Cablegate: Update On Banks' Reaction to New

This record is a partial extract of the original cable. The full text of the original cable is not available.

300725Z Aug 04





E.O. 12958: N/A

REF: (A) Abuja 1327, (B) Abuja 1405

1. (SBU) In response to the Central Bank of Nigeria's
(CBN) new N25 billion capital base requirement (about
USD 200 million), banks are forming strategic alliances
through consolidations, mergers and acquisitions. Big
banks are expected to comply fully, many smaller banks
face the unwelcome choice of scurrying to acquire
capital to meet the requirement or of merging with a
larger institution that has greater bargaining power.
Meanwhile, the value of bank shares has been declining
as skittish investors take to the sidelines to watch
the action of the market, and some customers of smaller
banks have been moving deposits to safer large banks or
to purchasing foreign currency. Although many observers
believe the new directive will strengthen the Nigerian
banking sector, it is causing short-term withdrawals
from the banking system. Many would like the CBN to
buffer the shock of the new requirement by phasing it
in over a number of years. Senators of the National
Assembly oppose the requirement, and intend to clip the
CBN's wings. End summary.

--------------------------------------------- ----
Banks Give Public Appearance of Keeping Calm Over
Financial Sector Reforms
--------------------------------------------- ----

2. (SBU) Since July 6 when Central Bank Governor
Charles Soludo proposed an increase in the capital base
of commercial banks, Nigerian bank executives have been
privately expressing anxiety, despite public statements
indicating they are calm and confident about the
future. Since then, bank executives have been taking
turns announcing alternative strategies for meeting the
new capitalization requirement. Meanwhile, depositors
at many banks are demonstrating their concern and
showing no compunction about closing accounts at the
smaller banks and transferring the funds to larger
banks or purchasing foreign exchange.

3. (SBU) A week after Saludo's announcement (ref A), a
select group of bank chief executives (essentially of
larger banks) agreed on Saludo's prescription for
strengthening the banking sector. However, many bank
executives who did not participate in the discussion
faulted the steep capitalization increase and the short
deadline for compliance. Esan Ogunleye, the Executive
Secretary of the Chartered Institute of Bankers, for

one, told EconSpec during a meeting last week that the
institute intends to recommend to the CBN a reduction
in the capital base requirement to 10 billion naira
(about USD 80 million) for settlement banks (banks that
clear checks for other banks) and 5 billion naira
(about USD 40 million) for other banks. Such action
would bring Nigeria's banks on par with South African
counterparts whose capital base equals about five 5
billion naira, according to Ogunleye.

4. (SBU) Most bank execs recognize the need to rebuild
public confidence in the banking sector. Some banks
are advertising their resolve to meet the required
capital base at minimum cost to stakeholders and to
ensure the safety of customer funds. Babajide Rogers
of Gulf Bank, for example, has assured customers that
deposits will not be lost whether banks merge or are
acquired. In a letter to customers, Bimbo Olashore of
Leadbank likewise assured "the bank's business will not
be affected in any way or form". But the drop in bank
share prices and the withdrawal of deposits from small
or under-capitalized banks suggest that many bank
customers are not placated by these appeals.

Strategic Alliances And Merger Talks Begin

5. (SBU) Banks have started forming strategic alliances
in preparation for merging or being bought. The
Intercontinental Bank group, which owns three banks
(Equity, Gateway and Global banks), will consolidate
them to achieve N20 billion (about USD 160 million) in
both capital and accumulated reserves. This model is
also expected of other large bank groups like First
Bank, Union Bank of Africa and Union Bank Nigeria, all
of which include investment banks. In March of this
year, the CBN designated seven banks --First Bank,
Union Bank, United Bank for Africa, Afribank, Standard
Trust Bank, Guaranty Trust Bank and Zenith Bank -- to
clear checks on behalf of other banks. Each of these
big settlement banks easily met the required 15 billion
naira (USD 120 million) capitalization threshold
(considered collateral) to be a settlement bank.
Settlement banks will have the easiest time attaining
the new N25 billion capital base mark without merging.

6. (U) Comment. To meet CBN requirements, smaller
banks face options such as mergers with larger banks or
a collective merger of a number of small banks.
Smaller banks are at a distinct disadvantage in talks
with large banks. Large banks can meet the new
capitalization requirement on their own. Because they
do not need to merge, the large banks can bargain down
the smaller ones. The latter's best chance for
survival may thus be that some larger banks see
opportunities, such as niche market access, in linking
with smaller banks. Conversely, many smaller banks see
merger as their only means of survival -- but in what
form? End comment.

