VZCZCXRO7848
PP RUEHMA RUEHPA
DE RUEHUJA #1828/01 2350925
ZNR UUUUU ZZH
P 230925Z AUG 07
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 0704
INFO RUEHOS/AMCONSUL LAGOS PRIORITY 7699
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 ABUJA 001828 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PASS TO USTR (AGAMA) 
DEPT OF TREASURY FOR RHALL, DPETERS 
 
E.O. 12598: N/A 
TAGS: EFIN ECON PGOV NI
SUBJECT: NIGERIA: BANKING CONSOLIDATION SECOND WAVE 
 
REF: A. Lagos 553 
 
      ¶B. Lagos 549 
      ¶C. Abuja 1793 
 ¶D. Abuja 1438 
      ¶E. Abuja 887 
      ¶F. Lagos 32 
 
¶1.  Summary.  The second wave of banking consolidation is underway 
with a large portion of the banking community under-banked.  By the 
end of 2007 at least 7 banks will have share capital in excess of $1 
billion and ten with over $2 billion.  Banks are raising additional 
capital in both the domestic and international capital markets to 
spread operations, and resist takeovers.  Banks are eyeing the 
lucrative management of the Government of Nigeria's (GON) large 
foreign exchange reserves.  Increased competition and a demanding 
shareholder base pose challenges to improving returns to 
shareholders and credit risk management.  Spring Bank may become the 
first casualty of the consolidation and may not be alone. Despite 
challenges, banking officials remain optimistic in this fast growing 
sector. End Summary. 
 
¶2.  EconOffs met with five senior bank executives to discuss the 
current situation, challenges, and future outlook of the banking 
sector since consolidation.  The banks focused on were selected 
based on size and market share, and were Zenith Bank and Guaranty 
Trust Bank (GTB) (top tier banks), First Inland Bank(FIB), (a 
mid-level bank made up of four merged banks), Unity Bank, (a lower 
level bank made up of nine merged banks), and Spring Bank a merger 
of six banks. 
. 
Central Bank's Views 
-------------------- 
. 
¶3.  According to a recent assessment by Professor Charles Soludo on 
June 12, 2007, the ongoing banking consolidation program has been a 
huge success.  Over $1 billion has been invested in the sector in 
the last twelve months, and several hundreds of million of dollars 
are still pouring in.  Non-performing loans as a percentage of total 
loans before consolidation have gone down from 23% to less than 8%, 
total deposits have almost doubled, and credit to the private sector 
grew - annualized at 72% within the first four months in 2007. 
 
¶4.  Interest rates are gradually coming down and there are over 
4,100 commercial bank branches, up from 3,200 prior to 
consolidation.  The total employment in the sector is far higher 
than before consolidation, and Soludo expects by the end of 2007, 
there will be seven or more banks with shareholders funds in excess 
of $1 billion, and over ten banks with market capitalization over $2 
billion. 
. 
Consolidation's Second Wave 
--------------------------- 
. 
¶5.  Following the initial consolidation mandated by the CBN, a 
second wave of consolidation has begun, driven by market forces.  A 
number of competing banks are discussing mergers to increase their 
size and market share. South Africa's Standard Bank through Stanbic 
Bank in Nigeria has begun acquiring a 51% stake in IBTC-Chartered 
Bank.  Unity Bank and Eco Bank signed a memorandum of understanding, 
and First Inland Bank is in discussions with Eco Bank.  Jacobs Moyo 
Ajekigbe, Managing Director of First Bank told us that merger 
discussions between First Bank and Eco Bank are still on contrary to 
rumors.  Experts contend that jockeying between banks will continue 
as the banking sector evolves and market forces take hold.  The bank 
officials we spoke with were clear that as long as additional 
shareholder wealth was created the consolidation would accelerate. 
. 
Why Raise More Capital? 
----------------------- 
. 
¶6.  Banks continue to shop for capital both in the domestic and 
international market.  Banks are using the new capital for opening 
additional branches; deploying new technology; warding off hostile 
takeover, and qualifying to manage the GON's foreign reserves.  Some 
banks are raising new capital through public and bond offerings in 
the domestic and international capital markets.  Guaranty Trust Bank 
(GTB) issued a $300 million Eurobond in February which was 
oversubscribed by $221 million.  GTB concluded a $750 million Global 
Depository Receipts (GDR) offering with $250 million raised locally 
and $500 million internationally, culminating in the listing of 
GTB's GDR on the London Stock Exchange.  Access Bank is raising 70 
billion naira ($551 million) through a public offer.  Fidelity Bank 
is raising 49 billion naira ($386 million) through a combination of 
public offer and rights issue to existing shareholders; and First 
Bank concluded a 100 billion naira ($787 million) offer. 
 
