Cablegate: Nigeria: Banking Consolidation Second Wave

DE RUEHUJA #1828/01 2350925
P 230925Z AUG 07





E.O. 12598: N/A

REF: A. Lagos 553

B. Lagos 549
C. Abuja 1793
D. Abuja 1438
E. Abuja 887
F. Lagos 32

1. Summary. The second wave of banking consolidation is underway
with a large portion of the banking community under-banked. By the
end of 2007 at least 7 banks will have share capital in excess of $1
billion and ten with over $2 billion. Banks are raising additional
capital in both the domestic and international capital markets to
spread operations, and resist takeovers. Banks are eyeing the
lucrative management of the Government of Nigeria's (GON) large
foreign exchange reserves. Increased competition and a demanding
shareholder base pose challenges to improving returns to
shareholders and credit risk management. Spring Bank may become the
first casualty of the consolidation and may not be alone. Despite
challenges, banking officials remain optimistic in this fast growing
sector. End Summary.

2. EconOffs met with five senior bank executives to discuss the
current situation, challenges, and future outlook of the banking
sector since consolidation. The banks focused on were selected
based on size and market share, and were Zenith Bank and Guaranty
Trust Bank (GTB) (top tier banks), First Inland Bank(FIB), (a
mid-level bank made up of four merged banks), Unity Bank, (a lower
level bank made up of nine merged banks), and Spring Bank a merger
of six banks.
Central Bank's Views
3. According to a recent assessment by Professor Charles Soludo on
June 12, 2007, the ongoing banking consolidation program has been a
huge success. Over $1 billion has been invested in the sector in
the last twelve months, and several hundreds of million of dollars
are still pouring in. Non-performing loans as a percentage of total
loans before consolidation have gone down from 23% to less than 8%,
total deposits have almost doubled, and credit to the private sector
grew - annualized at 72% within the first four months in 2007.

4. Interest rates are gradually coming down and there are over
4,100 commercial bank branches, up from 3,200 prior to
consolidation. The total employment in the sector is far higher
than before consolidation, and Soludo expects by the end of 2007,
there will be seven or more banks with shareholders funds in excess
of $1 billion, and over ten banks with market capitalization over $2
Consolidation's Second Wave
5. Following the initial consolidation mandated by the CBN, a
second wave of consolidation has begun, driven by market forces. A
number of competing banks are discussing mergers to increase their
size and market share. South Africa's Standard Bank through Stanbic
Bank in Nigeria has begun acquiring a 51% stake in IBTC-Chartered
Bank. Unity Bank and Eco Bank signed a memorandum of understanding,
and First Inland Bank is in discussions with Eco Bank. Jacobs Moyo
Ajekigbe, Managing Director of First Bank told us that merger
discussions between First Bank and Eco Bank are still on contrary to
rumors. Experts contend that jockeying between banks will continue
as the banking sector evolves and market forces take hold. The bank
officials we spoke with were clear that as long as additional
shareholder wealth was created the consolidation would accelerate.
Why Raise More Capital?
6. Banks continue to shop for capital both in the domestic and
international market. Banks are using the new capital for opening
additional branches; deploying new technology; warding off hostile
takeover, and qualifying to manage the GON's foreign reserves. Some
banks are raising new capital through public and bond offerings in
the domestic and international capital markets. Guaranty Trust Bank
(GTB) issued a $300 million Eurobond in February which was
oversubscribed by $221 million. GTB concluded a $750 million Global
Depository Receipts (GDR) offering with $250 million raised locally
and $500 million internationally, culminating in the listing of
GTB's GDR on the London Stock Exchange. Access Bank is raising 70
billion naira ($551 million) through a public offer. Fidelity Bank
is raising 49 billion naira ($386 million) through a combination of
public offer and rights issue to existing shareholders; and First
Bank concluded a 100 billion naira ($787 million) offer.

Foreign Incursion

ABUJA 00001828 002 OF 004

7. Falalu Bello, Unity Bank CEO and Okey Nwosu of First Inland Bank
contended that Nigerian banks were not afraid of foreign
participation and welcomed it. Most Nigerian banks are holding
discussions with or already have foreign banks and foreign
institutions interested in them. Foreign investments have resulted
in an inflow of foreign staff into the banking sector, and Nigerian
banks are sending their staff abroad to affiliated financial
institutions for skills training.

