MANAGING DIRECTOR'S REVIEW FOR THE FINANCIAL YEAR ENDED 31ST
MARCH 2005

Introduction
Industry Review
The Bank
Outlook
Conclusion

1 INTRODUCTION

Distinguished shareholders, ladies and gentlemen. It is my privilege and honour to welcome you to the 36th Annual General Meeting (AGM) of our Bank and to present to you the financial statements for the year ended March 31, 2005. I am pleased to report that the FirstBank Group continued its long term growth trend by completing another year successfully despite challenges from the operating environment.

The out-gone year was characterised by a number of developments, all of which challenged our ability to respond to change in a very proactive and pragmatic manner. Our main focus in this respect was to ensure that revenue opportunities are transacted at acceptable levels of risk in the face of increased market volatility and competition. The core second priority was the containment of costs and maintenance of margins in an environment in which infrastructural facilities are unreliable and interest rates continue a southward trend. Indeed, the main task before the Bank in the financial year under review was the pursuit of continued good performance and improvement in our core businesses, while substantially reducing credit losses. In spite of the downsides to the industry outlook, we were able to take some bold steps which positioned us firmly as the pre-eminent provider of financial services in Nigeria.

The fact that the business environment remains susceptible to changes is not in itself new. Indeed over the years, this aspect of our life as an organisation has strengthened our capacity for continuous and never-ending improvement, and frequent adaptation without losing our identity and core values. We reinforced this process of continuous renewal in the review period with the unveiling of our new brand. Fashioned in response to the changing business environment and the changing needs of our customers, the objective of the brand transformation project is to confer a younger, modern, attractive, and nimble look and feel on the Bank. The new aesthetics also complements a greatly improved customer service model driven by a passion to continue to outperform competition.

The branding initiative however transcends the changes in the look and feel of the Bank’s physical attributes such as the logo and aesthetics of our business locations. The core concept of our brand “dependably dynamic” captures the spirit of the Bank’s personality. It is in this sense, a distillate of our experiences, present reality, and future projections. Its realisation rests on four pillars that will ensure the Bank’s continuity and progress. These are leadership; safety and security; enterprise; and service excellence.

Our concept of leadership emphasises the status and financial strength of your bank within the industry. Safety and security depicts the Bank’s concern for the inviolability of depositors’ funds, the security of investors’ funds, and the protection of employees’ jobs. Enterprise represents our focus on flexibility, creativity, initiative, and tenacity of purpose, while service excellence emphasises our relentless commitment to process efficiency, focused performance, and accessibility.

2. INDUSTRY REVIEW

The 12-months to end-March 2005 witnessed an unprecedented number of changes in the industry. The major event in the financial services industry in 2004 was the banking sector reforms announced by the Central Bank of Nigeria (CBN) on July 6, 2004. The reform, aimed at broadening and deepening the financial system, has as its high point, the raising of banks’ minimum capital from N2 billion to N25 billion, with full compliance by the end of December 2005. Expectedly, this spurred a flurry of activities by banks to meet the December 2005 deadline. Most of the more visible initiatives undertaken by industry players were geared towards mergers/acquisitions and raising of funds from the capital market. So far, banks have raised about N210.5 billion, through public offers and private placements, in order to meet the consolidation requirement. The outlines of the post consolidation structure of the industry became clearer by the first quarter of 2005 as 15 groups involving 47 banks were granted pre-merger consent, while one group obtained CBN approval-in-principle. Developments in the period since then indicate that by the end of the consolidation exercise, Nigeria would most likely have not more than 25 strong and reliable banks.

With the Bank’s capital base as at 31 March 2004 at N38.6 billion, and our strategic intent of becoming the “Clear Leader” in Nigeria’s financial services industry, the ongoing industry reform initiative presents a great opportunity for our bank to accelerate the execution of our strategic intent. Our near-term response has focused on acquiring strategic banks to further strengthen our leadership of the market. We do believe that post-consolidation, our advantage of size and scale will play a significant role in the industry.

The central goal of the industry reform initiative is to build upon the achievement of the financial services sector, especially in the last 10 years. The proposed reforms to be executed in two phases, also aim at restoring confidence in the banking system, and strengthening it to play competitive roles in the African and global markets. One important outcome of the consolidation exercise was the huge increase in investment in the capital market as banks shopped for funds to meet the new capital requirement.

