VZCZCXRO4506
PP RUEHMA RUEHPA
DE RUEHUJA #1845/01 2801533
ZNR UUUUU ZZH
P 071533Z OCT 09
FM AMEMBASSY ABUJA
TO RUEHC/SECSTATE WASHDC PRIORITY 7170
INFO RUEHOS/AMCONSUL LAGOS 2057
RUEHJO/AMCONSUL JOHANNESBURG 0091
RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 ABUJA 001845 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTDA-PAUL MARTIN, EXIM-JRICHTER AND KJACKSON 
DEPT PASS TO USTR-AGAMA 
DEPT PASS TO OPIC 
JOHANNESBURG FOR NAGY 
TREASURY FOR TONY IERONIMO AND ADAM BARCAN 
DOC FOR 3317/ITA/OA/BURRESS AND 3130/USFC/OIO/ANESA/REED 
 
E.O. 12598: N/A 
TAGS: EFIN ECON PGOV NI
SUBJECT:  NIGERIA:  CBN RELEASES ITS SECOND BANK AUDIT RESULTS 
 
REF: A. LAGOS 359 
 ¶B. ABUJA 1497 
 ¶C. ABUJA 1290 
 ¶D. ABUJA 1190 
 
ABUJA 00001845  001.2 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED - DO NOT DISTRIBUTE OUTSIDE USG. 
 
¶1. (U) SUMMARY.  The Central Bank of Nigeria's second and final bank 
audit report found five banks to be undercapitalized and/or suffering 
from illiquidity.  The CBN replaced three managing directors and 
injected 200 billion naira ($1.3 billion) into the affected five 
banks.  The Nigeria Stock Exchange showed a slight rebound in the 
first day of trading after the CBN actions and suspended the trading 
of shares of two banks for one week.  The nine remaining banks were 
given a clean bill of health.  END SUMMARY. 
 
CBN Sacks Additional Bank Managers 
---------------------------------- 
 
¶2. (U) The Central Bank of Nigeria (CBN) released its second and 
final bank audit report on Friday October 2, finding five of the 14 
audited banks to be undercapitalized and/or suffering from 
illiquidity.  The five affected banks are Spring Bank, PHB Bank, 
Equatorial Trust Bank, Wema Bank, and Unity Bank.  The CBN determined 
Spring Bank, PHB Bank, and Equatorial Trust Bank to be in "grave 
problems" and fired their managing directors and appointed new ones. 
Wema Bank was found to suffer from undercapitalization and 
illiquidity, while Unity Bank was found to be undercapitalized.  The 
problems of the last two banks were not found to be as egregious as 
the first three; hence their executives avoided the CBN's axe.  The 
management of Wema bank had just been replaced in June 2009 and the 
CBN did not find it appropriate to hold the current management 
responsible for the bank's pre-existing problems.  Similarly, Unity 
Bank did not suffer from illiquidity and only needed to increase its 
capital.  All five affected banks will be required to increase their 
capital by the end of June 2010.  Access Bank, Citibank Nigeria, 
Ecobank Nigeria, Fidelity Bank, First City Monument Bank, Sky Bank, 
Stanbic IBTC Bank, Standard Chartered Bank, and Zenith Bank were 
deemed healthy and cleared by the CBN. 
 
GON Injects 200 Billion Naira into Five Banks 
--------------------------------------------- 
 
¶3. (U) The CBN injected 200 billion naira ($1.3 billion) into the 
five affected banks, as opposed to the 420 billion naira ($2.6 
billion) it injected in the five banks it rescued in the first bank 
audit on August 14 that involved 10 banks.  The 200 billion naira was 
injected in the form of long-term loans to provide liquidity for the 
banks' operations.  The 200 billion naira is less than half the 
amount of the first audit because most of the affected banks in the 
second audit are smaller and the problems found were apparently less 
serious.  The 200 billion naira is also more that the 150 billion 
naira that had been mentioned in the press prior to the CBN's actions 
on October 2. 
 
¶4. (U) The Nigerian Stock Exchange (NSE) showed a slight rebound on 
Monday, October 5, the first day of trading following the CBN's 
actions.  The NSE also suspended trading for one week in the shares 
of Spring Bank and PHB Bank to protect investors from possible 
capital erosion.  (Note:  Equatorial Trust Bank is a privately held 
company not traded on the NSE.  End Note). 
 
