Identifier
Created
Classification
Origin
05LAGOS747
2005-05-19 08:49:00
CONFIDENTIAL
Consulate Lagos
Cable title:  

CBN'S NEW CAPITALIZATION DEADLINES CAUSE BANKS TO

Tags:  EFIN ECON EINV PGOV PREL NI 
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190849Z May 05
C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000747 

SIPDIS

DEPT PLEASE PASS TO EX-IM KENNETH VRANICH, RICHARD
BRACKLEY, THOMAS F. MATTHIAS, AND BERT C. UBAMADU
DEPT OF TREASURY PLEASE PASS TO SONJA RENANDER

E.O. 12958: DECL: 05/19/2015
TAGS: EFIN ECON EINV PGOV PREL NI
SUBJECT: CBN'S NEW CAPITALIZATION DEADLINES CAUSE BANKS TO
PICK UP THEIR PACE


Classified By: Consul General Brian Browne for reasons 1.4 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000747

SIPDIS

DEPT PLEASE PASS TO EX-IM KENNETH VRANICH, RICHARD
BRACKLEY, THOMAS F. MATTHIAS, AND BERT C. UBAMADU
DEPT OF TREASURY PLEASE PASS TO SONJA RENANDER

E.O. 12958: DECL: 05/19/2015
TAGS: EFIN ECON EINV PGOV PREL NI
SUBJECT: CBN'S NEW CAPITALIZATION DEADLINES CAUSE BANKS TO
PICK UP THEIR PACE


Classified By: Consul General Brian Browne for reasons 1.4 (b) and (d).


1. (C) Summary. Eschewing prior consultation with the
industry, the Central Bank of Nigeria (CBN) unexpectedly
promulgated a new set of deadlines to spur banks to meet its
recapitalization requirement: April 30 for pre-merger
consent, August 31 for preliminary merger approval, and
October 31 for merger final approval. Nigeria's banks were
moving at their own pace to meet the December 31 naira 25
billion recapitalization requirement but the CBN felt many
banks were footdragging. Banks were given a month to meet
the April deadline, hastening a spate of bank merger
announcements. Further clouding the air, bankers are
uncertain about the consequences of failing to meet these
interim CBN deadlines. Moreover, bankers kept telling us
that few of them are keen on merging and that the forced
march toward consolidation is fraught with major
uncertainties from the standards for valuation of bank assets
to the hidden operational costs associated with mergers. End
summary.


2. (U) On March 31, the Central Bank of Nigeria (CBN) made a
rather Delphic announcement setting new interim deadlines for
banks on their way to meet the naira 25 billion (USD 192
million) recapitalization requirement. The new timetable is:
pre-merger consent by April 30, merger approval-in-principle
by August 31, and final approval by October 31. Banks have
five days after each deadline to submit their plans (actual
deadlines: May 5, September 5, November 5) Previously, banks
were allowed to move at their own pace in merger negotiations
as long as the naira 25 billion mark was reached at year's
end. However, the CBN clearly was dissatisfied with the pace
the mergers were being accomplished.


3. (C) Spurred by the CBN's new deadlines, more serious
merger discussions took place in April than in the preceding

eight months since the CBN set the recapitalization goal. As
a result, new merger announcements include: 1) Union Bank
acquiring or merging with Broad Bank, Gulf Bank, Universal
Trust Bank, Union Merchant Bank, 2) First National Bank will
emerge from a merger between Centerpoint Bank, First
Interstate Bank, Intercity Bank, Liberty Bank, Pacific Bank,
and Tropical Commercial Bank -- most of these are perceived
to have northern Nigeria affiliations, 3) Access Bank merging
with Capital Bank and Marina Bank, 4) Afribank with New
Nigerian Bank (NNB) and FSB International Bank, 5) Reliance
Bank to merge with foreign investors, 6) First City Monument
Bank, Cooperative Development Bank, NUB International Bank,
and Societe Bancaire, 7) Equitorial Trust Bank and Devcom
Bank, 8) Indo-Nigerian Bank and NAL Bank, and 9) Investment
Banking and Trust Company (IBTC) and Bond Bank.


4. (C) Capital Bank Managing Director, Seyin Ayida,
acknowledged that the CBN's new rules sped his bank's
announcement to merge with Access Bank and Marina Bank. He
said their partnering was only three weeks in the making, but
the CBN's edict called for quick decisions. Capital Bank's
original plan was to meet the N25 billion goal raising
capital on its own. Since Capital, Access, and Marina Banks
have been talking, Ayida said, he has been "stretched beyond"
his limits, working endless hours with unfamiliar legal
material. Other merging banks are likely experiencing the
same discomforting sensation of venturing into territory
heretofore uncharted by members of the Nigerian banking
sector.


5. (C) Merger pains include a valuation predicament. Bankers
want merging or acquisition partners to be valued low in
order to get a good deal, but once the merger is effectuated,
want partners' assets to be valued high enough to guarantee
the merger meets the naira 25 billion capitalization goal.
Other pains include ambitious MDs and board members who will
have a tough time stepping down from high-level positions,
and technical issues such as integrating computer systems.


