NIGERIA: SECOND PHASE OF BANK CONSOLIDATION UNDERWAY

UNCLAS SECTION 01 OF 02 LAGOS 000654

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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.

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Banks Rush to the Stock Market
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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.

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And Take Over Defunct Banks for More Market Share
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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.

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Big-Ticket Mergers in the Offing
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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).
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Banks Expand Branches
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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

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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.

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And Target Foreign Reserves
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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.

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Comment
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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