Foreign Incursion 
 
ABUJA 00001828  002 OF 004 
 
 
----------------- 
. 
¶7.  Falalu Bello, Unity Bank CEO and Okey Nwosu of First Inland Bank 
contended that Nigerian banks were not afraid of foreign 
participation and welcomed it.  Most Nigerian banks are holding 
discussions with or already have foreign banks and foreign 
institutions interested in them.  Foreign investments have resulted 
in an inflow of foreign staff into the banking sector, and Nigerian 
banks are sending their staff abroad to affiliated financial 
institutions for skills training. 
 
¶8.  First Bank's 100 billion naira ($787 million) offer prospectus 
stated that a large percentage would be preferentially allotted to 
foreign institutional investors.  Industry insiders suggest that 
HSBC, First Bank's technical partner in the management of its 
foreign reserves will be allotted the shares.  Access Bank's offer 
prospectus stated that out of the 70 billion naira ($551 million) it 
plans to raise, 30 billion naira ($236 million) will be 
preferentially allotted to foreign investors.  Vectis Capital, EMP 
Africa Fund II, AIG Global Emerging Markets Fund II, and Rand 
Merchant Bank of South Africa all foreign financial institutions 
recently invested 20.25 billion naira ($161 million) of convertible 
preferred equity in Intercontinental Bank. 
 
¶9.  The International Finance Corporation (IFC) has provided a $50 
million convertible loan to UBA Plc.  The $50 million is part of a 
$75 million financing and advisory package the IFC approved.  The 
package includes $25 million in partial credit guarantees for bonds 
and medium term notes that UBA plans to issue to finance mortgage 
lending and other strategic businesses.  First City Monument Bank 
(FCMB) secured 10 billion naira ($78.7 million) direct equity 
investment by Helios Investment Partners, a United Kingdom based 
equity fund. 
 
¶10.  Actis, a leading private equity investor in emerging markets, 
recently acquired 19.1% equity in Diamond Bank at a value of 17 
billion naira ($134 million).  The investment will make available to 
Diamond Bank international corporate governance standards and 
processes that Actis has acquired.  In 2005 the Netherlands 
Financial Development Company invested $15 million and the IFC $30 
million in equity in Access Bank.  Standard Bank Group's acquisition 
of IBTC-Chartered Bank will bring in $525 million of foreign direct 
investment into Nigeria. 
. 
New Credit Lines 
---------------- 
. 
¶11.  Nigerian banks continue to shop for credit lines in order to 
manage their assets and liabilities because most deposits usually 
have terms not exceeding 90 days and the banks have to finance 
transactions with longer periods.  International export credit 
agencies and foreign financial institutions continue to increase 
their credit lines to Nigerian Banks.  The U.S. Export-Import Bank 
recently increased its credit lines to Nigerian banks from $300 
million to $405 million.  The number of Nigerian banks that are 
eligible to benefit from the facility increased from 14 to 17.  In 
2006, the IFC provided a $15 million convertible loan to Access Bank 
for Access Bank/IFC Gender Entrepreneurship Program. 
Intercontinental Bank's credit lines are at $1 billion, and FCMB 
received $200 million from HSBC Holdings Plc between March and July 
2007 to fund its growth plan.  GTB's $350 million Eurobond will be 
used to finance projects in the oil and gas and telecommunication 
sectors. 
. 
Nigeria's First Credit Bureau 
----------------------------- 
. 
¶12.  To improve retail banking business and increase retail lending, 
nine local banks in partnership with Dunn and Bradstreet established 
the first Nigerian credit bureau - the Credit Reference Company 
(CRC).  The CRC will compile public record data, including statutory 
information, identity information, credit transactions and payment 
histories of individuals and organizations.  The CRC will provide 
needed information to subscribers, including negative and positive 
reports on borrowers to assist financial institutions in their 
lending activities.  The nine participating banks are UBA, First 
Bank, IBTC Chartered Bank, GTB, Diamond Bank, Intercontinental Bank, 
Standard Chartered Bank, FCMB, and Access Bank. 
. 
Diversification and Expansion Plans 
----------------------------------- 
. 
¶13.  Banks are paying serious attention to growth strategies in a 
bid to capture market share, and have diversified into other 
segments of the financial services industry.  Some have diversified 
into insurance, pension funds, stock broking, microfinance, asset 
management, and investigating at diversifying into mortgages. 
 
ABUJA 00001828  003 OF 004 
 
 
However, the absence of a legal framework hinders banks investing in 
mortgages, especially the absence of a foreclosure law.  Jide 
Ogundare of GTB said that once better laws were passed his bank will 
invest heavily in mortgages. 
 