On the downside, the consolidation and shakeout phases of the reforms hold out huge disruptive potentials for the industry. Whereas, in the medium to long-term its impact on the industry is expected to be salutary, the near-term impact on the interbank market has amplified existing vulnerabilities. Net placers of funds in this market, of which FirstBank is notable, have had to make necessary adjustments in response to the problems posed by weak banks in the market. The downward slide in lending rates which started in November 2002, continued in 2004, with an official rate ceiling of 19% (MRR+4). The situation has, however been complicated by a further reduction in the Minimum Rediscount Rate (MRR) from 15% to 13% early in 2005.

Another significant change in the banking sector was the implementation of the new settlement system which saw the appointment of the following banks as settlement banks: First Bank, Union Bank, UBA, Zenith, Standard Trust Bank, Wema, and GTB. The reform, which took effect in April 2004, is designed to unburden the CBN of its previous responsibility for the daily control of the settlement system, and make this function to be market driven, with the settlement banks at its core. The on-going reform of the industry may however necessitate a restructuring of the new settlement system.

The Central Bank’s efforts at broadening and deepening the financial services industry continued in the period under review with the transition to a risk-focused, rule-based regulatory framework. The apex body also automated reporting requirements, and adopted a number of monetary policy measures to check the problem of excess liquidity in the banking system. These measures include the phased withdrawal of public sector deposits from the industry and upward revision of cash reserve requirements from 9.5% to 10%. Although the computed excess liquidity in the banking system as at the end of the review period was N80 billion, the withdrawal of public sector deposits put further pressure on rates.

The operating guidelines for discount houses were revised during the period, with the minimum capital base increased from N500 million to N1 billion. The review, like the on-going banking consolidation, is expected to further strengthen the financial services industry and deepen the money market. The CBN committee on implementation of Basle II (a regulatory capital framework which aims at building a solid foundation for prudent capital regulation, supervision, and market discipline, as well as further enhancing risk management and financial stability) progressed to sensitise the industry on the needs and benefits of the framework. Essentially the aims of the Basle II Accord are to promote the soundness and stability of the global banking and financial system; to enhance competitive equality; and to provide a more widely applicable approach to the capital assessment process. Basle II’s three basic pillars define capital requirements for credit, market, and operations risks; specify the structure of reporting by banks to regulators; and outline requirements for disclosure to markets.

I am glad to report that we have responded to the imperative of the Accord by instituting a project team to prepare the Bank for the adoption of the new capital regulatory framework well before the take-off date tentatively fixed for 2008.

The Pension Reform Act, enacted in June 2004 capped the sequence of reforms for the period under review. By replacing the defined benefits scheme with a defined contribution framework, the Act simultaneously tackles the legacy of unfunded public pensions, while creating institutions for the mobilisation and management of domestic savings. The Act specifically provides for contributory pension by employees and employers, under which the former is expected to contribute a minimum of 7.5% of his/her monthly income with the employer contributing an equal percentage. It is gladdening to note that our Bank has been granted approval by the CBN to establish a pension funds custodian company to fully reap the benefits provided by this new arrangement. The development specifically would promote savings as over N200 billion accumulated pension funds are on ground, while government’s unfunded pension obligation is estimated at over N2 trillion.

Generally, the operating environment in the 12 months to end-March 2005 was tasking and our response has been to focus on growth and profitability. Consolidation would however stretch industry profitability in the short-term, as banks struggle to optimise returns on the new and enhanced capital base. Ahead of this, we have begun creating new business lines and adopting more aggressive business models and processes to position us ahead of competition. We have, in fact, changed our operating model in order to empower our front-office personnel to deliver our products and services more efficiently.

3. THE BANK

3.1 Financial Performance

Despite the difficult business environment under which the bank operated during the review period, our balance sheet closed at N379 billion, representing an increase of 21.3% on the N312.49 billion achieved in the previous year. Our performance was enhanced by increases in deposits and other liabilities, which grew by 28% over the previous year’s figure, but the benefits of these were not fully realised due to the near-collapse of the interbank market in which we are a major lender. Gross earnings increased to N49.5 billion from N45.12 billion recorded in the preceding year, as a result of growth in both interest and noninterest income. Interest income grew marginally by 8% to close at N32.27 billion while non-interest income rose by 12.9% to close at N17.23 billion. Overhead for the year closed at N26.5 billion representing an increase of 6.4% when compared with the N24.9 billion recorded in the previous year. The increase was largely accounted for by staff related costs, expenses related to rollout of our new banking applications, Finacle, to more branches and infrastructure related expenses such as light and power as we relied mainly on stand-by generators for our Head Office building and branches during the period. NDIC premium increased by 22.5%, to N1.6 billion while depreciation on fixed assets grew by N577 million or 35% over prior year’s figure as a result of additional investments in fixed assets to cope with the demands of our operation and our strategy of growth and modernisation. Overall, the increase in overheads was generally below inflation rate which stood at 16.3% as at the end of the review period.

