VZCZCXRO0954
RR RUEHMA RUEHPA
DE RUEHOS #0266/01 2001230
ZNR UUUUU ZZH
R 181230Z JUL 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0026
INFO RUEHUJA/AMEMBASSY ABUJA 9712
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000266 
 
SIPDIS 
 
STATE PASS USAID FOR NFREEMAN, GBERTOLIN 
DOC FOR 3317/ITA/OA/KBURRESS 
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS 
DOC FOR USPTO-PAUL SALMON 
DOJ FOR MARIE-FLORE KOUAME 
TREASURY FOR RHALL, DPETERS 
STATE PASS EXIM FOR JRICHTER 
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS 
STATE PASS TDA FOR LFITTS, PMARIN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV ENRG NI
 
SUBJECT: NIGERIA: U.S. TREASURY VISITOR HEARS STRENGTHS, WEAKNESSES 
OF BANKING SECTOR 
 
Ref: A. ABUJA 119 
      ¶B. LAGOS 201 
      ¶C. LAGOS 97 
 
¶1. (U) Summary: During June 19-20 meetings with Richard Hall, U.S. 
Department of Treasury, stakeholders in the Nigeria's banking and 
financial sectors identified several weaknesses: the banking 
sector's inability to absorb excess liquidity through sound medium 
to long term investments; bank asset overvaluation; under-developed 
risk management capacity; and untested management. These fundamental 
weaknesses could arrest, if not roll back, growth in the sector. End 
Summary. 
 
¶2. (U) From June 19-20, Richard Hall, International Economist at the 
U.S. Department of Treasury, accompanied by Lagos and Abuja 
EconOffs, met with banks, infrastructure-financing institutions, 
private equity firms, and economic think tanks in Lagos to assess 
the health of Nigeria's financial sector.  Participants included 
Mansur Ahmed, Director General of the Nigerian Economic Summit Group 
(NESG); Professor Doyin Salami of the Lagos Business School (LBS); 
Bismarck Rewane, Managing Director of Financial Derivatives; Richard 
Kramer, Chairman of the African Capital Alliance (ACA); Malcom 
Gilroy, Deputy Managing Director of Global Markets and Investment 
Banking, United Bank for Africa (UBA); Solomon Asamoah, Executive 
Vice President of the Africa Finance Corporation (AFC); Dr. Cecilia 
Ibru, Managing Director of Oceanic Bank; and Jubril Aku, Executive 
Director of Treasury and International Institutions, Ecobank. 
 
Banks Healthy, Fighting for Market Share 
---------------------------------------- 
 
¶3. (U) Jubril Aku, Executive Director for Treasury and International 
Institutions at Ecobank, told Hall that Nigerian banks were getting 
bigger and stronger; banking assets were doubling every two years; 
and lending to the private sector has more than doubled since 
consolidation.  Following consolidation, Aku said 80 percent of 
banks were strong and sound, and only two banks were under interim 
management.  When asked if Nigerian banks really need all the 
capital they have raised, Aku noted that not only were banks fearful 
of hostile takeovers, they were also gearing up to fight for greater 
market share.  Aku thinks that bank earnings will come under greater 
pressure in 2009 from increasing competition and dwindling 
opportunities in the market.  According to Aku, the industry's room 
for asset growth, except in the complex areas of power and 
infrastructure finance, is fast reaching saturation point. 
 
Bank Management Inexperienced, Untested 
--------------------------------------- 
 
¶4. (U) Bismarck Rewane, Managing Director of Financial Derivatives; 
Richard Kramer, Chairman of the African Capital Alliance (ACA); and 
Malcom Gilroy, Deputy Managing Director of Global Markets and 
Investment Banking, United Bank for Africa (UBA) voiced concerns 
about the banks' human capacity, especially in light of potential 
downturns in the medium to long term future.  Rewane said a "rising 
tide" in the banking sector brought everybody up with it; as a 
result, bankers have not yet been put to the test.  Kramer believes 
there is much "froth" in the market, and a looming financial "storm" 
will weed out the good from the bad.  Because Nigerian banks were 
small, poorly managed, and not exposed to complex deals, Gilroy 
pointed out the need for these banks to build capacity and 
international alliances in order to meet global competition and best 
practices.  Senior-level management is not experienced enough to 
handle the post-consolidation banks' massive sizes, Gilroy said. 
Not even a handful of bank managers have ever made "meaningful 
decisions"; most of them have spent their entire career within 
Nigeria's bank industry doing basic trade finance, which gave them 
little scope for professional growth, he observed.  The capacity gap 
between the upper echelon in management and the rest of the 
organization is another area of concern.  Using Zenith Bank as an 
example, Kramer said Zenith's performance and future are too 
dependent on its current, highly competent Managing Director. 
 
