US embassy cable - 05LAGOS1464

UNCLAS SECTION 01 OF 02 LAGOS 001464 
 
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, PGOV, NI 
SUBJECT: 2005 NIGERIAN STOCK MARKET NEGATIVELY AFFECTED BY 
BANK REFORMS 
 
 
1. (SBU) Summary.  The bank recapitalization process 
continues to weaken the Nigerian Stock Exchange (NSE) as many 
investors prefer to channel their money toward bank Initial 
Public Offerings (IPOs) rather than daily stock market 
activities.  The average returns on investment (ROI) for the 
30 largest Nigerian companies are lower for 2005 than 2004, 
although still higher than average returns for U.S. blue chip 
stocks.  Nevertheless, NSE representatives remain optimistic 
that returns on investment will increase once the bank 
recapitalization process is completed.  End Summary. 
 
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Background 
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2. (U) The Nigerian Stock Exchange (NSE) has nine branches, 
over 120 employees and lists 285 securities with a total 
market capitalization of over naira 2.1 trillion (USD 16 
billion).  The listed securities include: 10 federal 
government development stocks, 57 industrial 
loans/bonds/preference stocks and 218 equities.  Average 
daily trade volume on the NSE is between naira 200 and 300 
million (USD 1.5 to 2.2 million).  The NSE estimates five 
million Nigerians invest in the stock exchange. 
 
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Secondary Markets Depressed 
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3. (SBU) Technical Advisor to the Director General of the 
NSE, Nicholas Okoye, told us the bank recapitalization 
process has hurt his institution because more people are 
investing in Initial Public Offerings (IPOs) by banks than 
making daily trading on the NSE.  Numerous banks have 
resorted to IPOs to raise capital to meet the Central Bank of 
Nigeria's naira 25 billion (USD 192 million) capital 
requirement.  Because Nigerian investors have shifted to the 
primary market, the returns on the secondary market have 
declined, the NSE representative said.  Okoye told us 
shareholders invested naira 225 billion (USD 2 billion) in 
the primary market last year, but over naira 500 billion (USD 
4 billion) so far this year.  He expects investments in the 
primary market to total naira 800 billion (USD 6 billion) by 
December. 
 
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10-15 Percent ROI on Nigerian Blue Chips 
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4. (SBU) Okoye is correct.  Capital shifts to the primary 
market are partially to blame for the considerable lowering 
of average returns on investment in the 30 largest Nigerian 
companies.  2005 average ROI for the 30 largest Nigerian 
companies were 10-15% compared to 40-50% returns in 2004. 
Moreover, with inflation hovering near 15%, any real capital 
gains on investment were minimal.  Yet, NSE representatives 
predict ROI on Nigerian blue chip companies will rise to 20% 
in the immediate post-bank recapitalization period.  The 
CBN's bank consolidation process required mobilizing an 
additional naira 600 billion (USD 4.5 billion) in domestic 
capital for the banking sector.  Once bank recapitalization 
is complete, NSE representatives believe the volume of trade 
will increase and predict the number of investors will grow 
from its current 5 million to 7 million by 2006. 
 
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Optimistic Future, But Capacity Lags 
------------------------------------ 
 
5. (SBU) NSE representatives are bullish about stock market 
expansion, and are working on plans to develop a derivatives 
market to include: asset-backed securities, options, and 
exchange-traded funds.  They estimate 20 to 30 million 
Nigerians have sufficient capital to invest in the stock 
market (a figure we think is high), and that the Government's 
Pension Reform Act will spur further investment into the 
stock market.  Despite optimistic growth projections, 
however, NSE members stated the securities sector lacked the 
regulatory capacity and infrastructure to keep pace with the 
expansion.  Okoye told us the lack of capacity hurt the 
sector as a whole, and that more resources were needed in the 
training, recruitment, and restructuring of the Security and 
Exchange Commission (SEC), the industry's main regulatory 
body. 
 
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Comment 
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6. (SBU) Comment.  The phenomenal 40 to 50% average rate of 
return enjoyed by Nigerian investors in 2004 is not in the 
cards for 2005.  However, financial experts generally agree 
the stock market will recover and ROI will increase in 2006 
as more capital returns to the secondary market.  Experts 
agree the CBN's bank recapitalization requirement in the 
short-term has shifted investment from the stock market; 
however, the long-term benefits of bank consolidation might 
boost investment in the stock market.  When and if larger 
numbers of investors begin to move to the NSE, the SEC will 
need to strengthen its currently weak regulatory capacity by 
investing more in training and recruitment, and in creating 
an adequate legal framework to handle the increased trading 
volume.  End Comment. 
BROWNE