8. First Bank's 100 billion naira ($787 million) offer prospectus
stated that a large percentage would be preferentially allotted to
foreign institutional investors. Industry insiders suggest that
HSBC, First Bank's technical partner in the management of its
foreign reserves will be allotted the shares. Access Bank's offer
prospectus stated that out of the 70 billion naira ($551 million) it
plans to raise, 30 billion naira ($236 million) will be
preferentially allotted to foreign investors. Vectis Capital, EMP
Africa Fund II, AIG Global Emerging Markets Fund II, and Rand
Merchant Bank of South Africa all foreign financial institutions
recently invested 20.25 billion naira ($161 million) of convertible
preferred equity in Intercontinental Bank.

9. The International Finance Corporation (IFC) has provided a $50
million convertible loan to UBA Plc. The $50 million is part of a
$75 million financing and advisory package the IFC approved. The
package includes $25 million in partial credit guarantees for bonds
and medium term notes that UBA plans to issue to finance mortgage
lending and other strategic businesses. First City Monument Bank
(FCMB) secured 10 billion naira ($78.7 million) direct equity
investment by Helios Investment Partners, a United Kingdom based
equity fund.

10. Actis, a leading private equity investor in emerging markets,
recently acquired 19.1% equity in Diamond Bank at a value of 17
billion naira ($134 million). The investment will make available to
Diamond Bank international corporate governance standards and
processes that Actis has acquired. In 2005 the Netherlands
Financial Development Company invested $15 million and the IFC $30
million in equity in Access Bank. Standard Bank Group's acquisition
of IBTC-Chartered Bank will bring in $525 million of foreign direct
investment into Nigeria.
New Credit Lines
11. Nigerian banks continue to shop for credit lines in order to
manage their assets and liabilities because most deposits usually
have terms not exceeding 90 days and the banks have to finance
transactions with longer periods. International export credit
agencies and foreign financial institutions continue to increase
their credit lines to Nigerian Banks. The U.S. Export-Import Bank
recently increased its credit lines to Nigerian banks from $300
million to $405 million. The number of Nigerian banks that are
eligible to benefit from the facility increased from 14 to 17. In
2006, the IFC provided a $15 million convertible loan to Access Bank
for Access Bank/IFC Gender Entrepreneurship Program.
Intercontinental Bank's credit lines are at $1 billion, and FCMB
received $200 million from HSBC Holdings Plc between March and July
2007 to fund its growth plan. GTB's $350 million Eurobond will be
used to finance projects in the oil and gas and telecommunication
Nigeria's First Credit Bureau
12. To improve retail banking business and increase retail lending,
nine local banks in partnership with Dunn and Bradstreet established
the first Nigerian credit bureau - the Credit Reference Company
(CRC). The CRC will compile public record data, including statutory
information, identity information, credit transactions and payment
histories of individuals and organizations. The CRC will provide
needed information to subscribers, including negative and positive
reports on borrowers to assist financial institutions in their
lending activities. The nine participating banks are UBA, First
Bank, IBTC Chartered Bank, GTB, Diamond Bank, Intercontinental Bank,
Standard Chartered Bank, FCMB, and Access Bank.
Diversification and Expansion Plans
13. Banks are paying serious attention to growth strategies in a
bid to capture market share, and have diversified into other
segments of the financial services industry. Some have diversified
into insurance, pension funds, stock broking, microfinance, asset
management, and investigating at diversifying into mortgages.

ABUJA 00001828 003 OF 004

However, the absence of a legal framework hinders banks investing in
mortgages, especially the absence of a foreclosure law. Jide
Ogundare of GTB said that once better laws were passed his bank will
invest heavily in mortgages.

