Cablegate: Nigeria: First Bank Chief Fears Banks Over Capitalized

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DE RUEHOS #0774/01 3391306
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R 051306Z DEC 07
FM AMCONSUL LAGOS
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E.O. 12958: N/A
TAGS: EFIN ECON NI
SUBJECT: Nigeria: First Bank Chief Fears Banks Over Capitalized

REF: A) ABUJA 2240; B) LAGOS 654

SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPRIETARY INFORMATION; HANDLE
ACCORDINGLY

1. (SBU) Summary: Central Bank insistence that only banks with USD 1
billion in capital will manage Nigeria's foreign reserves may have
resulted in some banks being over-capitalized for their current
operations and lead to bad loans. The Managing Director (MD) of
First Bank, Nigeria's oldest bank, called on the Central Bank of
Nigeria (CBN) to adopt a risk-based monitoring system to avoid the
prospect of a wave of bad loans that could result from banks
managing huge new amounts of capital. First Bank will merge with
Ecobank Transnational Incorporated to extend its reach deeper in
Africa. End Summary.

CBN Requirement Leads to Over-Capitalization
--------------------------------------------

2. (SBU) Jacobs Ajekigbe, Managing Director (MD) of First Bank
Nigeria (FBN), told Econoffs that the Central Bank of Nigeria (CBN),
by requiring banks to further increase their capital to USD 1
billion as a prerequisite for managing Nigeria's foreign reserves,
may have led some banks to over-capitalize. The USD 1 billion
requirement for managing foreign exchange reserves is a substantial
increase over the mandatory recapitalization to 25 million naira
(USD 192 million) required in 2005. The over-capitalized banks,
anxious to put their capital to work, may be prone to bad loans, he
said. To avoid this problem the CBN should shift gears from its
reactionary rule/compliance-based supervision to more proactive
risk-based monitoring.

3. (SBU) The MD praised the CBN's recent introduction of a new
corporate governance code for banks. The code will help banks to
establish strategic objectives, clear lines of responsibility and
accountability. The new corporate values deriving from the code
will be essential if banks are to properly manage the huge amounts
of capital currently at their disposal, he said.

4. (SBU) Ajekigbe said First Bank's planned merger with Ecobank
Transnational Incorporated (ETI) is still on. He said the deal has
been slowed by regulatory requirements arising from ETI's operations
in over 13 African countries. The banks have engaged the advisory
services of Goldman Sachs and Merrill Lynch to move the merger plans
forward more quickly, he said.

PO Brings First Bank's Capital to USD 5 Billion
--------------------------------------------- ---

5. (SBU) In May, First Bank's public offering increased the bank's
capital to 320 billion naira (USD 2 billion). The public offering,
originally planned to raise 100 billion naira, was hugely over
subscribed, he said, raising 250 billion naira (USD 1.9 billion).
First Bank assets now total more than USD 5 billion. Following the
merger with Ecobank, Ajekigbe anticipates the two banks will have
more than USD 7 billion in capital.

6. (SBU) Recently, First Bank declared 15 billion naira (USD 115
million) as profit for the first half of 2007. Hafiz Bakare, FBN's
Head of Corporate Planning and Group Coordination, said this result
is attributable to the bank's management changes in retail and
corporate banking, to optimal use of electronic banking, to returns
from projects funded by the bank and to yields from investments in
the bond and money markets (Note: The bank officers did not mention
what percentage of profit was attributable to each source. Nigerian
banks rely less upon loans than upon investments as a source of
profits. End Note).

FBN to Invest in Infrastructure
-------------------------------

7. (SBU) Ajekigbe said FBN plans to work closely with state

governments to finance major infrastructure and energy projects.
The bank was part of the group that funded construction of a new
domestic airport terminal in Lagos and major rehabilitation on
Lagos' Lekki-Epe expressway. The bank will also participate in
financing the proposed Lagos fourth mainland bridge and the coastal
road to Port Harcourt. The bank is currently engaged in talks
regarding the rehabilitation though a public-private partnership
(PPP) initiative of the Lagos-Ibadan expressway. According to
Ajekigbe, the bank intends to play a leading role in PPP initiatives
in housing and mortgage finance, as well. Private sector
involvement had made infrastructure finance attractive to the bank,
which has declined to finance wholly government-driven projects.

Economic Reforms Have Benefited Banks
-------------------------------------

8. (SBU) The MD said he believes Nigeria's current economic growth
has been enabled by the "smooth" handover of presidential power in
May. Continuing reforms in telecommunications, power and aviation
have created opportunities for local banks. Local banks, once only
agents for the International Finance Corporation (IFC) and foreign
banks, are now able to fund big ticket transactions on their own, he
said.

9. (U) This cable has been coordinated with Embassy Abuja.

Blair

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