VZCZCXRO0575
PP RUEHMA RUEHPA
DE RUEHOS #0473/01 3421531
ZNR UUUUU ZZH
P 081531Z DEC 09
FM AMCONSUL LAGOS
TO RUEHC/SECSTATE WASHDC PRIORITY 1102
INFO RUEHZK/ECOWAS COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 0657
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 LAGOS 000473
SENSITIVE
SIPDIS
DEPT PASS TO USTDA-PAUL MARTIN, EXIM-JRICHTER AND KJACKSON
DEPT PASS TO USTR-AGAMA
DEPT PASS TO OGIC
JOHANNESBURG FOR NAGY
TREASURY FOR TONY IERONIMO AND ADAM BARCAN
DOC FOR 3317/ITA/OA/BURRESS AND 3130/USFC/OIO/ANESA/REED
E.O. 12958: N/A
TAGS: EFIN ECON PGOV NI
SUBJECT: THE TRUE SCALE OF THE NIGERIAN BANKING CRISIS
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SUMMARY
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1. (SBU) Former and current employees of Citibank
participated in a November 13 discussion on the banking
sector and ongoing reforms. They see green shoots of
recovery on the horizon, but banking leaders in Nigeria took
part in outright stealing. The end result could be 1.8
trillion naira (USD 12 billion) to 4 trillion naira (USD 26.7
billion) in impaired assets. Banks cannot be allowed to fail
as too many people would be affected without a social safety
net. Entrepreneurs and manufacturers see this time as an
opportunity for change in how they do business in Nigeria.
END SUMMARY.
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DISTINGUISHED ALUMNI RETURN TO CITIBANK
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2. (SBU) Former and current employees of Citibank
participated in a on November 13 roundtable discussion at the
bank,s Lagos headquarters entitled, Great
Re-Calibration: Navigating the New Economic Landscape -
Challenges, Realities and Opportunities.8 Panelists
included Oceanic Bank CFO Oyinkan Adewale, Bank PHB CEO Cyril
Chukwuma, Dangote Executive Director Uzo Nwankwo, and
Farafina Books CEO Muhtar Bakare. The event was sponsored by
Citibank in honor of its twenty-fifth anniversary in Nigeria.
A panel discussed recent activities regarding the banking
sector.
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GREEN SHOOTS OF RECOVERY
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3. (SBU) Lagos Business School Economics Professor Doyin
Salami in his financial reform talk referred to the "green
shoots of recovery after the successful global attempt to
avert a depression." The key element in this recovery was
the role of the financial sector in avoiding widespread
panic. The impact to Nigeria was delayed, according to
Salami, in that the global events of 2007 and 2008 are still
adversely affecting Nigeria. There are more crises headed
towards Nigeria since GON revenue is impaired due to falling
oil prices and unrest in the Niger Delta remains a long-term
threat to production. A full GON financial accounting is not
possible because GON spending activity is not clear. The
challenge is not to frighten Nigeria into a deeper recession.
4. (SBU) The proposed GON 2010 budget is based on the
assumption of two million barrels of oil being produced per
day. This will happen as long as amnesty holds, Salami
continued. Local politics will increasingly focus on the
2010 elections. . Where will the economy be in 2010?
Entrepreneurs and manufacturers are in deep trouble due to
the lack of electricity.
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NIGERIAN BANKS RUN AMOK BY NON-BANKERS
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5. (SBU) The world outside Citibank is very different from
the world inside, according to Ms. Adewale. Western banks in
Western countries failed even though they were run by
professional bankers; however, Nigerian banks failed because
they were run by public relations (PR) people with no clue
about the banking business. The regulations in Nigeria
allowed this to happen even after the first recapitalization
round, where banks were required to have USD 200 million in
capital. The PR people were good at raising money, but
horrible at managing it. Managers from small banks took on
the management of large banks without any training or
experience. Risk management was non-existent.
6. (SBU) Nigerian bank consolidation in 2004 created
"strange bedfellows", Adewale said. Mergers
occurred between banks with different philosophies, no
synergy, and no cost savings incurred. The driving force for
the mergers was to obtain a banking license. The CBN thought
that by having banks merge, they would become larger and have
more diversified ownership. This did not happen. Share
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ratios upon merging were one-to-one, thereby keeping the same
people in charge. Banks hired lawyers to rewrite the
accounting rules on goodwill. Post-merger audits were
abolished.
