NIGERIA: SECOND PHASE OF BANK CONSOLIDATION UNDERWAY

UNCLAS SECTION 01 OF 02 LAGOS 000654 SIPDIS PASS TO DOE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EINV PGOV NI SUBJECT: NIGERIA: SECOND PHASE OF BANK CONSOLIDATION UNDERWAY ¶1. (U) Summary: Another phase of bank consolidation in the wake of successful recapitalization of banks in 2005 pursuant to the Central Bank of Nigeria (CBN) banking reform is underway. Many banks are going to the stock market to raise capital. Banks which had criticized the CBN directive to recapitalize to 25 billion naira (USD 190 million) in 18 months now relish the challenge, amassing from 70 billion to 100 billion naira (USD 560 to 800 million) in new capital, as they position themselves to manage portions of Nigeria's USD 45.9 billion foreign reserves. End summary. -------------- Banks Rush to the Stock Market -------------- ¶2. (U) Reminiscent of the 2005 drive to recapitalize, banks are raising additional funds from the capital market, in what is termed the second phase of bank consolidation. Banks which had criticized the CBN directive to recapitalize to 25 billion naira (USD 190 million) within 18 months now relish the challenge to amass capital ranging from 70 billion to 100 billion naira (USD 560 to 800 million) in anticipation of market induced consolidation. In the first three quarters of 2007, banks raised about 278.8 billion naira from the Nigerian stock Exchange. Oceanic Bank and United Bank for Africa (UBA) raised 55 billion naira (USD423 million) and 53.8 billion naira (USD 414 million) respectively in the first quarter (Q1). First Bank raised 100 billion naira (USD769 million) in Q2, Access Bank, 70 billion naira (USD 538 million) in Q3, while GT Bank successfully raised USD350 million in Eurobonds from a foreign market. Zenith Bank had earlier raised 50.7 billion naira (USD390 million) in December 2006, and there are indications that Union Bank, Afribank, Fidelity Bank, Sterling Bank, First City Monument Bank and Skye Bank are likely raise similar amounts in the next six months. ¶3. (U) That these banks are returning to the market to further raise their capital base has experts predicting an imminent wave of mergers and acquisitions. An industry source told Consulate Economic Specialist that banks are rushing to the stock market because they want to be in better bargaining positions when the consolidation begins. -------------- -------------- And Take Over Defunct Banks for More Market Share -------------- -------------- ¶4. (U) Meanwhile, strong banks have been taking over some of the 14 banks that failed to meet the 2005 recapitalization deadline, in a "cherry-picking" process put in place by the CBN. Experts believe some banks, which had earlier spurned the CBN's invitation to take over weaker partners, now see the process as a show of strength. Others believe stronger banks are using takeovers to expand operations. ¶5. (U) UBA, which took over Trade Bank (in liquidation) in November 2006 and Metropolitan Bank in May 2007, recently accepted the offer of the Nigerian Deposit Insurance Corporation (NDIC) to take over City Express Bank, also in liquidation, under a purchase & assumption arrangement. Earlier, Afribank took over Assurance Bank and Lead Bank, while Ecobank took over Allstates Trust Bank. -------------- Big-Ticket Mergers in the Offing -------------- ¶6. (U) The CBN governor predicted that market induced consolidation would follow the CBN's 2005 mandatory bank consolidation. Banks now moving to increase their market share via mergers are Stanbic Bank-IBTC-Chartered Bank, and First Bank-EcoBank Transnational Incorporated (ETI). When finalized, the First Bank-ETI, merger will create a financial institution worth about USD 8 billion, and one of the first six banks in Africa. The Stanbic-IBTC deal which is at an advanced stage will see Standard Bank SA, parent company of Stanbic Bank take over 51 percent of the company through a tender, becoming the core investor in what could be Nigeria's biggest bank. The deal effectively brings together an investment bank (IBTC),a retail bank(Chartered Bank) and a wholesale bank(Stanbic bank). -------------- Banks Expand Branches -------------- ¶7. (U) Industry operators say the new banking consolidation is driven by the desire for greater market share and the opportunity to manage a portion of Nigeria's foreign reserves currently estimated at USD45.9 billion. ¶8. (U) To increase market share banks have embarked on branch expansion and introduction of new products. Branches of banks are springing up in locations that were previously had no or few banks. Rural and market branches are now commonplace, some are even opening LAGOS 00000654 002 OF 002 up in largely residential areas to bring services closer to the people. According to the CBN, the number of bank branches has risen by over 4,000 since 2004. New products including household appliance acquisition loans, shares and stock acquisition loans, mortgage finance loans, and salary advance loans have been introduced to win more patronage. Introduction of debit and credit cards in both local and foreign currencies are also major selling points for banks. -------------- And Target Foreign Reserves -------------- ¶9. (U) Banks have also signed pacts with foreign financial institutions in order to qualify to manage a portion of Nigeria's foreign reserves. The CBN had promised that some reserves would be managed by each local bank in partnership with global asset managers. The local press reported that the CBN has finalized the legal framework pursuant to which banks can start managing the reserves. The legal framework includes custody arrangements between the CBN, global asset managers, and participating banks. In July 2006, the CBN disbursed USD 7 billion, about 18.4 percent of total reserves to 14 banks; USD500 million was disbursed to each. Currently 17 banks are partnering to manage foreign reserves. -------------- Comment -------------- ¶10. (U) Financial analysts expect the new wave of consolidation to further strengthen the Nigerian banking sector. They laud bank branch expansion and extension of credit but warn that increased capitalization must be part of a sound business plan, not growth for growth's sake. End comment. McConnell