¶5. (U) The naira has appreciated since the CBN's actions, in contrast 
Q5. (U) The naira has appreciated since the CBN's actions, in contrast 
to the depreciation following the release of the results of the first 
bank audit on August 14.  The different reaction has been attributed 
to the fact that the market is no longer concerned about the 
stability of the overall banking sector, as was the case following 
the first bank audit.  The second bank audit also takes place in the 
context of higher oil prices, increased oil production as a result of 
the government's Delta amnesty program, and a related increase in the 
supply of foreign exchange. 
 
GON Not Nationalizing Banks 
------------------------------ 
 
¶6. (U) CBN Governor Lamido Sanusi told reporters that the GON was not 
nationalizing the banks and will return them to private investors or 
liquidate them if they are not systemically important to the banking 
sector and there are no buyers.  He said the government might also 
convert its stakes into equity until investors are found for the ten 
banks in which it has now pumped a total of 620 billion naira ($3.9 
 
ABUJA 00001845  002.2 OF 002 
 
 
billion).  Sanusi said that Oceanic Bank, Union Bank, PHB Bank, and 
Intercontinental Bank have systemic importance to the economy, as 
each controls five percent of the banking market.  The CBN indicated 
that an asset management company (or "bad bank") might be established 
to manage the liquidation process and the GON's interests in the 
rescued banks. 
 
The President Ordered Less Fanfare This Time Around 
--------------------------------------------- ------ 
 
¶7. (SBU) President Yar'Adua instructed the Minster of Finance, the 
Presidential Chief Economic Advisor, and the Director General of the 
State Security Service to ensure that the CBN announced its second 
bank audit report and actions without fanfare and according to the 
law, according to a weekend press report.  The CBN attracted 
criticism for announcing its first bank audit report and the firing 
of the managing and executive directors of affected banks in a press 
conference.  Some of the fired bank executives and debtors have filed 
charges against the CBN and the CBN Governor for violation of the 
provisions of the Banks and Financial Institutions Act, including the 
denial of due process.  Critics have also blamed the CBN Governor for 
increasing uncertainty via the manner with which he implemented 
actions following the first bank audit. 
 
No Hidden Northern Agenda 
------------------------- 
 
¶8. (SBU) Some observers have accused the CBN Governor of pursuing a 
hidden northern agenda designed to take banks out of the hands of 
southerners and put them in the control of northerners.  However, 
analysts dismiss this charge by pointing out that all 24 of the 
country's banks were audited, that some of the most wealthy and 
politically connected figures from all parts of the country were on 
the list of defaulters published by the CBN earlier, and that the PHB 
Bank was not spared despite the fact that the president's family has 
interest in the bank.  The Unity Bank, which largely does business 
with 19 northern states, was also not spared from being required to 
increase its capital by the end of June 2010. 
 
Reform May Lead to Consolidation and Foreign Investment 
--------------------------------------------- ---------- 
 
¶9. (U) The GON has endorsed a three-step strategy to strengthen the 
banking sector and restore confidence, according to Sanusi.  These 
steps include: the recapitalization of weakened banks through capital 
infusion by private investors, bank mergers; and, and the takeover of 
affected banks by core foreign investors.  He said the Enterprise 
Promotion Act allows complete foreign ownership of banks, citing the 
case of Citibank Nigeria as an example.  Sanusi predicted that the 
strategy may eventually reduce the number of banks to from the 
current 24 to around 15. 
 
¶10. (SBU) COMMENT.  Market and industry observers are relieved that 
the CNB bank audit is over and are pleased that the CBN has taken 
tough measures to clean up and strengthen the banking sector. 
Nevertheless, there are concerns about the higher costs going forward 
that are associated with the necessary provision for large amounts of 
bad debt.  Ultimately, the success of the CBN's actions will be 
measured by the growth of bank credit and the stability of interest 
Qmeasured by the growth of bank credit and the stability of interest 
rates following the lifting of the CBN guarantee on interbank 
deposits at the end of March 2010. 
 
¶11. (U) This cable has been coordinated with ConGen Lagos. 
 
MCCULLOUGH