2004/2005 FirstBank ANNUAL REPORT AND ACCOUNTS

Operating Environment
Operating Results
Board Changes
Outlook for 2005/2006

Fellow shareholders, invited guests, distinguished ladies and gentlemen. It is with immense pleasure that I welcome you to the 36th Annual General Meeting (AGM) of our Bank. I am equally pleased to present to you, a review of the environment in which our Bank operated in the financial year ended March 31, 2005. The operating result for the period is provided within a broader context including an outlook for the 2005/2006 financial year.

FirstBank’s long history has been marked by a succession of milestones, which began with our being the first bank in Nigeria and has continued to define us as Nigeria’s most successful bank to date. An essential element of this highly successful record is that we have always proactively taken on the challenges posed by our operating environment. In addition, the several turning points, which characterise the annals of the nation’s financial services industry, have taught us to recognise the need for change, to understand change dynamics in a developing economy, and to adapt to the ensuing environmental and regulatory pressures. Therefore, whenever history and fate converge to shape new turning points in the nation’s financial services industry, FirstBank always emerges stronger.

The 2004/2005 financial year opened new vistas for the Nigerian banking industry. Amongst the major challenges were the spike in global crude oil prices, which traded at prices last quoted in the mid-1970s and the weakening of the US dollar against major international currencies. The economic and humanitarian prospects of the global economy were further marred by the after-shocks of the under-sea quake, which hit South-East Asia on December 25, 2004. In addition, the Central Bank of Nigeria (CBN) announced a 1,150% increase in the minimum capitalisation of banks operating in the country to N25 billion. These events had significant impact on the economy, banking customers, the competitive landscape, and business strategy. With the effects of the increase in oil prices more than offsetting the effects of the weakening dollar, the economy suffered increases in costs of import, which fed into domestic prices of refined petroleum products; labour unrest and its attendant loss of man-hours. The banking reform embarked upon by the CBN confronts the industry with perhaps its greatest challenges and opportunities. At present, it has triggered a major shake up in the industry, exacerbating concerns over continued consumer confidence. In the event, the first three months following the pronouncement witnessed a very rapid constriction of the interbank market. Significantly, almost two years ago, we designed our strategic plan fully conscious of the need to grow our domestic footprint in the industry, as a prelude to and as a corollary of our increased engagement at the subregional and international levels. We thus eliminated, well in advance, the element of surprise contained in the current reform initiative.
On this note, I want to give you my sincere assurances that post-consolidation, our Bank would retain its leadership position, while customers, employees, and shareholders will benefit enormously from the dividends of the reforms. With your permission, I will like to present the review of the international and domestic environment in which our Bank operated as well as highlights of the performance for the financial year ended 31st March 2005.

1. Operating Environment

1.1 The Global Economy

A number of economic and political developments shaped the global economy in 2004. Major developments on the political front include the war against terrorism led by the United States of America; the handover of sovereignty by the US-led coalition in Iraq to an interim government on June 28, 2004; the United States’ elections of November 02, 2004 (won by the incumbent, George Bush); and improvements in the outlook for peace in the Middle East following the death of Yasser Arafat, as well as the emergence of a new Palestinian leadership.
Of increasing concern to the global outlook, however, was the threat of proliferation of nuclear weapons from both Iran and North Korea; the continued insurgency in Iraq despite the elections of January 05, 2005; the escalation of hostilities and deterioration of humanitarian conditions in the Darfur region of Sudan; and the Asian Tsunami of December 26, 2004, which claimed about 300,000 people with damaged property worth billions of dollars.
In spite of these developments, the scorecard for 2004 was generally positive with the global economic recovery, which started in the second half of 2003 strengthening and expanding by an estimated 5.1% from the 4% recorded in the preceding year, reflecting a return to more sustainable growth. Oil prices remained high and volatile, on the back of continued strong demand from China and the USA, uncertainties about the Organisation of the Petroleum Exporting Countries (OPEC) production plans, and falling non-OPEC supply.
Meanwhile, the global economic rebound continues to manifest growing divergences across regions. In the United States, strong business and household consumption drove stronger than expected growth, while activities were buoyant in China despite tightening policy measures. Africa and a number of emerging markets notably China, Russia, and India recorded remarkable growths of 9.0%, 7.3%, and 6.4% respectively. In contrast, growth in Japan and Europe was marginal, reflecting faltering export and weak domestic demand.

