Weak caution lies ahead

Michael Dynes

It will be months before the dust settles from Nigerian Central Bank Governor Lamido Sanusi's full-frontal assault on the reckless lending practices of the domestic banking sector

But settle it will, and when it does, a second round of banking consolidation is likely to see the number of banks drop precipitously from 24 to around 14.

Sanusi's four month-long audit into the banking sector revealed that 10 of the country's 24 financial institutions were under-capitalised or in danger of becoming so - having exposed themselves to the stock market downturn through excessive lending on margin loans, posing a systemic risk to the remaining 14.

His solution was to inject almost $4bn into the ailing institutions to shore up their capital base until such times as they can be sold off to their domestic or international peers. No one knows when that might be. But Sanusi is now trying to get approval from the National Assembly for the creation of a bad bank that would take toxic assets of troubled bank balance sheets, making them more attractive for potential acquisitions.

Sanusi has only been in the job six months, but his credibility rating among the National Assembly, foreign investors, and the Nigerian public - still aghast at the excesses of the banking sector - is running high. His tough regulatory stance goes against the conventional wisdom that insists reform in the middle of a downturn is not a good idea. But he sees restoring confidence in the Nigerian financial sector as the greater priority.

Removing the cloud of suspicion hanging over all Nigeria's financial institutions has certainly helped to temper the widespread feeling in sub-Saharan Africa's second biggest economy - and in the rest of Africa - that Nigerian banks were "not to be trusted". Prior to the banking sector audit, all banks were under suspicion. Now we know which institutions are insolvent and which ones are not.

Sanusi has said that he expects expressions of interest from at least six of the country's sound domestic banks, and possibility three or four foreign banks, in acquiring the troubled Nigerian institutions. Speculation about who might buy whom is now running rampant.

Renaissance Capital has tipped Gurantee Trust Bank, FirstBank, United Bank for Africa and Zenith Bank, as the most likely post-audit industry leaders. All four South African retail banks have now expressed an interest in acquiring Nigerian branch network. Even Barclays, George Soros and HSBC are thought to be sniffing around.

When that consolidation will take place is anyone's guess. Industry insiders do not expect it to happen anytime soon. The banking sector as a whole was already struggling to cope with the impact of the downturn long before Sanusi revealed the extent of the rot in the banking sector. Impairments continue to rise and profits continue to fall - pretty much across the board.

The Sanusi revelations may have shaken confidence in the banking sector in the short-term. But that is a knee-jerk reaction unlikely to last. What Sanusi has actually done is to lay the foundations for strong banking sector growth in the future by ring-fencing the weak institutions from the strong, and preventing any contagion spreading from the former to the latter.

Caution may inhibit rapid acquisitions in the short-term. But the troubled banks could currently be bought at a substantial discount. When recovery emerges, the strong are expected to snap up the weak. A frenzy of M&A activity is expected as strong domestic banks buy weak domestic banks, foreign banks buy domestic banks, and foreign and domestic joint ventures go for what is left.