Banks Ill-Equipped For Infrastructure Development 
--------------------------------------------- ---- 
 
LAGOS 00000266  002.2 OF 003 
 
 
 
¶5. (U) Solomon Asamoah, Executive Vice President of the Africa 
Finance Corporation (AFC); Mansur Ahmed, Director General of the 
Nigerian Economic Summit Group (NESG); and Gilroy agreed that 
private public partnership (PPP) is the way forward for 
infrastructure development.  Financing is no longer the issue given 
the liquidity in the market; instead, the technical ability required 
of the government and private partners to structure and get projects 
off the ground is the biggest hurdle, the executives said.  They all 
expressed concerns about the banks' forays into infrastructure 
financing and their ability to do so safely.  According to Gilroy's 
estimate, only about four Nigerian banks are capable of structuring 
sophisticated infrastructure transactions.  ACA Chairman Dick Kramer 
echoed this assessment.  He believes there are only several banks 
capable of such transactions in Nigeria, including First Bank, 
Guarantee Trust Bank, and Stanbic IBTC Bank. 
 
Bank Weaknesses: "Borrowed" Capital, Margin Lending 
--------------------------------------------- ----- 
 
¶6. (U) Some interlocutors contended the banking sector is grossly 
overvalued and exhibits fundamental weaknesses.  Rewane speculated 
that 50 percent of the capital banks raised during consolidation was 
not "genuine capital", but rather "borrowed capital" and claimed 
that 18 to 20 percent of the Nigerian Stock Exchange's (NSE) market 
capitalization was based on bank loans.  He predicted the banks will 
go back to the market again to fill the gap created by the "borrowed 
capital".  In addition, many banks habitually lend people money to 
buy the banks' own shares and then use these shares as collateral, 
Rewane noted (Reftel C).  He also sees banks venturing into 
uncharted territory as a direct result of not knowing what to do 
with their liquidity.  Given these weaknesses in the system, Ahmed 
expressed concerns about the health of the banking sector and 
macro-economy.  Dr. Cecilia Ibru, Managing Director of Oceanic Bank, 
shared his assessment, noting that, with the fluidity in the market 
and the massive amount of capital available to be deployed, the 
banking sector cannot afford to take a wrong turn. 
 
¶7. (U) Contrary to other stakeholders' views, Gilroy argued that 
Nigerian bank stocks are not really over-valued.  The returns are 
still good, and the economy is still growing, he said. Gilroy 
contended the concern about liquidity in the market is exaggerated, 
and attributed liquidity growth to the growth of bank capital and to 
the Federation Account's allocations. (Note: The Federation Account 
collects almost all revenues collected by the Government of Nigeria, 
and funds in the account are distributed monthly to the Federal, 
state, and local governments in accordance with the revenue 
allocation formula approved by the National Assembly.  The 
governments, in turn, deposit the allocation in banks. (Reftel A) 
End Note) He claimed that, since the allocations are short-lived, 
there is no reason to worry about inflation.  Ten percent of the 
money flows out of the financial system, but a lot more flows into 
the bond and capital markets, he estimated. (Note: Transactions not 
channeled through banks or are conducted in the informal sector are 
considered outside the financial system.  Capital flows into 
Nigeria's bond and capital markets, although passing through banks, 
do not stay long enough to significantly influence total bank 
deposit liabilities and, therefore, to increase bank capacity to 
create loans.  As a result, what ordinarily could have become 
inflation will appear as "price pressure" in the capital market. End 
Note) 
 
Banks Need to Develop Risk Management Capacity 
--------------------------------------------- - 
 
¶8. (U) UBA's Gilroy expressed grave concerns about the fragile and 
underdeveloped risk management capacity in the industry.  He 
suggested that a few banks may be propping up their stock prices to 
inflate their balance sheets.  Presently most mega loans in the 
industry are new and short term, which give banks a window of 
comfort, he added.  Given the recent growth of the banking sector, 
Gilroy thinks the current level of knowledge about handling risk 
management at most banks will suffice for the short term.  However, 
as the market matures and becomes increasingly sophisticated, he 
claimed the current risk management structure would not be able to 
 
LAGOS 00000266  003 OF 003 
 
 
keep up. 
 
¶9. (U) This cable has been cleared with Richard Hall and Embassy 
Abuja. 
 
BLAIR