1.1.1 The United States of America

On the back of sustained consumer spending, the United States economy grew by 4.4% in 2004 as against 3% in 2003. However, rising household debt-to-income ratios, and household savings, which dropped to a record low of less than 1%, remain key concerns. Business investment also grew solidly, supported by buoyant corporate profitability, even as businesses struggled to cope with higher oil prices, weak employment growth, and mounting debt in the household sector.
Expansionary policy of the US government triggered fiscal deficit, which widened to over US$600 billion, equivalent to 5.7% of GDP in 2004. This record surpassed the previous all time high, set in 2003 by nearly one-quarter. Americans’ appetite for imported goods also helped drive the current account deficit to proportions never attained by any industrial country. The market’s concern about the medium-term sustainability of the current account deficit has been the main factor driving the weakening of the U.S. dollar. Although financing of the deficit was not a fundamental problem, it may have negative impact on living standards in the U.S. in the near to medium-term.
Inflationary pressures in the USA remained subdued, rising slightly to 2.6% from 2.4% in 2003, while the cost-push effect of high oil prices was generally contained due to the Federal Reserves constructive monetary policy, favourable labour market conditions, and the persisting economic slack. Labour productivity in the United States, a critical input into living standards assessments increased by 4.1% in 2004, capping a remarkable three-year period in which worker efficiency climbed at the fastest pace in half a century. However, lower workforce participation has been the main downside of increased efficiency as companies avoided hiring new workers.
At 5.5%, employment growth was considered slow, but showed some level of improvement when compared to the 4.3% recorded in 2003. On the other hand, employment grew marginally by 2.2 million workers, the first annual gain after three years of job losses as the country struggled to cope with the 2001 recession. This job loss recovery rate reflected the ability of US companies to extract more output from a smaller workforce.
Business investment, boosted by improving corporate profits, low interest rates and a recovery in equity prices was strong. Overall, despite the big budget deficit, the United State’s underlying economic fundamentals were robust in 2004 and helped to drive growth worldwide.

1.1.2 Europe

With the exception of the United Kingdom and Ireland, economic activities in the Euro area were sluggish in 2004. GDP grew by 2% largely due to subdued consumer spending. Final domestic demand was restrained due to high and volatile oil prices as well as structural weaknesses, while the appreciation of the Euro weakened export growth. However, modest production increase was recorded in the intermediate, energy and capital goods sectors.
Economic activities contracted in Germany, Italy, and the Netherlands while growth accelerated in France, Spain, and the United Kingdom, which recorded a GDP growth of 3.1%, driven by high domestic demand. Euro area inflation hovered between 1.4% and 2% because of oil price increases and upward review in administered prices and indirect taxes. Still, price pressures such as unit labour costs and wages were well contained. Fiscal deficits in the region were estimated at 2.7% of GDP, with Germany, France, and Greece all exceeding 3% of GDP.
In addition to its long-standing structural challenges, the region is still confronted with the problem of high unemployment figures, while aggregate factor productivity growth in the area could not match the acceleration witnessed in the United States in recent times. Although there have been progress in advancing structural reforms, including labour market reform in Germany and France as well as raising the effective retirement age in Italy, the desired objectives of raising productivity and increasing employment was not attained in 2004. The situation was worsened by the rejection of the European Commission’s proposal to liberalise trade-inservices. Also of concern was Turkey’s application to join the European Union. The admission or otherwise of Turkey into the European Union would have far reaching implications beyond the region itself, as America would see a rejection of Turkey as a big setback in the war on terrorism. In addition, though the amendments to the Stability and Growth Pact (SGP), which provided governments with significant additional fiscal policy flexibility, had been agreed upon, the EU’s inability to strengthen enforcement mechanisms may not guarantee the amendment’s effectiveness. France and Germany have consistently breached the deficit limit for three consecutive years.

