Cablegate: Nigeria: U.S. Treasury Visitor Hears Strengths, Weaknesses

VZCZCXRO0954
RR RUEHMA RUEHPA
DE RUEHOS #0266/01 2001230
ZNR UUUUU ZZH
R 181230Z JUL 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0026
INFO RUEHUJA/AMEMBASSY ABUJA 9712
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC

UNCLAS SECTION 01 OF 03 LAGOS 000266

SIPDIS

STATE PASS USAID FOR NFREEMAN, GBERTOLIN
DOC FOR 3317/ITA/OA/KBURRESS
DOC FOR 3310/USFC/OIO/ANESA/DHARRIS
DOC FOR USPTO-PAUL SALMON
DOJ FOR MARIE-FLORE KOUAME
TREASURY FOR RHALL, DPETERS
STATE PASS EXIM FOR JRICHTER
STATE PASS OPIC FOR ZHAN, MSTUCKART, JEDWARDS
STATE PASS TDA FOR LFITTS, PMARIN

E.O. 12958: N/A
TAGS: EFIN ECON EINV ENRG NI

SUBJECT: NIGERIA: U.S. TREASURY VISITOR HEARS STRENGTHS, WEAKNESSES
OF BANKING SECTOR

Ref: A. ABUJA 119
B. LAGOS 201
C. LAGOS 97

1. (U) Summary: During June 19-20 meetings with Richard Hall, U.S.
Department of Treasury, stakeholders in the Nigeria's banking and
financial sectors identified several weaknesses: the banking
sector's inability to absorb excess liquidity through sound medium
to long term investments; bank asset overvaluation; under-developed
risk management capacity; and untested management. These fundamental
weaknesses could arrest, if not roll back, growth in the sector. End
Summary.

2. (U) From June 19-20, Richard Hall, International Economist at the
U.S. Department of Treasury, accompanied by Lagos and Abuja
EconOffs, met with banks, infrastructure-financing institutions,
private equity firms, and economic think tanks in Lagos to assess
the health of Nigeria's financial sector. Participants included
Mansur Ahmed, Director General of the Nigerian Economic Summit Group
(NESG); Professor Doyin Salami of the Lagos Business School (LBS);
Bismarck Rewane, Managing Director of Financial Derivatives; Richard
Kramer, Chairman of the African Capital Alliance (ACA); Malcom
Gilroy, Deputy Managing Director of Global Markets and Investment
Banking, United Bank for Africa (UBA); Solomon Asamoah, Executive
Vice President of the Africa Finance Corporation (AFC); Dr. Cecilia
Ibru, Managing Director of Oceanic Bank; and Jubril Aku, Executive
Director of Treasury and International Institutions, Ecobank.

Banks Healthy, Fighting for Market Share
----------------------------------------

3. (U) Jubril Aku, Executive Director for Treasury and International
Institutions at Ecobank, told Hall that Nigerian banks were getting
bigger and stronger; banking assets were doubling every two years;
and lending to the private sector has more than doubled since
consolidation. Following consolidation, Aku said 80 percent of
banks were strong and sound, and only two banks were under interim
management. When asked if Nigerian banks really need all the
capital they have raised, Aku noted that not only were banks fearful
of hostile takeovers, they were also gearing up to fight for greater
market share. Aku thinks that bank earnings will come under greater
pressure in 2009 from increasing competition and dwindling
opportunities in the market. According to Aku, the industry's room
for asset growth, except in the complex areas of power and
infrastructure finance, is fast reaching saturation point.

Bank Management Inexperienced, Untested
---------------------------------------

4. (U) Bismarck Rewane, Managing Director of Financial Derivatives;
Richard Kramer, Chairman of the African Capital Alliance (ACA); and
Malcom Gilroy, Deputy Managing Director of Global Markets and
Investment Banking, United Bank for Africa (UBA) voiced concerns
about the banks' human capacity, especially in light of potential
downturns in the medium to long term future. Rewane said a "rising
tide" in the banking sector brought everybody up with it; as a
result, bankers have not yet been put to the test. Kramer believes
there is much "froth" in the market, and a looming financial "storm"
will weed out the good from the bad. Because Nigerian banks were
small, poorly managed, and not exposed to complex deals, Gilroy
pointed out the need for these banks to build capacity and
international alliances in order to meet global competition and best
practices. Senior-level management is not experienced enough to
handle the post-consolidation banks' massive sizes, Gilroy said.
Not even a handful of bank managers have ever made "meaningful
decisions"; most of them have spent their entire career within
Nigeria's bank industry doing basic trade finance, which gave them
little scope for professional growth, he observed. The capacity gap
between the upper echelon in management and the rest of the
organization is another area of concern. Using Zenith Bank as an
example, Kramer said Zenith's performance and future are too
dependent on its current, highly competent Managing Director.