6. (C) Bank Managing Directors (MDs) say the CBN is not
providing the promised technical assistance to help banks
struggle through the merging process. The few Nigerian bank
MDs who have merger or acquisition experience, such as
Investment Banking and Trust Company (IBTC)'s Atedo
Peterside, understand the arduousness of the process and
relate that the due diligence process alone usually takes 18
months. Given the CBN's short deadline for
recapitalization-led mergers, banks complain the CBN should
be doing more to assist them. The Monetary and Fiscal
Policies subcommittee of the Bankers' Committee recently
proposed several ideas to assist banks: CBN refunds for the
cost of raising funds through public offers, IPOs, and
private placements; intensified monitoring of bank
consolidation; "facilitation" of the consolidation process
(no specific recommendations made); create and publicize
enhanced guarantees for depositor funds; and a working CBN
help desk for merger questions and problems, and for
questions regarding merger incentives. (Note: The Bankers'
Committee is open to all bank MDs and the CBN governor. Its
Monetary and Fiscal Policies subcommittee meets monthly to
discuss recent economic factors and their effects on the
banking sector. The subcommittee often releases
recommendations to the CBN.) The CBN has not responded to
these proposals.


7. (C) Managing Directors from Bond Bank, Capital Bank,
Ecobank, Fidelity Bank, IBTC, and the President of the
Chartered Institute of Bankers of Nigeria, who attended a
dinner at the Consul General's residence on April 28,
discussed the abruptness of, and motivations behind, CBN
decisionmaking. The CBN has not clearly stated its purpose
in raising the capitalization requirement to naira 25
billion, beyond having fewer, larger banks to "strengthen"
the banking sector. Interlocutors believe the CBN move is
partly to punish bankers, long-vilified under the perception
that they are tools for profiteering and diverting funds
overseas for the benefit of an elite few.


8. (C) The GON plays on the public's general ignorance of
banking mechanics by fostering sentiment that bankers do not
want to help Nigerian consumers, manufacturers and
industries. Some bankers also believed that financial sector
reform was being pushed because it did not materially affect
President Obasanjo's elite allies. they claimed that most of
Obasanjo's monied cronies were wealthy businesspeople and
politicians. Thus, reforming the financial sector would not
bruise their interests but would give the facade of reform to
the Nigerian public and outside world. Conversely, in the
economic sectors where Obasanjo's allies are focused, reform
is not progressing. Instead, bans and tariffs protecting the
special interests of Obasanjo's elite friends are the order
of the day, bemoaned the bankers. The consequences for banks
who do not meet the deadlines are not known. CBN has not
made public its intent but industry rumors are that
noncompliant bank names will be publicized. To date,
non-compliant banks have not been cited by the CBN, though 20
banks have not publicized their plans leading industry
watchers to speculate whether they have met the CBN deadline.
Meanwhile, the CBN has not mentioned any bank names, but it
announced it will write off 80 percent of bad debts owed it
by 13 of the weakest banks, estimated at about naira 72
billion (about USD 550 million),thereby making those banks
more attractive for acquisition. The terms and conditions
for these write-off loans are stringent, however, and few
banks are expected to be able to take advantage of the write
off. With no apparent negative repercussions two weeks after
the April 30 deadline, a CBN strategy of helping troubled and
non-compliant banks to ease out of sight via acquisition
seems to be taking form. The approach may save the sector
from panic or distress.


9. (C) Bankers stated the CBN will help out banks that come
close to the naira 25 billion goal but cannot quite make it
by December 31. The help is expected to come in the form of
additional incentives or offers to merge with smaller banks
to help banks acquire the extra capitalization needed to meet
the requirement. Additionally, the CBN has given bank MDs
the impression it will allow new serious merger announcements
to be made beyond the April, August, and October deadlines,
so long as banks are in compliance with CBN regulations for
consolidation.


10. (C) So far, bankers do not believe the recapitalization
effort is enabling banks to offer more services to the
average Nigerian, as it was intended to do. For example,
Ayida asserted banks not able to finance small and medium
size enterprises during the recapitalization period because
funds are too tight. Banks are spending time and money
shoring up capital bases and focusing only on the largest and
most profitable financing. He said some small business
borrowers have had to stop commercial activities because of
insufficient financing. Banks are even stalling compliance
with the GON Small and Medium Industries Equity Investment
Scheme (SMIEIS) initiative for Nigerian banks to set aside
ten percent of profits for small and medium size business
investments. At least in the short term, the capitalization
requirement has undermined another key objective of banking
sector reform, that of providing more services to small and
medium sized firms.


11. (C) Comment. CBN Governor Soludo and others say the
recapitalization is part of the GON's overall economic reform
plan. Yet, curiously, reforms in the banking sector have
been fast-tracked while needed reforms in other areas such as
trade policy and infrastructure lag. The difference in pace
could be conscious. Perhaps the GON has determined that
financial reform is the essential first step toward overall
economic reform and growth. Or perhaps, as one of our
interlocutors suggested, financial reform is getting more
emphasis than it deserves chiefly because Obasanjo appointed
top-flight personalities such as Ngozi Okonjo-Iweala,
Minister of Finance, and Charles Soludo, CBN Governor in this
sector. Meanwhile, political appointees with little interest
in reforms dominate the other economic portfolios.
Regardless of the factors underlying the push toward
financial sector reform, the newest round of deadlines for
the capitalization requirement has startled the banks and
will cause them to accelerate their game plans for compliance
with the requirement. End comment.
BROWNE