1.1.3 Asia

Asia recorded GDP growth of 7.8% in 2004, the highest since the Asian crisis. Growth was driven by high demand from the United States and an upturn in global information and communication technologies (ICT) product markets. While the impetus from powerful growth in China continued to increase, a better-than-anticipated recovery in Japan added new strength to the region’s growth and engendered a rapid expansion in intra regional trade.
With the exception of China, which blazed the trail with growth of 9.5%, growth in most countries in the region slowed considerably. Imports in a growing number of Asian economies outpaced exports, suggesting an increasing contribution to the recovery in the rest of the world. However, improvements in labour markets were relatively weak. Inflation remained subdued in the region and the small number of economies that experienced deflation in the past either reversed it or improved upon the situation. The surge in the prices of commodities and policy interventions in foreign exchange markets increased inflationary pressures in some Asian economies.
In addition, the depreciation of the United States dollar, along with more flexible exchange-rate regimes, allowed most Asian countries to ease monetary policy, as interest rates were generally low in the region. Meanwhile, investor confidence continues to improve, as reflected by the rebound in asset prices and the narrowing of sovereign debt spreads. For the first time in decades, the region registered a current-account surplus. All these contributed to the 7.8% growth achieved in 2004 as against 7.4% in 2003.
However, major worries to this outlook include the tension between the objectives of maintaining inflation and nominal exchange rate stability; vulnerability to commodity price volatility; tightening of monetary policy in the United States; potential difficulties in servicing external debts and political tension in some countries in the region.

1.1.4 Africa

For African economies, 2004 was an exceptional year. GDP growth leapt to 5.1%, compared to 4.1% in 2003, on the back of the rebound in the global economy, favourable commodity prices, and relative improvement in macroeconomic management across the continent. Per capita GDP growth reached 2.3% compared to 1.8% in 2003. It is gratifying to note that this is the highest GDP growth recorded in the continent since 1996 and is well above the annual average of 3.4% achieved in the last five years. In addition, the increased adoption of democratic values, which ushered in transparency, higher inflows of foreign funds and competition, which mitigated the negative effect of volatility on economic growth, assisted in improving the growth potentials of countries in the region.
As usual, economic growth in the review period exhibited considerable variation across countries. About 20 African countries achieved GDP growth rate of above 5% while 17 others recorded a growth rate of between 3% and 5%. Only two countries witnessed negative growth rate compared to six in 2003.
Analysis of the growth trend showed that oil prices, which were high, conferred substantial revenue and foreign exchange advantage on oil exporting countries. Average GDP growth in oil exporting countries rose to 5.1%, compared to 4.3% the previous year. Surprisingly, oil-importing countries equally performed well although there were indications that higher oil prices exerted substantial downward pressure on growth. On the other hand, Africa’s leading reforming countries witnessed substantially higher growth rate. Some of these are Burkina Faso, Botswana, Ghana, Mali, Mozambique, Tanzania, Uganda, Tunisia, Morocco, and South Africa.
In terms of sub-regional patterns, there were significant variations in economic performance. Driven by post-conflict dividends and robust oil prices, central African countries recorded an average growth of 4.7%. Southern African countries appreciated modestly by 4.7% compared to 2.7% in 2003. The West African sub-region grew by an average of 4%, which compares adversely with the 7% recorded the previous year.
The fairly impressive growth notwithstanding, Africa was plagued by a plethora of preventable problems. War and violence were commonplace. Although conflict generally declined during the year, the cases of Sudan, Cote d’Ivoire, etc remained red spots requiring urgent attention. It was also evident that democratic values made significant progress in Africa during the period under review on the back of the African Union’s policy of non-indifference, which helped stem potential crises in Togo, and Sao Tome and Principe. However, the excellent growth figure presented above did little to uplift the pervasive poverty, high external debt overhang, and diseases that plague the continent. Malaria, HIV/AIDS, illiteracy, conflicts, and corruption remain endemic and require urgent attention. Although African leaders at the Ouagadougou meeting in 2004 affirmed that reducing poverty and achieving the Millennium Development Goal (MDG) would be their central focus, the objective of reducing the number of the poor by half in 2015 is unattainable without concerted foreign development assistance. I am heartened by the progress made on the NEPAD initiative. UK Prime Minister Tony Blair’s Commission for Africa launched by the United Kingdom and which carries high prospects of being supported by other members of the G-8 will most likely increase flows of development assistance to Africa and help to fast-track the growth of African economies.

