US embassy cable - 05LAGOS1405

UNCLAS LAGOS 001405 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS TO EX-IM KENNETH VRANICH AND BERT C. UBAMADU DEPT 
OF TREASURY PASS TO C. ALEXANDER SEVERENS 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, NI 
SUBJECT: BANKS SCRAMBLING TO MEET DECEMBER RECAPITALIZATION 
DEADLINE 
 
REF: LAGOS 00747 
 
25-30 BANKS LIKELY TO SURVIVE BANK CONSOLIDATION 
--------------------------------------------- ---- 
 
1. (SBU) Banking experts predict 25 to 30 banks or newly 
merged bank groups will make the December 2005 Central Bank 
of Nigeria (CBN) deadline to attain a 25 billion naira 
capital base.  A large number of banks will be unable to meet 
the CBN's naira 25 billion (USD 192 million)recapitalization 
requirement (reftel).  Only one bank met the CBN's August 31 
preliminary merger deadline, and large banks remain wary of 
acquiring weaker banks because the CBN's promised tax 
incentives for said acquisitions have yet to materialize. 
 
ACCESS BANK MEETS MERGER APPROVAL DEADLINE; 
OTHERS LAG BEHIND 
------------------------------------------- 
 
2. (U) Last July, the Central Bank of Nigeria (CBN) directed 
Nigerian banks to recapitalize to naira 25 billion (USD 192 
million) by the end of 2005.  For those banks that chose the 
path of merger as the avenue to achieve the required 
capitalization, interim merger deadlines were also 
established: August 31 for preliminary merger approval and 
October 31 for final merger approval.  So far, only Access 
Bank has met the August 31 deadline for obtaining preliminary 
approval for the merger plan.  However, seven banks have met 
or surpassed the new capital requirement, including: United 
Bank of Africa (UBA) and Standard Trust Bank (STB) forming 
UBA PLC through merger and the other six banks (First Bank, 
Union Bank, Zenith Bank, GT Bank, Intercontinental Bank, and 
Standard Chartered Bank) through Initial Public Offerings 
(IPOs).  An additional 18 to 23 banks are expected to meet 
requirements through combinations of mergers, public 
offerings, and private placements. 
 
BANKING SECTOR MAY LACK CAPACITY TO KEEP PACE 
WITH REFORMS 
--------------------------------------------- 
 
3. (SBU) On balance, many banking experts have shed their 
initial skepticism and now believe the CBN's reform efforts 
are positive, but some still express concern that lag in 
reforms on trade policy, infrastructure, and government 
regulation of the economy will partially mute the impact of 
the banking reforms.  Bismarck Rewane, CEO of Financial 
Derivatives, stated he "fears change in the banking sector is 
too rapid" and that Nigeria did not have the regulatory 
capacity to keep pace with the CBN's reforms.  Sola 
David-Borha, Executive Director of Investment Banking and 
Trust Company (IBTC), told us an inadequate legal system is 
hindering the bank consolidation process.  "Banks are asked 
to merge without any incentives to do so, without 
accompanying legislation, and without tax incentives" 
promised by the CBN since last July, she said. 
 
4. (SBU) Comment.  With four months remaining to meet the 
December deadline, banks continue to scramble to raise 
capital.  Among large banks, problems associated with mergers 
such as boardroom infighting, squabble over staff 
remuneration, and differences in the assignment of management 
positions dog the process.  The prediction by bank experts 
that 25-30 large banks will emerge from this process appears 
to be a sound prognosis.  Overall, we expect the changes to 
be positive, but newly capitalized banks will be competing 
with emerging pension funds to find good quality investment 
opportunities, which will pose challenges to maintaining the 
quality of lending.  End Comment. 
BROWNE