US embassy cable - 05LAGOS747

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000747 
 
SIPDIS 
 
DEPT PLEASE PASS TO EX-IM KENNETH VRANICH, RICHARD 
BRACKLEY, THOMAS F. MATTHIAS, AND BERT C. UBAMADU 
DEPT OF TREASURY PLEASE PASS TO SONJA RENANDER 
 
E.O. 12958: DECL: 05/19/2015 
TAGS: EFIN, ECON, EINV, PGOV, PREL, NI 
SUBJECT: CBN'S NEW CAPITALIZATION DEADLINES CAUSE BANKS TO 
PICK UP THEIR PACE 
 
 
Classified By: Consul General Brian Browne for reasons 1.4 (b) and (d). 
 
1. (C) Summary. Eschewing prior consultation with the 
industry, the Central Bank of Nigeria (CBN) unexpectedly 
promulgated a new set of deadlines to spur banks to meet its 
recapitalization requirement: April 30 for pre-merger 
consent, August 31 for preliminary merger approval, and 
October 31 for merger final approval.  Nigeria's banks were 
moving at their own pace to meet the December 31 naira 25 
billion recapitalization requirement but the CBN felt many 
banks were footdragging.  Banks were given a month to meet 
the April deadline, hastening a spate of bank merger 
announcements.  Further clouding the air, bankers are 
uncertain about the consequences of failing to meet these 
interim CBN deadlines.  Moreover, bankers kept telling us 
that few of them are keen on merging and that the forced 
march toward consolidation is fraught with major 
uncertainties from the standards for valuation of bank assets 
to the hidden operational costs associated with mergers.  End 
summary. 
 
2. (U) On March 31, the Central Bank of Nigeria (CBN) made a 
rather Delphic announcement setting new interim deadlines for 
banks on their way to meet the naira 25 billion (USD 192 
million) recapitalization requirement.  The new timetable is: 
pre-merger consent by April 30, merger approval-in-principle 
by August 31, and final approval by October 31.  Banks have 
five days after each deadline to submit their plans (actual 
deadlines: May 5, September 5, November 5) Previously, banks 
were allowed to move at their own pace in merger negotiations 
as long as the naira 25 billion mark was reached at year's 
end.  However, the CBN clearly was dissatisfied with the pace 
the mergers were being accomplished. 
 
3. (C) Spurred by the CBN's new deadlines, more serious 
merger discussions took place in April than in the preceding 
eight months since the CBN set the recapitalization goal.  As 
a result, new merger announcements include: 1) Union Bank 
acquiring or merging with Broad Bank, Gulf Bank, Universal 
Trust Bank, Union Merchant Bank, 2) First National Bank will 
emerge from a merger between Centerpoint Bank, First 
Interstate Bank, Intercity Bank, Liberty Bank, Pacific Bank, 
and Tropical Commercial Bank -- most of these are perceived 
to have northern Nigeria affiliations, 3) Access Bank merging 
with Capital Bank and Marina Bank, 4) Afribank with New 
Nigerian Bank (NNB) and FSB International Bank, 5) Reliance 
Bank to merge with foreign investors, 6) First City Monument 
Bank, Cooperative Development Bank, NUB International Bank, 
and Societe Bancaire, 7) Equitorial Trust Bank and Devcom 
Bank, 8) Indo-Nigerian Bank and NAL Bank, and 9) Investment 
Banking and Trust Company (IBTC) and Bond Bank. 
 
4. (C) Capital Bank Managing Director, Seyin Ayida, 
acknowledged that the CBN's new rules sped his bank's 
announcement to merge with Access Bank and Marina Bank.  He 
said their partnering was only three weeks in the making, but 
the CBN's edict called for quick decisions.  Capital Bank's 
original plan was to meet the N25 billion goal raising 
capital on its own.  Since Capital, Access, and Marina Banks 
have been talking, Ayida said, he has been "stretched beyond" 
his limits, working endless hours with unfamiliar legal 
material.  Other merging banks are likely experiencing the 
same discomforting sensation of venturing into territory 
heretofore uncharted by members of the Nigerian banking 
sector. 
 
5. (C) Merger pains include a valuation predicament.  Bankers 
want merging or acquisition partners to be valued low in 
order to get a good deal, but once the merger is effectuated, 
want partners' assets to be valued high enough to guarantee 
the merger meets the naira 25 billion capitalization goal. 
Other pains include ambitious MDs and board members who will 
have a tough time stepping down from high-level positions, 
and technical issues such as integrating computer systems. 
 
6. (C) Bank Managing Directors (MDs) say the CBN is not 
providing the promised technical assistance to help banks 
struggle through the merging process.  The few Nigerian bank 
MDs who have merger or acquisition experience, such as 
Investment Banking and Trust Company (IBTC)'s Atedo 
Peterside, understand the arduousness of the process and 
relate that the due diligence process alone usually takes 18 
months.  Given the CBN's short deadline for 
recapitalization-led mergers, banks complain the CBN should 
be doing more to assist them.  The  Monetary and Fiscal 
Policies subcommittee of the Bankers' Committee recently 
proposed several ideas to assist banks: CBN refunds for the 
cost of raising funds through public offers, IPOs, and 
private placements; intensified monitoring of bank 
consolidation; "facilitation" of the consolidation process 
(no specific recommendations made); create and publicize 
enhanced guarantees for depositor funds; and a working CBN 
help desk for merger questions and problems, and for 
questions regarding merger incentives.  (Note: The Bankers' 
Committee is open to all bank MDs and the CBN governor.  Its 
Monetary and Fiscal Policies subcommittee meets monthly to 
discuss recent economic factors and their effects on the 
banking sector.  The subcommittee often releases 
recommendations to the CBN.)  The CBN has not responded to 
these proposals. 
 