1.2 Nigeria

1.2.1 The Domestic Political Environment

The review period marked the second year of the second term of the democratic dispensation. Government demonstrated clearly its determination to sustain and improve the democratic structures. In spite of government’s efforts, however, democratic structures were confronted by a variety of stress tests. Social and political crises were rife while a number of the legal fallouts of the 2003 general elections were yet to be disposed off by the electoral tribunals. Political crisis in Anambra State constituted a major challenge to the party system, funding of elections and electoral processes. Youth restiveness and ethnic crises continued nationwide, especially in the Niger Delta and other hotbeds in the North. Notable among the latter is the inter-communal clash that led to the imposition of a six-month state of emergency in Plateau State. Labour/government relations in 2004 were frosty. Labour union agitation, especially over increases in the price of refined petroleum products resulted in considerable loss of man-hours and generally increased the cost of doing business. Analysts have estimated the total man-hours lost to labour unrest at about 30 days in 2004.
Government continued to receive plaudits for its effort at confronting corruption in high places. High profile episodes of this crusade impacted positively on the country’s risk rating. Conscientious efforts by the Economic and Financial Crimes Commission (EFCC), the Independent Corrupt Practices Commission (ICPC) and the Budget Monitoring and Price Implementation Unit of the Presidency to increase domestic capacity and accountability are quite commendable. However, a lot needs to be done if the monster of corruption is to be effectively controlled and reduced to an acceptable minimum.
The challenges of insecurity, poor state of infrastructure such as road networks, power and water supply, poverty, unemployment, etc. remained endemic.