7. (SBU) The banks were encouraged to embark on a second
recapitalization round for USD 1 billion in capital, Adewale
continued. This amount was required to manage Nigeria's
foreign exchange reserves. That Nigerian banks did not know
how to manage foreign exchange reserves was not seen as an
impediment. The CBN did not verify that the money was
actually raised. The result of the two recapitalization
rounds was 25 "mega banks" that were only "mega" on paper.
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OUTRIGHT STEALING
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8. (SBU) An unnamed bank had 400 branches but did not know
what was happening at each location. International branches
opened, without planning or understanding of market risk.
Banks knew neither the risks in Nigeria, nor abroad, stated
Adewale. The banks seemed solvent at their core, but their
subsidiaries had problems. Excessive lending concentrating
on strange clients with no "Tier One" clients. Adewale went
so far as to state that such bankers engaged in outright
stealing.
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USD 12 BILLION IN IMPAIRED ASSETS
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9. (SBU) Bank PHB CEO Chukwuma said that 1.8 trillion naira
(USD 12 billion) in toxic assets exists. Chukwuma calculated
the total in three parts. First, one trillion naira (USD 6.7
billion) was claimed have been raised in the two
recapitalization rounds when, in reality, only half of that
amount was raised. An estimated 500 billion naira (USD 3
billion) existed only on paper. Second, Banks made one
trillion naira (USD 6.7 billion) in margin loans. The
Nigerian stock exchange (NSE) declined precipitously between
March and October of 2009 which led to a 500 billion naira
(USD 3 billion) loss in margin loans. Third, the rapid
expansion of credit during the two recapitalization rounds
created 800 billion naira (USD 5.3 billion) in non-performing
loans.
10. (SBU) An unidentified Citibank employee suggested that
the amount of toxic assets could be even higher. At the peak
of the NSE in March 2009, the market capitalization was 13
trillion naira (USD 8.7 billion). The NSE is now at 5
trillion naira (USD 33 billion) after posting an 8 trillion
naira (USD 53 billion) loss. Banks made up half of this loss
or 4 trillion naira (USD 26.7 billion).
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WHY NOT LET BANKS FAIL?
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11. (SBU) Citibank Corporate Financial Group Manager Carl
Devin asked, "Why not just let the banks fail if they are in
such a deep hole?" The panelists answered that the cost to
liquidate would lead to more problems. It is easier to keep
the banks alive. An average of 7,000 direct and 13,000
indirect staff work for each of the eight troubled banks, for
a total of 160,000 workers, panel members reported.
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IMPACT ON ENTREPRENEURS AND MANUFACTURING
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12. (SBU) The banking reforms are an opportunity to
re-calibrate the economy, according to Farafina Books CEO
Muthar Bakare. This is an ideal time to look at the
commercial culture in Nigeria, how business is done and how
it relates to banking reforms. Almost 350 manufacturers have
closed their shops in 2009 due to the credit freeze,
according to Dangote Director Nwankwo. Multiple and
duplicate regulations and taxes discourage new businesses.
Taxes must be paid before a business can be set up.
13. (SBU) Instead of giving 1.2 trillion naira (USD 8
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billion) to the banks, Nwankwo thought it better to give it
directly to the entrepreneurs. Currently an entrepreneur
must offer a house to secure a 90-day loan. Most businesses
are cash-flow operations due to this lack of credit. A
recent trend has seen Nigerians setting up business in Ghana
and selling back into Nigeria, according to Nwankwo.
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COMMENT
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14. (U) The true scale of the Nigerian banking problem is
emerging as scrutiny of the sector intensifies. The CBN,s
initial capital injection of over 600 billion naira (USD 4
billion) is only the beginning. Many more resources will
have to be devoted to have ¬ one bank fail8 as CBN
governor Sanusi has stated. Allocation of such resources
will have a substantial impact on the Nigerian Federal
budget, but not providing assistance will impact the flow of
credit which, along with reliable electricity, is crucial to
developing the Nigerian economy. END COMMENT
BLAIR