Cablegate: Nigeria: 95 Percent of Bank Loans Are Securitized, Ex-Im

VZCZCXRO6369
RR RUEHMA RUEHPA
DE RUEHOS #0465/01 3260720
ZNR UUUUU ZZH
R 210720Z NOV 08
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC 0314
INFO RUEHUJA/AMEMBASSY ABUJA 9956
RUEHZK/ECOWAS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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

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