1.2.2 The Domestic Economic Environment

The macro-economic policies of the government in 2004 were essentially directed at achieving sustainable economic growth and containing inflation within the single digit range, while minimising exchange rate volatility. I am enthused by the reform proposals rolled out by the federal government during the review period. The launch of the National Economic Empowerment and Development Strategy (NEEDS) marked government’s desire to implement economic reforms in all sectors of the economy. NEEDS, if diligently implemented is a pro-poor policy, which should achieve the desired reduction in current levels of poverty through its investment - employmentpoverty linkage approach. NEEDS, together with its state equivalent (SEEDS) and LEEDS for local governments would have a high multiplier effect on the economy and in particular for the poor and low-income group.
Strenuous efforts were also made to obtain debt relief from creditors by a new team of technocrats, who are optimistic of obtaining a write-off of large portions of the country’s debt stock of US$34 billion. To achieve this objective, government has made frantic efforts to impose discipline on the public expenditure management framework, including the unprecedented act of saving excess crude oil revenue. Nigeria also worked closely with the International Monetary Fund (IMF), which has commended its efforts. Three major reasons have being adduced for the debt write-off: per capita oil revenue per day is 50 cents; much of the debt is “odious”, having been contracted under unelected administrations; and there is now a fair chance that the proceeds of the relief would be sensibly invested, simultaneously boosting the on-going reformation.
Furthermore, in the review period, government went further down the path of improved economic management by proposing a fiscal responsibility act, currently under consideration by the National Assembly. The act would standardise accounting practices in government and institute independent audits for the three tiers of government with a view to improving governance processes. Despite government’s best efforts, the economy remains in dire need of restructuring. The oil sector continues to account for over 76.5% of Federal Government revenue, more than 95% of export earnings, and 10.6% of GDP. Agriculture is still the main occupation of majority of Nigerians but accounts for about 40% of GDP, with gross capital formation already low at around 6.3% occuring almost exclusively in the oil sector. However, the incessant hikes in the price of petroleum products led to resurgence in inflation, drop in consumer purchasing power, and a drop in corporate profits amongst others. The high petroleum prices were in response to the high price of crude oil in the international market resulting in higher domestic landing cost of petroleum products. The 2004 performance was greatly influenced by developments in the oil and gas sectors. The economy grew by 3.5% in 2004 as against 10.2% (measured in 1990 basic prices) recorded in 2003. Capacity utilisation improved slightly to 52% in 2004 as against 47% in 2003 largely due to the ban on importation of goods that could otherwise be manufactured locally and the strong campaign by the National Agency for Food and Drug Administration and Control (NAFDAC) against illegal importation of banned and fake products.
Inadequate infrastructure, especially frequent power outages, epileptic water supply, and insecurity continue to be major concerns for the industrial sector. While power supply has long been erratic, it became increasingly unreliable in 2004 and almost unavailable in the first quarter of 2005. The need to run backup generators, and run-down motorways contributed to the abysmal contribution of this sector to GDP in the review period.
The nation’s teledensity and telecommunication industry received a boost in 2004 as over four million new lines were added to the network while investment worth about US$3 billion (local and foreign) was injected. This brought the total number of telephone lines (mobile & fixed wireless) in the country to about nine million, up by 225% from the 2.77 million lines in 2003. Also, teledensity grew from 2.31 to 7.5 with mobile phones accounting for more than seven million of the total available telephone lines.
On a positive note, for the first time in almost two decades, the monetary policy target was met. In the twelve months to end-December 2004, narrow money (M1) and broad money (M2) rose by 9.1% and 15.2%, respectively compared with the 2004 targets of 13.4% and 16%. According to the National Bureau of Statistics estimates, the 12 months moving average inflation figure stood at 15% at end December 2004 as against 13.8% in 2003.
Owing to the depreciation of the dollar in the international market, the Naira for the first time in seven years recorded a positive growth against the dollar in the review period. The value of the Naira appreciated against the dollar by 3.03% to close the year at US$132.85 in the official market as against N137/US$ in 2003. Demand pressure in the foreign exchange market was curtailed during the year largely due to the enhanced external reserves position, which recorded an unprecedented rise of 126% to close at US$16.95 billion at end-December 2004 from US$7.5 billion the corresponding period, largely due to higher oil prices in the international market.
Nigeria’s external debt obligations now stands at US$34 billion with an expected annual debt service of US$2.1 billion, after rescheduling agreements, to the biggest creditor, the Paris Club. By implication, payment of such a large amount would mean that little or no capital expenditure for health, education and infrastructure, could be financed and hence, growth would be jeopardised. Since Nigeria’s campaign for debt relief/cancellation since 1999 seem unsuccessful, the National Assembly considered the implications of outright suspension of debt payments.
The capital market witnessed modest growth in 2004. Midyear, the NSE All-Share index attained an all-time high of 30,703.46 points while market capitalisation achieved a high of N2.19 trillion, thus bringing growth in the NSE All-Share Index as at June 18, 2004 to 52.5%. However, From July 1 to December 31, 2004 the market recorded a negative performance of 13.2% in its value to close the year at 18.46%, while market capitalisation closed at N37.5 trillion and the allshare index closed at 23,844.45 points, representing a growth of 18.5% compared to 20,122 points recorded in 2003.
In spite of the relatively poor performance of the Nigerian stock market, it outperformed most of the major world stock market indices in 2004.

1.3 The Banking Industry

One of the notable banking developments during the year was the appointment of a new Governor of the Central Bank of Nigeria (CBN), Professor Charles Soludo, following the retirement of the erstwhile Governor, Chief (Dr.) Joseph Sanusi. On the resumption of the new governor, the minimum paid-up capital of banks was raised from N2 billion to N25 billion with a view to strengthening the banking industry. The upward review forms part of the major elements of the reforms by the CBN in the first phase of the banking sector reforms. Banks are expected to fully comply by December 31, 2005.
As a result of the significant dependence of banks on government deposits, accounting for over 20% of total deposit liabilities of deposit money banks, the CBN, in the review period commenced phased withdrawal of N74.5 billion government fund from banks. This created panic and distrust in the system, as some relatively small banks, which had depended on the funds, were reported to have defaulted on their financial obligations.
In order to align interest rate movements with market fundamentals, the CBN reviewed the MRR downward by 200 basis points to 13% in the first quarter of 2005, while the spread between banks’ deposit and lending rates remained wide. Remarkably, the spread between the weighted average deposit and maximum lending rates closed 2004 at 10.63%, while the margin between the average savings deposit and maximum lending rates stood at 16.07%, as against 12.4% and 18.20% respectively at end-December 2003. While maximum lending rate was pegged at MRR+4%, the Cash Reserve Requirement was reduced from 12.5% to 9.5%. Also, the daily Open Market Operations (OMO) was introduced to effectively control the level of liquidity in the system, while the 182 day-Treasury bills was introduced to restructure the CBN’s debt portfolio.
In addition, as opposed to the traditional practice of anchoring the MRR on the 12-month moving average rate of inflation, the Minimum Rediscount Rate (MRR) is to be determined by the year-on-year inflation rate. This is to ensure that the MRR serves more as a true anchor on which other rates in the money market is predicated. Going forward, review of the MRR is to be on a quarterly basis.

