NIGERIA: 95 PERCENT OF BANK LOANS ARE SECURITIZED, EX-IM

UNCLAS SECTION 01 OF 02 LAGOS 000465 SENSITIVE SIPDIS TREASURY FOR DFIELDS, AIERONIMO, RHALL, DPETERS STATE PASS OPIC FOR DERB, ZHAN, MSTUCKART, JEDWARDS STATE PASS TDA FOR LFITTS, PMARIN STATE PASS USAID FOR NFREEMAN, GBERTOLIN, GWEYNAND, SLAWAETZ STATE PASS EXIM FOR JRICHTER, KJACKSON, KJANIK DOC FOR 3317/ITA/OA/KBURRESS E.O. 12958: N/A TAGS: EFIN EFIN EAID NI SUBJECT: NIGERIA: 95 PERCENT OF BANK LOANS ARE SECURITIZED, EX-IM VISITORS TOLD Ref: A) Abuja 2180 B.) Lagos 426 ¶1. (SBU) Summary: Over 95 percent of banks' loan portfolios are securitized, bank representatives told U.S. Export-Import Bank officials during their October 21-24 visit; this indicates that banks are unable to conduct risk assessment and project monitoring. Retail banking cannot develop due to the lack of a credit system, and banks are struggling to recruit, retain, and develop competent employees. Despite these problems, Nigerian banks are optimistic and see the market's downward slide as a reflection of profit taking by investors who captured high yields before the beginning of the global downturn. End Summary. ¶2. (SBU) U.S. Export-Import Bank (Ex-Im) officials Katherine Janik, Mauricio Milian, and Kyle Jackson, visited to Lagos October 21-24, to assess the capacity of Nigerian commercial banks to conduct risk assessment and project monitoring. Ex-Im officials, accompanied by EconOff, met with financial experts and with representatives of nine commercial banks (United Bank for Africa, Oceanic Bank, EcoBank, Diamond Bank, Intercontinental Bank, Bank PHB, Union Bank, Zenith Bank, and Access Bank). Nigerian Problems, Regional Impacts -------------- ¶3. (SBU) Bismarck Rewane, Managing Director of Financial Derivatives, a Nigerian consulting, told Ex-Im visitors that Nigeria is facing a financial crisis given the loss of confidence in the domestic market and the global credit crunch. He also said problems in the Nigerian banking system have regional ramifications. Through their aggressive expansion to other African countries, the Nigerian banks, he argued, are supporting satellite markets in Africa. Problems in the Nigerian banking system, arising from domestic sources or from the international financial crisis, are likely to affect other regional markets and need to be watched carefully, he said. Local Banks See Market Correction, Not Financial Crisis -------------- ¶3. (SBU) The banks expressed confidence in the capital market, asserting that its downward slide signaled a market correction, not a financial crisis. Olamide Shonekan, Director of Global Markets, United Bank for Africa (UBA),said international investors began pulling their investments out of Nigeria starting in 2007, long before the current global financial crisis and downturn in Nigerian capital market. According to Shonekan, international investors had captured high yielding investment opportunities from 2006 to 2007, and their departure from Nigeria reflected a need to deploy capital elsewhere, not a loss of confidence in Nigeria. (Comment: Whether the Nigerian capital market is undergoing market correction or ailing from a financial crisis is still under debate. The banks inevitably painted a rosier picture of the current situation. End comment) The nine banks disagreed, however, over the economic rationale of commercial banks playing the role of market makers. (Ref B) With respect to the short term future, most of the nine banks believe the sector will undergo a second round of consolidation in 2009 through mergers and acquisitions. 95 Percent of Loan Portfolios Securitized -------------- ¶4. (SBU) Oceanic Bank, Bank PHB, and Access Bank officials said over 95 percent of their loan portfolios are fully collateralized or securitized, and unsecuritized loans are only available for blue chip companies, namely international companies such as Shell and Exxon-Mobil. (Comment: The collateralization or securitization of nearly 100 percent of banks' loan portfolios signals the banks' inability to conduct project risk assessment and monitoring. End Comment) For Oceanic Bank, loans for real estate development require 130 percent securitization. However, the banks claimed that only five to ten percent of their loan portfolios, a very insignificant portion, are used for margin lending. (Note: Financial experts, however, gave a higher figure; they told EconOff in separate incidents that margin lending accounts for around 40 percent of most Nigerian banks' assets. End Note) Bank Growth Unsustainable LAGOS 00000465 002 OF 002 -------------- ¶5. (SBU) Austen Obigwe, Executive Director of Corporate and International Banking, Union Bank, contended the high growth rates proclaimed by certain banks are not based on economic fundamentals and are unsustainable. According to Obigwe, these "cowboy" banks manipulated the numbers on their balance sheets through maneuvers such as inter-bank lending. Henry Nelson, Head of International Banking Group, Oceanic Bank, said Nigerian banks have their dividend pay-out ratios of around 70 percent. (Note: Dividend pay-out ratio is the percentage of earnings paid to shareholders in dividends. End Note) He believes the current ratio is unsustainably high, and hopes that it will decline in the medium to longer term future as banks undergo a second round of consolidation. Competition Exacerbates Human Capital Problem -------------- ¶6. (SBU) Local banks are aggressively recruiting and training entry-level employees, and there is fierce competition among the banks for the best people. Most banks have established in-house training courses for entry-level employees coming out of the universities and have provided their mid-level management with training opportunities overseas. However, poaching is common, especially of employees who have been trained and have worked for a period of time. The lack of human capacity, coupled with the high rate of employee turnover, jeopardizes the banks' effort to develop and institutionalize risk management and project monitoring capabilities, bank representatives emphasized. Retail Banking Needs Credit Bureaus -------------- ¶7. (SBU) The absence of credit bureaus has made retail banking highly risky and, as a result, costly. Banks have been considering expanding into retail banking, but the costs of obtaining consumer credit histories, not generally available in Nigeria, far exceed the potential profits. Currently, banks must rely on corporations for credit checks, and no data exists for credit scoring. Retail banking will develop with the right structure, namely the development of a credit checking and scoring system, the bank representatives proffered. ¶8. (SBU) Comment: Ex-Im visitors, in the debrief with CommercialCouns and Econoff, said there is low capacity for risk assessment and project monitoring, as evidenced by the very high percentage of securitized loan as a part of the total loan portfolios, among local banks. Technology and human capacity are the common denominators for the problem. While some Nigerian banks are stronger than others with respect to their risk and monitoring capabilities, the Nigerian banking sector, as a whole, is still weak by absolute standards. End comment. ¶9. (U) Ex-Im visitors did not have an opportunity to clear this cable before departing Lagos. This cable has been cleared with Embassy Abuja. BLAIR