Financial Regulatory Forum

Nigeria bails out more banks for $1.3 billion, removes executives

By Reuters Staff
October 2, 2009

An aerial view shows the central business district in Nigeria's commercial capital of Lagos, April 7, 2009. (file photo) By Randy Fabi
ABUJA, Oct 2 (Reuters) – Nigeria’s central bank said on Friday it was providing 200 billion naira ($1.3 billion) to four banks judged to be facing a grave liquidity crisis and removed three of their chief executives.

The latest bank bailout in sub-Saharan Africa’s second biggest economy brings the total injection into the banking system over the past two months to almost $4 billion, paving the way to a restoration of confidence in the sector.

The regulator said an audit had found Bank PHB, Equitorial Trust Bank, Spring Bank and Wema Bank needed the funds to continue normal operations.

“The provision of a total of 200 billion naira by the CBN as liquidity support and long-term loans for the four banks adjudged to be in a grave situation (is) to enable them to continue normal business, while pursuing recapitalisation options,” the central bank said in a statement.

It also said Unity Bank was judged to have insufficient capital but was not in a grave situation because it had a healthy liquidity position.

The regulator said it had removed the heads of Bank PHB, Equitorial Trust Bank and Spring Bank as well as their executive directors and had appointed new managing directors.

It gave Unity Bank and Wema Bank until June 30, 2010 to recapitalise.

Central Bank Governor Lamido Sanusi has made cleaning up the banking system in Africa’s most populous nation his top priority since assuming office in June and his auditors have now completed an examination of all of Nigeria’s 24 banks.

The central bank injected 400 billion naira ($2.6 billion) into five banks on Aug. 14 and sacked their senior management after the first round of the audit found lax governance had left them so weakly capitalised they posed a systemic risk.

Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank between them accounted for almost 90 percent of exposure to the central bank’s expanded discount window, at which institutions can meet short-term obligations by borrowing central bank funds.

Five other banks were cleared in the first round.

The remaining nine banks in the second round of the audit were also found to have adequate capital and liquidity to support their current operations, the regulator said.

FOCUS NOW ON SUPERVISION, FLOW OF CREDIT
The central bank said it would help Bank PHB, Equitorial Trust Bank, Spring Bank, Wema Bank and Unity Bank in their loan recovery efforts. It said that with the audit completed, its focus now would be on restoring confidence to the system.

“With the conclusion of the bank audit exercise, we have come to the end of the first phase of the process of restoring financial sector stability,” it said in the statement.

“Ongoing action will focus on building capacity within the regulatory regime, fast-tracking the implementation … of cross-border supervision frameworks, easing the flow of credit, particularly to the real sector of the economy,” it said.

Nigerian markets were largely unaffected by Friday’s news.

The stock market had closed by the time the announcement was made, and the director-general of the exchange earlier met with brokers to reassure them that the central bank action has been taken in consultation with the banks.

The Aug. 14 bailout and removal of five bank chiefs shocked the market, triggering a sharp sell-off of banking stocks.

The local naira currency was also untroubled by the latest action, strengthening against the U.S. dollar as traders focused more on supply and demand.

Analysts and international investors have welcomed the efforts to clean up Nigeria’s banking system.

“While the banks rescued in mid-August were noted to have been under severe liquidity distress … subsequent CBN action has served to reassure markets that risks will be ring-fenced and depositors protected,” said Razia Khan, head of Africa research at Standard Chartered.

“Near term, with the injection of further liquidity into the system, market interest rates are expected to moderate. The currency has already been strengthening for some time, which is testament to renewed confidence in the country,” she said.

“Ultimately, the banking system and wider economy are better off as a result of the CBN’s actions.”

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