2. Operating Results

Despite the highly competitive operating environment, your bank posted yet another strong performance in the 2004/05 financial year, thereby fulfilling its key commitments to our shareholders. The performance compared favourably with industry average, with gross earnings of N49.5 billion, which represents an increase of 9.76% on the N45.1 billion posted in the prior financial year. Also Profit Before Tax at N15.15 billion, a 7.37% increase on the N14.11 billion recorded in the 2003/04 financial year, was the highest in the industry. Profit After tax was N12.2 billion, compared with N11.1 billion for the previous year, an increase of 9.91%. As a result, the Board is proposing a Dividend Payment of N1.60k to shareholders, representing 5 kobo increase on the previous year’s. Also, a bonus issue of one (1) for every four (4) ordinary shares held is recommended. This increased return to our shareholders represents a 52.3% dividend payout ratio for the year, which is in line with the Board’s long stated policy of exceeding shareholders’ expectations.
Importantly, this marks the tenth year in a row that dividends have been consistently paid and your Board is confident that these increases would further propel the Bank for future improvement.

3. Board Changes

3.1 Appointments

There was no appointment to the Board of Directors in the last financial year.
3.2 Retirement
I wish to formally announce the retirement of our longest serving executive director, Alhaji Umar Yahaya who retired from the Board of Directors effective August 20, 2004. On behalf of the Board and my humble self, I thank him sincerely for his diligence, hard work, and commitment to the Bank during his years in service. While wishing him a blissful retirement, we hope to count on his experience and look forward to his continued support even in retirement.
3.3 Retirement by Rotation
In accordance with the Company’s Article of Association, Alhaji M. Ibrahim OFR, Brigadier General Abba Kyari (Rtd.), Mr. B.A. Bakare and Mrs. Christy N. Okoye retire by rotation, and being eligible, offer themselves for re- election.

4. Outlook For 2005/2006

4.1 The Global Economy

The outlook for the global economy in 2005 will be largely dependent on the fortunes of the United States and China. According to the IMF, global economic growth is projected to moderate to 4.3% in 2005, 0.8% point slower than in 2004. However, projected growth may be undermined by slower growth in the United States and China. Also, high oil prices may hurt nearly all countries, especially those with currencies pegged to the U.S. dollar. Other vulnerabilities that may affect the short-term outlook are the deepening global imbalance from the high external trade deficit of the US, structural weaknesses in key industrialised nations and the high fiscal deficits in highly industrialised nations, except Canada.

4.2 The United States of America

On the strength of first quarter indices, which indicate generally robust business growth and strong consumer confidence, the outlook for 2005 is encouraging. GDP growth is projected to average 3.6%. Business investment, which finished 2004 on a high note, promises to remain strong, buoyed by favourable financing rates, sound corporate balance sheets, and rising business confidence. Consumer spending should lead the way, though at a more tempered pace than in 2004. The unemployment rate is expected to taper, gradually falling to 5% or thereabout by the end of 2005. Inflation should decelerate slightly from 2.7% in 2004 to 2.3% in 2005 while employee compensation costs will accelerate moderately, as the slack in the economy is picked up. US economic policy should become more restrictive during the forecast period as the Federal Reserve may boost its target fed funds rate to 4% by the end of 2005. Consequently, the housing boom may bottom out in the face of higher interest rates and government spending should moderate. With expenditure on the wars on terrorism over the years expected to rise, fiscal prudence is likely to become the major focus for the US government in the medium-term with an envisaged reduction in non-defense discretionary spending to its lowest share of GDP in over 40 years. Consequently, with renewed commitment of the Bush administration to halve the fiscal deficit by 2009, the federal budget deficit should at least stabilise and perhaps decline over the next ten years.

