US embassy cable - 04LAGOS1775

UNCLAS SECTION 01 OF 03 LAGOS 001775 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
STATE PLEASE PASS TO EX-IM 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, PGOV, PREL, NI 
SUBJECT: UPDATE ON BANKS' REACTION TO NEW 
CAPITALIZATION REQUIREMENT 
 
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. 
 
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Banks Give Public Appearance of Keeping Calm Over 
Financial Sector Reforms 
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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 
 
SIPDIS 
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. 
 
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Strategic Alliances And Merger Talks Begin 
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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 
 
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Inter-Bank Market In Frenzy As "Big Banks" Call In 
Funds 
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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. 
 
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Bank Stock Prices Decline 
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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 
comment.) 
 
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 
IPOs. 
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. 
BROWNE