement in view of its legacy constraints. One remaining legacy challenge, perhaps understandably, is that the bank’s Non- Performing Loans Ratio (NPL) is 46%. Even though the management has brought this ratio down to this level from around 80% at the time of the regulatory intervention, it is evident that the work of the management of Polaris Bank to clean up its inherited loan portfolio must continue until NPLs are within acceptable benchmarks. However given their success over the last three years in loan recovery, collateral documentation and cleaning up the portfolio, they appear to be on course to a successful portfolio repositioning. Polaris Bank’s 2019 result reflected a positive comparison with 2019 results of the leading Tier 1 banks and other banks. Its Return on Assets (RoA) at 2% ranked ahead of Ecobank Nigeria (0.03%), at par with Zenith Bank (2.01%), and ahead of Access Bank (1.35%), UBA (1.54%) and First Bank (0.72%). Only GTBank of the leading Tier 1 banks has a better RoA (5.73%) than Polaris. Polaris RoA is also far better than every Tier 2 bank in our comparison sample (Sterling, FCMB, Fidelity, Standard Chartered, Union, Keystone, Heritage, Wema and UNITY) except Rand Merchant, Citibank and Stanbic IBTC all of which minus Stanbic IBTC are relatively small, wholesale banks. 3 Polaris Bank’s Return on Equity (RoE) at 33% beats most Tier 1 banks except GTBank (33.67%) with which it is at par; Ecobank (0.24%), Zenith (15.85%), Access Bank (17.44%), UBA (15.35%) and First Bank (6.66%) are all inferior to Polaris. It is also better than all Tier 2 banks in our sample with the exception of Citibank (39.17%). Polaris Bank’s Return on Sales (RoS) at 18% ranks third against Tier 1 banks behind GTBank (50.63%) and Zenith Bank (38.30%). It beats Ecobank (0.33%), Access Bank (13.46%), UBA (15.11%) and First Bank (7.27%). It is also better than all local Tier 2 banks in the sample including Sterling Bank (4.28%), FCMB (6.43%), Fidelity (11.9%), Union (10.11%), Wema (5.66%) and Unity Bank (6.55%). Polaris Bank’s Capital Adequacy (14%) and Liquidity (81%) ratios are well above regulatory requirements demonstrating a strong return to prudential compliance and providing assurance of a strong capital buffer and careful liquidity management to customers and regulators. The bank’s Cost to Income Ratio at 59% is better than Ecobank (83.33%), Access Bank (70.08%), UBA (68.26%) and First Bank (75.83%). Only GTBank and Zenith Bank of the leading Tier 1 banks have better Cost to Income Ratio than Polaris, which is also better at cost management than Fidelity (73.79%), FCMB (86.71%), Sterling (84.24%) and Union Bank (84.27%). Not surprisingly, Polaris Bank’s non- performing loans at 46% is relatively high given its inherited portfolio, but management’s efforts to improve loan quality, strengthen collateralisation and collect outstanding loans should see this ratio normalise over time. With N857.86billion in Deposits and Total Assets standing at N1.143trillion at the end of 2019, Polaris Bank is a major and systemically important Nigerian bank. Strategy and Corporate Transformation Plan In 2018, immediately after the transition to Polaris, the Bank worked with a team of first-class advisers to develop both Corporate Strategy and Corporate Transformation Blueprints to provide direction for the bank into the future and define its corporate and strategic aspirations. While KPMG served as anchors to the project apart from working on business transformation; they also looked at cost optimisation-it was necessary to realign the institution’s corporate footprint especially as this had not been done after the merger with Mainstreet Bank (former 4 Afribank); EY carried out a deep and detailed review of Polaris Bank’s technology infrastructure and digital transformation needs. This was an important exercise given that investment in technology had stagnated in the precursor institution for over five years. Insight Communications worked with Polaris on brand transformation, while Deloitte advised

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