14. All 25 consolidated banks are opening new branches while UBA
and Eco Bank are cherry picking branches from the liquidated banks.
Banks are also establishing their presence within the sub-region in
Ghana, Sierra Leone, and Gambia. First Bank, Zenith Bank, and Union
Bank have established subsidiaries in the U.K. GTB will open a
subsidiary in London soon and has plans to establish subsidiaries in
Liberia and francophone West African countries. Unity Bank will
establish subsidiaries in Chad, Niger and Gambia.
Corporate Governance
15. A new corporate governance code was introduced in April 2006.
The corporate governance code limits government direct and indirect
equity holding in a bank to 10%, and an equity holding above 10% by
an investor requires CBN approval. Other features of the code are
separating the Board chairman's responsibilities from the managing
director/chief executive officer; and two members of the same family
cannot occupy the position of board chairman and chief executive
officer or bank executive director at the same time. The code
precludes the chairman of the board from serving as chairman or
member of any of the board committees. There are also penalties for
rendering false returns, and all insider related credit applications
pertaining to directors and top management staff and parties should
be sent for approval to the Board Credit Committee. The Board
Credit Committee cannot be chaired by the chairman of the board or
the managing director.
Spring Bank "Cooking the Books"
16. The CBN has said that it has a zero tolerance for fraud and
following the initial consolidation undertook an exercise to verify
the 25 billion naira shareholder capital requirement. Spring Bank,
a merger of six banks that consolidated very close to the December
31, 2005 deadline, came under scrutiny and after further
investigation the CBN directed the bank to increase its capital base
within six months. It has been alleged that some of the directors
paid for shares only on paper without making cash payments. The CBN
and Nigerian Depository Insurance Commission (NDIC) found that
Spring Bank under-listed the volume of shares held by bank directors
and the shares were funded directly through forgeries and
manipulation of bank records. Spring Bank was unable to satisfy the
requirements and only two of the merged banks, Guardian Express and
ACB International were held to have brought positive capital to the
merger. In response, the CBN ordered Spring Bank to replace the
Managing Director and its Board of Directors. Deep divisions
existed within Spring Bank and CBN had to intervene and appoint a
"neutral" board. EconOff met with Dr. H. I. Mohammed, one of the
CBN appointed board members, and he confirmed that the "books were
cooked" with creative "econometrics" to satisfy the consolidation
and that other banks may have done the same.
Challenges Ahead
17. The banks that met the recapitalization deadline without
merging with other banks, such as GTB and Zenith, have moved to the
next stage without having to solve integration problems. Falalu
Bello of Unity Bank and Okey Nwosu of First Inland Bank said that
integration problems related to technology, people, and processes
persist. Bello and Nwosu said putting all the branches on a single
information technology platform have been resolved while training
and re-training of staff continues.

18. Most of the banks are listed on the Nigerian Stock Exchange
resulting in pressures to improve performance and returns to
shareholders, while facing increased competition, demands for higher
returns, and solving integration problems. Bello said the Unity
Bank Board and shareholders have agreed to wait two years before
receiving dividends.

19. Banks now have more capital compared with what existed before
consolidation and could be tempted to give out loans that could
easily become delinquent thus creating additional challenges on how
to manage credit risk. The CBN is tackling the problem through its
risk based supervision of banks and sponsoring training on credit
risk management for banking staff at the Financial Institutions
training Center in Lagos. Most banks understand that their
workforce does not have the necessary skills and the training of
staff is a high priority. During the interim, banks are employing
experienced expatriates to fill the most senior level positions.

ABUJA 00001828 004 OF 004

20. Despite challenges, the senior executives we spoke with were
optimistic and believed the opportunities outweighed the challenges.
They were in agreement that Nigeria is under-banked and needs the
banking sector to expand to the rural and semi-urban parts of the
country. There are also huge opportunities in retail banking and
with the recent establishment of the CRC, banks will be able to get
credit information on customers easily and will be encouraged to
lend more. There are also opportunities in consumer finance and
other segments of the financial services industry.

21. Nigeria's banking industry is one of the fastest growing in the
world and the GON plans to make Nigeria the financial hub of the
African continent by 2020. The CBN will need to be vigilant
regarding regulatory issues to nip problems before they become
systemic. Training must be continuous and the industry should
strive to attract competent staff from around the world until local
capacity fills the gap and the industry knowledge base expands.

© Scoop Media

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