Cablegate: Nigeria: Bank Capitalization - Overheating, Or

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OO RUEHMA RUEHPA
DE RUEHUJA #2240/01 2951631
ZNR UUUUU ZZH
O 221631Z OCT 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1253
INFO RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHZK/ECOWAS COLLECTIVE
RUEHOS/AMCONSUL LAGOS 8121

UNCLAS SECTION 01 OF 02 ABUJA 002240

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EINV PREL NI
SUBJECT: NIGERIA: BANK CAPITALIZATION - OVERHEATING, OR
OVERBLOWN?

REF: A. LAGOS 00654

B. MOSS/TANSEY EMAILS

SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY.

1. (SBU) Summary: Nigeria's bank reforms, recapitalization,
and consolidation in the sector have been positive and in
line with other macroeconomic and financial reforms. Rapid
capitalization has raised the issue of possible overheating
if Nigeria's commercial banks rush to push available funds to
a limited set of customers. In our view, overheating is
unlikely to occur, at least in the short-term, because the
Nigerian banking system is not yet mature, and loans to
industrial and infrastructure projects remain limited.
Banking experts contend that rates, rather than holdings,
will determine how much money flows from the
newly-consolidated banks into the domestic economy, and
managing a share of Nigeria's growing foreign exchange
reserves may be the main impetus for the continuing strong
capitalization trend. GON policymakers may need to adjust the
regulatory environment to encourage longer-term lending as
well as access to capital markets to promote industrial
development. End summary.

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Could Positive Banking Reforms Lead to Overheating?
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2. (U) Nigeria's bank reforms, recapitalization, and
consolidation over the past two years have been positive and
in line with other macroeconomic and financial management
reforms. Reftel reported on the second phase of
capitalization and the status of bank mergers and
acquisitions. Clearly, the banks have accumulated large
capital reserves. The extent of rapid capitalization raises
the question of possible overheating if Nigeria's commercial
banks rush to push available funds to a limited set of
customers.

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Unlikely, At Least in the Short-term
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3. (SBU) In our view, overheating is unlikely to occur, at
least in the short-term. In some significant ways, the
Nigerian banking system is not yet mature, and loans to
industrial and infrastructure projects remain limited. While
the banks are expanding their business base, as noted in
reftel, they still tend to focus on "easier" areas like trade
letters of credit and retail banking, but are very
conservative loaning to the real sector.

4. (SBU) Industrialists tell us they face effective interest
rates of 20-30 percent. The banks also strongly prefer
short-term loans--thus borrowing to build factories or
improve infrastructure remains difficult. The Chairman, of
First Bank, Nigeria's largest commercial bank, told Econcouns
that his bank would not/not accept some of the applications
resulting from its capitalization offers, because it can
not/not make productive use of all the money. He said other
banks will make similar judgments.

5. (SBU) First Bank is venturing into West Africa and even
Europe. It has a full-fledged branch in London, a rep office
in South Africa, is applying to establish an office in China,
and has been interested in the U.S. market for some time.
First Bank has other interests in property development, both
within Nigeria and elsewhere. Asked about the possibility of
overheating and whether First's recent capital accumulation
will make its way into Nigeria as new working and investment
capital, the chairman again pointed out the bank's interest
in other West African countries and Europe. He himself was
headed to South Korea via Dubai to explore other
international possibilities, following attendance at the 2007
World Bank/IMF meetings in
Washington.

6. (SBU) There is little evidence that the process of
capitalization and consolidation to date has actually led to
increased lending to the real sector. Experts on the banking
sector tell us that rates, rather than holdings, will
determine how much money flows from the newly-consolidated
banks into the domestic economy. As also noted in reftel,
some experts believe that the opportunity to manage a share
of Nigeria's growing foreign exchange reserves may be the
main impetus for the continuing strong capitalization trend.

ABUJA 00002240 002 OF 002

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But, Could Capitalization be Overblown?
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7. (SBU) At this point, it is possible that Nigeria risks
going too far with bank capitalization; bank capitalization
has dominated financial markets to the point that it is
probably pulling funds away from other productive uses. In
2006, the Nigerian Stock Exchange considered and approved 62
applications for new issues plus mergers and acquisitions,
valued at 1.4 trillion naira, compared to 52 applications
worth 731 billion naira in 2005. The banking sector
accounted for 41 percent of the volume of issues in 2006,
with 21 applications valued at 577 billion naira. Forty
non-bank corporate issues totaled 679 billion naira.
Contacts outside the banking sector complain to us that those
benefiting from non-bank corporate issues are already
well-established, such as members of the Dangote Group of
companies, while less well-known firms have difficulty
accessing capital markets.

8. (U) As for the banks' own lending, it is not contributing
strongly to the much-needed growth of Nigeria's industrial
base. A report by Augusto and Company, Nigeria's foremost
rating agency, on the state of Nigeria's banking sector in
2006 showed that bank lending to the real sector has not yet
accelerated. The report shows that the banks still
concentrate on trading and general commerce, including export
financing, importation, and other intermediation activities.
Twenty-nine percent of lending went to trading and general
commerce. Manufacturing received only 15 percent of
cumulative credit in 2006.

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Time to Re-direct?
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9. (SBU) Comment: It may not be in the best interest of the
Nigerian economy for banks to focus mainly on capital markets
for funds. Banks are eager to mobilize money in that way,
while non-bank enterprises don't have the option of building
up a capital base from savings deposits. Future success
requires policy makers and regulators to improve conditions
in support of longer-term bank lending to industrial and
infrastructure projects, while making it easier for non-bank
borrowers to also access capital markets. Otherwise, there
is the possibility that Nigeria could develop a rich banking
sector while investments that provide employment and
diversify the economy remain neglected. End comment.
PIASCIK

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