¶14.  All 25 consolidated banks are opening new branches while UBA 
and Eco Bank are cherry picking branches from the liquidated banks. 
Banks are also establishing their presence within the sub-region in 
Ghana, Sierra Leone, and Gambia.  First Bank, Zenith Bank, and Union 
Bank have established subsidiaries in the U.K.  GTB will open a 
subsidiary in London soon and has plans to establish subsidiaries in 
Liberia and francophone West African countries.  Unity Bank will 
establish subsidiaries in Chad, Niger and Gambia. 
. 
Corporate Governance 
-------------------- 
. 
¶15.  A new corporate governance code was introduced in April 2006. 
The corporate governance code limits government direct and indirect 
equity holding in a bank to 10%, and an equity holding above 10% by 
an investor requires CBN approval.  Other features of the code are 
separating the Board chairman's responsibilities from the managing 
director/chief executive officer; and two members of the same family 
cannot occupy the position of board chairman and chief executive 
officer or bank executive director at the same time.  The code 
precludes the chairman of the board from serving as chairman or 
member of any of the board committees.  There are also penalties for 
rendering false returns, and all insider related credit applications 
pertaining to directors and top management staff and parties should 
be sent for approval to the Board Credit Committee.  The Board 
Credit Committee cannot be chaired by the chairman of the board or 
the managing director. 
. 
Spring Bank "Cooking the Books" 
------------------------------- 
. 
¶16. The CBN has said that it has a zero tolerance for fraud and 
following the initial consolidation undertook an exercise to verify 
the 25 billion naira shareholder capital requirement.  Spring Bank, 
a merger of six banks that consolidated very close to the December 
31, 2005 deadline, came under scrutiny and after further 
investigation the CBN directed the bank to increase its capital base 
within six months.  It has been alleged that some of the directors 
paid for shares only on paper without making cash payments.  The CBN 
and Nigerian Depository Insurance Commission (NDIC) found that 
Spring Bank under-listed the volume of shares held by bank directors 
and the shares were funded directly through forgeries and 
manipulation of bank records.  Spring Bank was unable to satisfy the 
requirements and only two of the merged banks, Guardian Express and 
ACB International were held to have brought positive capital to the 
merger.  In response, the CBN ordered Spring Bank to replace the 
Managing Director and its Board of Directors.  Deep divisions 
existed within Spring Bank and CBN had to intervene and appoint a 
"neutral" board.  EconOff met with Dr. H. I. Mohammed, one of the 
CBN appointed board members, and he confirmed that the "books were 
cooked" with creative "econometrics" to satisfy the consolidation 
and that other banks may have done the same. 
. 
Challenges Ahead 
---------------- 
. 
¶17.  The banks that met the recapitalization deadline without 
merging with other banks, such as GTB and Zenith, have moved to the 
next stage without having to solve integration problems.  Falalu 
Bello of Unity Bank and Okey Nwosu of First Inland Bank said that 
integration problems related to technology, people, and processes 
persist.  Bello and Nwosu said putting all the branches on a single 
information technology platform have been resolved while training 
and re-training of staff continues. 
 
¶18.  Most of the banks are listed on the Nigerian Stock Exchange 
resulting in pressures to improve performance and returns to 
shareholders, while facing increased competition, demands for higher 
returns, and solving integration problems.  Bello said the Unity 
Bank Board and shareholders have agreed to wait two years before 
receiving dividends. 
 
¶19.  Banks now have more capital compared with what existed before 
consolidation and could be tempted to give out loans that could 
easily become delinquent thus creating additional challenges on how 
to manage credit risk.  The CBN is tackling the problem through its 
risk based supervision of banks and sponsoring training on credit 
risk management for banking staff at the Financial Institutions 
training Center in Lagos.  Most banks understand that their 
workforce does not have the necessary skills and the training of 
staff is a high priority.  During the interim, banks are employing 
experienced expatriates to fill the most senior level positions. 
 
ABUJA 00001828  004 OF 004 
 
 
. 
Comment 
------- 
. 
¶20.  Despite challenges, the senior executives we spoke with were 
optimistic and believed the opportunities outweighed the challenges. 
 They were in agreement that Nigeria is under-banked and needs the 
banking sector to expand to the rural and semi-urban parts of the 
country.  There are also huge opportunities in retail banking and 
with the recent establishment of the CRC, banks will be able to get 
credit information on customers easily and will be encouraged to 
lend more.  There are also opportunities in consumer finance and 
other segments of the financial services industry. 
 
¶21.  Nigeria's banking industry is one of the fastest growing in the 
world and the GON plans to make Nigeria the financial hub of the 
African continent by 2020.  The CBN will need to be vigilant 
regarding regulatory issues to nip problems before they become 
systemic.  Training must be continuous and the industry should 
strive to attract competent staff from around the world until local 
capacity fills the gap and the industry knowledge base expands. 
.. 
GRIBBIN