4.3 Europe

Economic indicators in the first quarter of 2005 were mixed. While industrial production and retail sales in the Euro area firmed, business and consumer confidence were generally weak. Consequently, GDP is projected to grow by 1.6 % over the next twelve months. Besides, after a sharp improvement in industrial confidence in December 2004, there have been signs of relapse lately, reflecting wavering views about future business conditions. The gradual rebound will continue to rely on an expansion of exports and investment spending. Consumption is expected to pick up, but not to such an extent as to play a major role in generating growth. As external demand increases, further acceleration is expected. Stronger growth in South-Eastern Europe may be supported by high rates of investment associated with ongoing privatisation and the upgrading of production facilities. Recovery in investment is also expected in Central Europe, especially in Poland, where financial conditions in the corporate sector are fast improving. Monetary policy has been eased in a number of EU countries over the past year, partly in response to currency appreciations, but room for further monetary expansion seems to be limited as inflationary pressures are building. As most economies in the region have large budget deficits, fiscal policies will continue to focus on consolidation. The region’s downside risks include the possibility of weakening business confidence in EU, which may, however, be mitigated if it causes some EU firms to relocate production out of the region as a cost-cutting measure.
A major policy challenge for each of these economies is to work out a comprehensive post-enlargement strategy that minimises any adverse impact from the application of EU rules and regulations, entailing, for example, the need to phase out production subsidies and abolish preferential tax treatment for foreign investors. Overall, the continent may achieve a 1.8% GDP growth.

4.4 Asia

Japan is expected to grow by over 2% in 2005. The hoped-for resurgence would be driven mainly by exports, particularly from other Asian economies. The nascent external demandled recovery has gradually fed through to the domestic sector, with an increasing number of companies showing positive domestic earnings. Business capital spending is growing at a brisk pace as corporate profits grow strongly, and latest surveys show that improvement in corporate investment conditions is broadly based. For economic growth to become more self-sustained, the strength of the business sector needs to be transferred to the household sector through increases in wages and employment. Meanwhile, elimination of deflation requires action to be taken with regard to a number of structural problems, such as the decreasing but still large volume of non-performing loans in the banking sector, the fragile financial positions of both the public and the private sectors, and the need for corporate restructuring.

4.5 Africa

GDP growth in Africa is expected to accelerate in 2005 as many countries achieve increases in agricultural and industrial output. Anticipated peace, higher consumer spending, favourable weather conditions, increased investment, including more foreign direct investment (FDI), and expanded, though cautious, government expenditure in a growing number of countries are expected to support rising domestic demand. Meanwhile, a more auspicious external environment, including higher prices of commodities and increased demand for Africa’s exports are expected to improve the prospects of a large number of countries in the region. However, the current boom in oil and non-oil commodity exports, as well as exports of manufactured goods to the European Union (EU) and the United States under improved market access conditions, would begin to taper off in 2005. The short-term outlook for Africa is favourable in the absence of any major supply-side shocks to domestic output such as adverse weather conditions that would disrupt agricultural output or, for fuel-importing countries, a prolongation of the surge in the price of oil. Overall, acceleration in growth is expected in Africa in 2005. With improved domestic policies and good governance coupled with a more favourable international economic environment, growth is expected to improve further in 2005. Nevertheless, the improvement may be far short of the quantum leap necessary to extricate the continent from its “poverty trap”.
Apart from such downside risks as the crises in Darfur and Côte d’Ivoire, peace has returned to many more countries. Democracy and human rights are strengthening in Africa and the economy is booming in many countries. The link between democracy and development has been demonstrated and the outlook for 2005 is mostly positive on the strength of this widespread recognition. Overall, with the peace initiatives anchored by the Presidents of Africa’s richest and most populous nations respectively, Thabo Mbeki and his Excellency, Olusegun Obasanjo, Africa should attain a 6% - 7% growth in 2005.