Banks Ill-Equipped For Infrastructure Development
--------------------------------------------- ----

LAGOS 00000266 002.2 OF 003

5. (U) Solomon Asamoah, Executive Vice President of the Africa
Finance Corporation (AFC); Mansur Ahmed, Director General of the
Nigerian Economic Summit Group (NESG); and Gilroy agreed that
private public partnership (PPP) is the way forward for
infrastructure development. Financing is no longer the issue given
the liquidity in the market; instead, the technical ability required
of the government and private partners to structure and get projects
off the ground is the biggest hurdle, the executives said. They all
expressed concerns about the banks' forays into infrastructure
financing and their ability to do so safely. According to Gilroy's
estimate, only about four Nigerian banks are capable of structuring
sophisticated infrastructure transactions. ACA Chairman Dick Kramer
echoed this assessment. He believes there are only several banks
capable of such transactions in Nigeria, including First Bank,
Guarantee Trust Bank, and Stanbic IBTC Bank.

Bank Weaknesses: "Borrowed" Capital, Margin Lending
--------------------------------------------- -----

6. (U) Some interlocutors contended the banking sector is grossly
overvalued and exhibits fundamental weaknesses. Rewane speculated
that 50 percent of the capital banks raised during consolidation was
not "genuine capital", but rather "borrowed capital" and claimed
that 18 to 20 percent of the Nigerian Stock Exchange's (NSE) market
capitalization was based on bank loans. He predicted the banks will
go back to the market again to fill the gap created by the "borrowed
capital". In addition, many banks habitually lend people money to
buy the banks' own shares and then use these shares as collateral,
Rewane noted (Reftel C). He also sees banks venturing into
uncharted territory as a direct result of not knowing what to do
with their liquidity. Given these weaknesses in the system, Ahmed
expressed concerns about the health of the banking sector and
macro-economy. Dr. Cecilia Ibru, Managing Director of Oceanic Bank,
shared his assessment, noting that, with the fluidity in the market
and the massive amount of capital available to be deployed, the
banking sector cannot afford to take a wrong turn.

7. (U) Contrary to other stakeholders' views, Gilroy argued that
Nigerian bank stocks are not really over-valued. The returns are
still good, and the economy is still growing, he said. Gilroy
contended the concern about liquidity in the market is exaggerated,
and attributed liquidity growth to the growth of bank capital and to
the Federation Account's allocations. (Note: The Federation Account
collects almost all revenues collected by the Government of Nigeria,
and funds in the account are distributed monthly to the Federal,
state, and local governments in accordance with the revenue
allocation formula approved by the National Assembly. The
governments, in turn, deposit the allocation in banks. (Reftel A)
End Note) He claimed that, since the allocations are short-lived,
there is no reason to worry about inflation. Ten percent of the
money flows out of the financial system, but a lot more flows into
the bond and capital markets, he estimated. (Note: Transactions not
channeled through banks or are conducted in the informal sector are
considered outside the financial system. Capital flows into
Nigeria's bond and capital markets, although passing through banks,
do not stay long enough to significantly influence total bank
deposit liabilities and, therefore, to increase bank capacity to
create loans. As a result, what ordinarily could have become
inflation will appear as "price pressure" in the capital market. End
Note)

Banks Need to Develop Risk Management Capacity
--------------------------------------------- -

8. (U) UBA's Gilroy expressed grave concerns about the fragile and
underdeveloped risk management capacity in the industry. He
suggested that a few banks may be propping up their stock prices to
inflate their balance sheets. Presently most mega loans in the
industry are new and short term, which give banks a window of
comfort, he added. Given the recent growth of the banking sector,
Gilroy thinks the current level of knowledge about handling risk
management at most banks will suffice for the short term. However,
as the market matures and becomes increasingly sophisticated, he
claimed the current risk management structure would not be able to

LAGOS 00000266 003 OF 003

keep up.

9. (U) This cable has been cleared with Richard Hall and Embassy
Abuja.

BLAIR

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