7. (SBU) Marina Bank, considered a small family bank,
hopes to form an alliance to meet the new capital base
requirement. Jaiye Oyedotun, Marina Managing Director,
told Econoff in Lagos that Marina was asked by a "big
bank" to update Marina's capitalized value to before
talks proceed. According to Oyedotun, if the
revaluation is not measured liberally, Marina will be
disadvantaged in any potential alliance or merger,
possibly resulting in minimal representation on the
board of directors, a large discount of its shares,
loss of its corporate identity, and a significant loss
of jobs. Comment: In the quest to prove market and
merger worthiness, some banks reportedly have ignored
industry taboo by sharing confidential client
information with other banks. End comment. Successful
mergers will depend on customer and investor
confidence, the size and business compatibility of
banks involved (some banks are family or one-man
banks), valuation at current value of the banks merging
(a difficult exercise given the prevalence of non-
performing loans at many banks), post-merger
integration of separate workforces (job losses are
inevitable) and generally finding the right banking
partners. End comment

--------------------------------------------- -----
Inter-Bank Market In Frenzy As "Big Banks" Call In
--------------------------------------------- -----

8. (SBU) Between July 6 and August 25, the central bank
had been withdrawing public funds from commercial
banks, action that had caused some of the smaller or
inadequately capitalized banks to be late settling
interbank payments. Their executives not only faulted
the central bank but also blamed the big banks for
calling in funds from the interbank market. Many of the
smaller banks now find it difficult to meet their
obligations given the dearth of funds, and, according
to observers, it is no longer unusual for a bank to "go
out of clearing" for a day or two. (Comment. Some
banks have even allegedly "refused" to release deposits
of public funds, an assertion which we accept with a
grain of salt, given the right of the central bank to
recall such deposits. End comment.) Khalid Qurashi,
Managing Director of Citibank Nigeria (the only U.S.
bank in the Nigerian market), nevertheless told us that
the central bank's gradual withdrawal of public funds
from banks, and the larger banks' call of debts payable
by smaller banks suggest gloomy days ahead for the
banking sector.

9. (U) For his part, CBN Governor Saludo has charged
that some banks have been depending on public funds to
engage in commercial activities unrelated to
intermediation. To curb these banks' abusive use of
public funds and to control liquidity in the system,
the central bank is implementing periodic phased
withdrawals of such funding from the commercial banks,
according to Saludo. (Though the CBN most recently
announced it will stop withdrawing Nigerian National
Petroleum Corporation (NNPC) funds. Comment:
Speculation is that the NNPC fund withdrawal is merely
deferred and may eventually be re-implemented. End
comment.) The CBN plan is to deposit the public funds
with banks that meet the 25 billion naira
capitalization requirement by December 2005.

Bank Stock Prices Decline

10. (SBU) In recent weeks, active trading of bank
shares has characterized the stock exchange, as
speculators have been selling shares of banks
considered weak or unlikely to meet the capitalization
requirement. Big losers include Standard Trust Bank
(STB), whose share price fell to N4.98 in mid-August
from a high of N7.90 after its initial public offering
in January. Other casualties include Cooperative Bank,
Chartered Bank, EIB International Bank and Gulf Bank.
(Comment. The uncertainty and investor apathy for bank
stocks imply banks like Afribank and Oceanic Bank that
intend to raise money on the capital market will have a
hard time doing so, at least in the short term. End

11. (SBU) In the first half of the year, three large
banks -- Standard Trust Bank (STB), Guaranty Trust Bank
(GTB) and Zenith Bank -- raised capital by way of an
initial public offering; all three reportedly were over
subscribed. These banks are, however, likely survivors
of the CBN's bank consolidation program, having
accumulated about 10 billion naira each during their
12. (SBU) The opponents of Central Bank Governor
Saludo's initiative may draw comfort from a Senate
initiative to clip the wings of the central bank. On
August 26, the chairman of the Senate Banking
Committee, A. Z. Sunday, told Econoffs in Abuja that
all 60 senators present that day for the second reading
of a Senate-initiated bill unanimously supported the
bill to make the Central Bank accountable to the
National Assembly. Sunday justified their decision by
saying it is important that the bank be independent of
the executive. (Comment. Sunday did not explain why
monetary policy would likely be more effective under
legislative than executive oversight. This is the way
it should be in a democracy, he averred. We will try
to obtain a copy of the bill to see which branch of
government is likely to permit greater central bank
autonomy. End comment.) Sunday added that he hopes
the Senate will hold a public hearing on the bill
within the next month, after which he is optimistic
that the Senate will approve it. The Senate would then
send it to the House for its likely approval. Were the
President to refuse to then sign the bill, the
legislature would override his veto and enact it into
law by a large margin, according to Sunday.
13. (SBU) Comment. As uncertainty over the fate of
some banks persists, some depositors are closing their
accounts at smaller banks and queuing to open accounts
at larger banks. While that development might be
healthy for the system as a whole, were customer
confidence in the small banks to continue to diminish,
there could be a run on small banks. The chances of
that coming about are small, however. According to
Citigroup's Qurashi, Nigeria's banking sector may have
reached a critical moment stating, "The Nigerian
banking sector is sitting on a keg of gunpowder,". He
believes the CBN would be wise to address "systemic
distress" in the banking sector. Qurashi's statement
notwithstanding, as we indicated in ref B, according to
Governor Saludo the health of the banking system
overall is generally satisfactory.
14. (SBU) Comment, continued. As the banks approach
the December 2005 recapitalization deadline, bank
customers will identify more easily qualified and
unqualified banks. Already closer to meeting the
capitalization requirement than the smaller banks, the
big banks will point to their compliance or near
compliance as a marketing tool to lure depositors and
investors from smaller banks. The capitalization
requirement may, in the long run, flush out many weaker
banks, thus laying the foundation for a stronger
banking sector in the future. However, the manner in
which the requirement was announced sent shocks through
the banking sector which have also reverberated through
the relatively small community of depositors and
investors. Some bankers hope the CBN will ultimately
moderate its approach by easing the requirement and by
giving them more time to scale this more modest hurdle.
End comment.

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