4.6 Domestic Economy

Nigeria’s economy is forecast to grow by 7.4% in 2005, a rate of growth clearly above the convergence criteria required by the West African Monetary Zone (WAMZ). However, the growth would be primarily driven by the energy sector, and may not necessarily cascade to the entire economy. Besides, other areas of concern in the outlook are the attainment of a single digit inflation rate in the face of rising oil prices, and ability to achieve 7.4% GDP growth rate. On a positive note however, the set targets could be achieved and surpassed if the various economic reforms of the government are implemented. Government could consolidate its 2004 achievement by stimulating non-oil sector growth, pursuing fiscal stability, reducing the inflation rate, with enough funding capability, further working towards exchange rate stability, and ensuring the implementation of a tight monetary policy. In addition, with government’s commitment to save the oil windfall, its resolve to operate within an aggregate expenditure ceiling of N1.62 trillion, resulting in a deficit of N314 billion, the expected high prices of crude oil in the international market which currently hovers between US$45 and US$50, coupled with the renewed anti-corruption crusade, ample economic growth and development should be achieved.
Interest rates may remain relatively low if Government’s efforts at ensuring a revamp of the real sector are anything to go by. Hence, some level of relative stability should be expected. Given the resolve of the three tiers of government to share part of the oil windfall on a quarterly basis, with the attendant liquidity surge, monetary policy for the year might be very tight with the possibility of withdrawals of public sector funds from the financial system. There may be a possible realignment of Government securities from the 91-days and 182-days treasury bills to 365-days treasury bills, as this would enable government stretch out its liabilities.

4.7 The Bank

The Bank has performed well in almost all parameters, despite the tough operating environment where intense competition held sway. Irrespective of the challenges posed by consolidation, we are confident of the Bank’s future prospects across any range of metrics. The Bank will take the fullest advantage of its branch network as well as the opportunities provided by the recent banking reforms to the benefit of all stakeholders. We will continue to evaluate acquisition opportunities as they arise, but we will only execute transactions, which justify and satisfy our long-term strategic objectives as well as meet the stringent criteria we impose. Most importantly, we will continue to remain vigilant on all risk and asset quality issues.
We shall evolve new benchmarks centred on brand building to ensure that the trust and confidence of our customers are retained. Through focused customer orientation, improved service delivery, enhanced branch network and further investment in state-of-the-art technology; we shall create stronger brand equity for the Bank.
With renewed transparency in our dealings and the adoption of best practices of corporate governance, we shall attract new relationships by enhancing customers’ trust and confidence, thereby creating additional value for stakeholders. With our strong balance sheet, we shall continue to make strategic investments to enhance our multifaceted offering to customers and no peak shall be difficult for us to attain.
Despite the near-term challenges, our Bank should deliver growth again in fiscal 2005. The legacy of the Bank and the soundness of our strategies should enable the Bank to grow revenues in excess of industry average. I am very pleased with our achievements and look forward to better performance in the 2005/2006 financial year.

5. Appreciation

Gentlemen, it is time to find words to express my gratitude. As usual, I had the good fortune of receiving valuable guidance and sound advice in abundant measure from very competent and learned colleagues on the Board of the Bank. Their vision and wisdom have been instrumental in shaping the destiny, and elevating the position of your Bank as one with strong fundamentals. I am grateful to the shareholders of the Bank, for their valuable support over the years. Your abiding trust and encouragement would motivate our team to take your Bank to greater heights of excellence in the days to come. On behalf of the Bank and myself, I profusely thank all our customers and well-wishers for their patronage, support, and encouragement at all times. The Bank has immensely benefited from the contributions made by its auditors, legal advisors, and correspondents and I am grateful to all of them. The caring and committed employees of your Bank also deserve unreserved appreciation for their teamwork and contributions to the Bank’s heartening performance. I am also grateful to the regulatory authorities amongst which are the NDIC, NSE, SEC, correspondent banks, fellow bankers, and the state governments for their unalloyed support during the year. I am greatly beholden to the Federal Government of Nigeria and the CBN for their valuable support and guidance in the review period and solicit their continued support in the years to come.
Thank you distinguished ladies and gentlemen for your kind attention.


Alhaji (Dr.) Umaru Abdul Mutallab (CON)
CHAIRMAN

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