Accordingly, profit before tax rose by 7.37% from N14.11 billion in 2003/2004 to N15.15 billion during the year. Prudent management boosted our performance, with Profit after tax also increasing by 9.9% to N12.2 from the N11.1 billion recorded in the previous year.

3.2. Appropriations

In adherence to the provisions of the law, N1.83 billion has been transferred to statutory reserve, while N1.5 billion representing 10% of profit before tax has been set aside for Small and Medium Enterprises Equity Investment Scheme reserve. The sum of N6.3 billion representing 52.3% of profit after tax is being proposed as dividend to shareholders. This amounts to a dividend payout of N1.60k for each 50 kobo share held and an increase of 16.5% over the amount paid out in the last financial year. The humongous dividend proposed (N6.3 billion) is the largest absolute dividend in the financial services industry so far.

Furthermore, we are proposing a bonus issue of one for every four ordinary shares held in line with our commitment to improving shareholders’ value. Consequently, the sum of N494 million has been set aside as bonus issue reserve while the balance of N2.02 billion has been transferred to general reserve.

3.3 Material Issues Regarding Employees and Other Stakeholders

On the strength of our operations during the review period, we do not have any material human capital management concerns, which could unfavourably affect the continuity of the Bank’s business in the nearest future. Our executive management team is made up of individuals with diverse qualifications, experience, knowledge, attitude, and skills. The composition of the team is designed to guarantee that the Bank is not faced with “key man risk”. We are confident of our ability to retain this mix of competencies to effectively achieve our vision and mission.

We have continued to invest in the health of our valued employees and the building of our human resource capacity. We do maintain a standard Staff Clinic at the Head Office, and have retainership agreements with several strategically placed hospitals to provide health services to our workforce all over the country. During the review year, the Bank sponsored members of staff with special medical cases for treatment abroad.

In order to meet the training needs of our staff, we continued to run our learning centres in Lagos and four other locations across the country. A good number of our staff benefited from external courses and seminars provided by first class institutions both in Nigeria and abroad.

3.4 Material Credit Risk Events

The collapse of the interbank market during the review period was particularly troubling. Nevertheless, our proactive credit risk management helped mitigate our exposure to troubled obligors in the market. Thus, in spite of the rapid changes likely to occur in the industry in the near-term, there are no material (credit riskrelated) worries to the Bank’s business outlook going forward. The economy will remain a key concern in the future but the reform agenda of the present administration should moderate these in the long-term.

3.5 Compliance Function

Our Compliance function was further strengthened during the review period with the:

• Approval by the Board of a revised and more robust money laundering policy and procedure manual;
• Training of our staff bank-wide by officials of National Law and Drug Enforcement Agency (NDLEA)
• Continuous circulation of topical compliance issues to all staff through newsletters and the Bank’s intranet; and
• Inculcation in all training programmes organised by the Bank of the role and responsibility of the Board, Management, and Staff on compliance and money laundering.

3.6 Small & Medium Enterprises Equity Investment Scheme (SMEEIS)

Through First Funds Limited, your bank’s private equity company, we redoubled our support for the Small and Medium Enterprises sector. To this end, of the N2.723 billion we have put in the scheme so far, First Funds Limited, has N1.896 billion under management, while SME Managers have N360 million. Distinguished shareholders, our Bank has at year-end accumulated N5.383 billion as reserves for the scheme. We are poised to increase disbursements under the scheme as we go forward.

3.7 Branch Network & Customer Service Initiative

Our branch network expansion programme suffered a set-back during the review period as the regulatory authorities slowed down on approval of new branches in view of the on-going consolidation programme. As a result, we were able to open only seven new branches bringing the total number of our branches to 365. We remain committed to our goal of being the lead service provider in the nation’s financial services industry. We have repackaged some of our product offerings like the First Saving Plus and Automated Telegraphic Transfer, and have implemented several service standards in pilot branches as the beginning of the development of a revised Service Charter for the Bank. Our Client Service Management Unit has impacted positively on service delivery, and is working tirelessly to discover new and better ways of meeting and surpassing customers’ expectations.
In the review period, a new cheque management centre was established in Benin City to improve the delivery time of chequebooks to our customers in Delta, Edo, Bayelsa, Ondo, and Ekiti states. This is in conjunction with the automation of the cheque request process. We expect that our customers will reap the benefits of improved service in all areas of interaction with the Bank over the next six months.