7. (C) Managing Directors from Bond Bank, Capital Bank, 
Ecobank, Fidelity Bank, IBTC, and the President of the 
Chartered Institute of Bankers of Nigeria, who attended a 
dinner at the Consul General's residence on April 28, 
discussed the abruptness of, and motivations behind, CBN 
decisionmaking.  The CBN has not clearly stated its purpose 
in raising the capitalization requirement to naira 25 
billion, beyond having fewer, larger banks to "strengthen" 
the banking sector.  Interlocutors believe the CBN move is 
partly to punish bankers, long-vilified under the perception 
that they are tools for profiteering and diverting funds 
overseas for the benefit of an elite few. 
 
8. (C) The GON plays on the public's general ignorance of 
banking mechanics by fostering sentiment that bankers do not 
want to help Nigerian consumers, manufacturers and 
industries.  Some bankers also believed that financial sector 
reform was being pushed because it did not materially affect 
President Obasanjo's elite allies.  they claimed that most of 
Obasanjo's monied cronies were wealthy businesspeople and 
politicians.  Thus, reforming the financial sector would not 
bruise their interests but would give the facade of reform to 
the Nigerian public and outside world.  Conversely, in the 
economic sectors where Obasanjo's allies are focused, reform 
is not progressing.  Instead, bans and tariffs protecting the 
special interests of Obasanjo's elite friends are the order 
of the day, bemoaned the bankers.  The consequences for banks 
who do not meet the deadlines are not known.  CBN has not 
made public its intent but industry rumors are that 
noncompliant bank names will be publicized.  To date, 
non-compliant banks have not been cited by the CBN, though 20 
banks have not publicized their plans leading industry 
watchers to speculate whether they have met the CBN deadline. 
 Meanwhile, the CBN has not mentioned any bank names, but it 
announced it will write off 80 percent of bad debts owed it 
by 13 of the weakest banks, estimated at about naira 72 
billion (about USD 550 million), thereby making those banks 
more attractive for acquisition.  The terms and conditions 
for these write-off loans are stringent, however, and few 
banks are expected to be able to take advantage of the write 
off.  With no apparent negative repercussions two weeks after 
the April 30 deadline, a CBN strategy of helping troubled and 
non-compliant banks to ease out of sight via acquisition 
seems to be taking form.  The approach may save the sector 
from panic or distress. 
 
9. (C) Bankers stated the CBN will help out banks that come 
close to the naira 25 billion goal but cannot quite make it 
by December 31.  The help is expected to come in the form of 
additional incentives or offers to merge with smaller banks 
to help banks acquire the extra capitalization needed to meet 
the requirement.  Additionally, the CBN has given bank MDs 
the impression it will allow new serious merger announcements 
to be made beyond the April, August, and October deadlines, 
so long as banks are in compliance with CBN regulations for 
consolidation. 
 
10. (C) So far, bankers do not believe the recapitalization 
effort is enabling banks to offer more services to the 
average Nigerian, as it was intended to do.  For example, 
Ayida asserted banks not able to finance small and medium 
size enterprises during the recapitalization period because 
funds are too tight.  Banks are spending time and money 
shoring up capital bases and focusing only on the largest and 
most profitable financing.  He said some small business 
borrowers have had to stop commercial activities because of 
insufficient financing.  Banks are even stalling compliance 
with the GON Small and Medium Industries Equity Investment 
Scheme (SMIEIS) initiative for Nigerian banks to set aside 
ten percent of profits for small and medium size business 
investments.  At least in the short term, the capitalization 
requirement has undermined another key objective of banking 
sector reform, that of providing more services to small and 
medium sized firms. 
 
11. (C) Comment.  CBN Governor Soludo and others say the 
recapitalization is part of the GON's overall economic reform 
plan.  Yet, curiously, reforms in the banking sector have 
been fast-tracked while needed reforms in other areas such as 
trade policy and infrastructure lag.  The difference in pace 
could be conscious.  Perhaps the GON has determined that 
financial reform is the essential first step toward overall 
economic reform and growth.  Or perhaps, as one of our 
interlocutors suggested, financial reform is getting more 
emphasis than it deserves chiefly because Obasanjo appointed 
top-flight personalities such as Ngozi Okonjo-Iweala, 
Minister of Finance, and Charles Soludo, CBN Governor in this 
sector.  Meanwhile, political appointees with little interest 
in reforms dominate the other economic portfolios. 
Regardless of the factors underlying the push toward 
financial sector reform, the newest round of deadlines for 
the capitalization requirement has startled the banks and 
will cause them to accelerate their game plans for compliance 
with the requirement.  End comment. 
BROWNE