3.8 Information Technology

Information technology is increasingly becoming an indispensable utility, supporting and driving processes in the services and manufacturing sectors alike. Our processes are evidently beyond this stage. The next level is to leverage IT at the cutting edge of our processes, by delivering mass customised products/services, and improving the efficiency of our resource conversion process. Unlike other utilities, though, IT still offers stupendous opportunities for managing the product life cycle for value; and for fast tracking the time-to-market of our new product delivery process.

In addition, with 250 on-line real-time branches, we are offering unparalleled customer interface with the Bank. The Bank’s Internet banking has continued to gain acceptance. In the review period, we deployed more ATMs and issued more debit cards with a view to decongest our banking halls and facilitate prompt cash withdrawals. More importantly, our transaction volume grew at an average of 30% per month and the value of cash withdrawal at the ATMs increased in like manner. These have been greatly facilitated by our collaboration with other banks through InterSwitch to encourage increased use of cards in banking transactions. The collaboration ensures that FBN cardholders can visit the ATMS of any bank connected to InterSwitch to carry out their transactions and vice versa.

We also acted as settlement bank for all ATM Consortium (ATMC) transactions and supported ATMC with Cash in transit services in 23 of the 30 locations within the Lagos area. Hence, activity on the Quickcash logo, which provides 24-hour service to cardholders of member banks, has been stimulated. In order to support the availability of cash in good quality for our ATMs and customers, we have developed cash sorting centres in eleven locations across the country.

Activity on the Quickcash logo, which provides 24-hour service to cardholders of member banks, has been stimulated. In order to support the availability of cash in good quality for our ATMs and customers, we have developed cash sorting centres in eleven locations across the country.

The Bank deployed more MasterCard on-line terminals to merchants and key branches, and converted most of the existing merchants from manual transaction processing to electronic processing. We also successfully launched the first Point of Sales (PoS) terminal that accepts local debit cards from FirstBank and other banks on the interSwitch network. This was a landmark achievement, which was widely reported, in the news media. Today, our Bank is the number one bank in the ValueCard consortium on merchant acquired transactions.

Other electronic products developed in the last one year include Electronic Payment System Solution (currently being used by the Federal Inland Revenue Service, NEPA and Lagos Water Corporation) and Telephone Banking. These are aimed at improving service delivery to our esteemed customers.

3.9 Manpower Development

In the review period, we continued with our recruitment policy of maintaining a skill mix, which is intended to rejuvenate our workforce through a combination of entry level and executive recruitment. To this end, we recruited 850 Executive Trainees nationwide to ensure continuous supply of personnel for our business. This initiative has also served to reduce unemployment level in the country and enhanced our corporate/social responsibility. These new crop of young FirstBankers completed an intensive induction programme in April 2005.

To further strengthen our workforce we also recruited various professionals with broad industry knowledge and hands-on experience to enable us take advantage of emerging opportunities in big-ticket transactions and deal structuring during the year. The resources expended in this regards have started to manifest positively in enhanced deal flows and flawless execution. Overall, the Bank had total staff strength of 6,698 as at March 31, 2005. Of these, 18% were officers, 79% were senior staff and 3% were in the management cadre. We continued to devote appreciable resources to staff training and development, both through local and foreign facilitation.

Convinced that our role as one of the leading employers of labour outside the public sector behoves on us a moral obligation for post-employment re-integration of our personnel into the larger society, we have paid as much attention to the welfare of our pensioners as we have to our staff. We shall continue to motivate our people to achieve higher levels of productivity and engage men and women with the requisite skill and experience.

3.10 Financing the Economy

As a result of a number of the initiatives enunciated above, our Bank consolidated on its reputation as industry leader in loan syndication by closing a landmark N20.0 billion (twenty billion naira) medium term loan for West African Portland Cement Plc (WAPCO), by acting as Lead Arranger and Agent Bank. The Bank won the mandate to act as the underwriter and co-adviser for the N10.00 billion (ten billion Naira) Rights Issue by WAPCO. We also acted as a Lead Arranger in a N60.0 billion (sixty billion Naira) syndicated loan facility for Dangote Industries Limited, Nigeria’s largest indigenous conglomerate. This is the biggest of such transaction by any bank in Nigeria.

3.11 Agric Business & SME Operations

In giving impetus to government’s drive towards self-sufficiency in food production, employment generation and diversification of the economy, the Bank approved the sum of N1 billion for disbursement to farmers nationwide under a new initiative called Agricultural Development Trust Fund Credit (ADTFC). Already, the sum of N486 million has been assigned to some states under the scheme while Memorandum of Understanding for its implementation is being executed with more states of the federation. disbursement to farmers nationwide under a new initiative called Agricultural Development Trust Fund Credit (ADTFC). Already, the sum of N486 million has been assigned to some states under the scheme while Memorandum of Understanding for its implementation is being executed with more states of the federation.

Besides the special programme, the Bank maintained its direct financing operations to both small and large scale farmers by way of its numerous agricultural finance products.

3.12 Recognition & Awards

During the review period, reputable institutions both at home and abroad duly recognized our consistent superior performance. The Bank received the prestigious Euromoney Award in London as the Best Bank in Nigeria, and the reputable US-based Global Finance Magazine equally awarded the Bank the Best Emerging Market Bank as well as the Best Foreign Exchange Bank in Nigeria.

Equally, the Influential UK-based Banker Magazine rated the Bank the largest bank in Nigeria and seventh in Africa in terms of tier-one capital. The Bank as well received the Nigerian Stock Exchange and Pearl Awards in the review period. Furthermore, our Bank received the highest rating of the JIC Governance Plus. Our Bank also emerged as the best brand in the banking industry in the 2004 Alder Consulting brand rating exercise.

4. OUTLOOK

The out-gone year was very challenging and it has positioned the Bank to seek newer opportunities for growth. Although our Bank has substantial capacity for organic growth and significant investment opportunities in our core businesses, the consolidation exercise has opened for us fresh opportunities to further expand our business focus.

The general rebound in the global economy, the increasing democratisation in the African continent, and the growing business confidence in Nigeria engendered by the successful transition from one democratic government to another, would offer First Bank an opportunity to consolidate on its leading position in the Nigerian financial services industry and make appreciable inroad into the international market.

The future, no doubt, is competitive. We have, therefore, put in place structures that would enable us seek new strategic growth opportunities in our increasingly volatile operating environment. Indeed, we will continue to leverage our strength as the most profitable and largest Nigerian bank in terms of branch network and shareholders funds to provide our customers with excellent financial services.

In the years ahead, technology would continue to drive our business. We will target getting more than 90% of our branches on-line. Currently we have achieved more than 68% of this, making First Bank the largest on-line bank in Nigeria. We particularly hope to leverage technology to improve our customer service delivery and further enhance the value chain. We are very optimistic that the new financial year will usher in an ing banking public in the local market. We are poised more than ever before to reinvigorate our customer service premise of being the bank of first choice. economic environment that would brighten our income expectations. The on-going consolidation programme and the contraction in the number of banks would task us to innovatively use our strength of size to an advantage as well as challenge us to improve on our risk asset quality. There would also be the challenge to re-engineer our work processes and to create new products to meet the demands and expectations of the growing banking public in the local market. We are poised more than ever before to reinvigorate our customer service premise of being the bank of first choice.

On the international scene, the correctness of our “progressive internationalisation” strategy is validated daily by the operations of our subsidiary in the UK, FBN Bank (UK) Limited, and our representative office in South Africa.

Overall, we believe 2005/2006 will be a year of immense opportunities for our Bank in particular and the national economy in general. The economic reformations taking place in the country through the National Economic Empowerment and Development Strategy (NEEDS) will position the national economy for optimal performance if properly handled. We at First Bank, therefore, see 2005 as a year of transition to greater performance of the national economy and of the local business operators.

5. CONCLUSION

Finally, we are grateful to the Almighty God for blessing our efforts in the last financial year. Permit me to thank my colleagues for their relentless commitment to the success of our Bank. I wish to also use this occasion to thank one of us, Alhaji Umar Yahaya, who until lately was a member of the executive management. We wish him well in his future endeavours. Distinguished Ladies and Gentlemen, I thank you for your kind attention.

Jacob M. Ajekigbe
Managing Director/Chief Executive
First Bank of Nigeria Plc