Consolidation in banking sector on the cards as bidding process looms

Lagos, 27 April 2011: Bank lending should rise significantly in the second quarter of the financial year once the April 2011 elections, which have prompted a slowdown, are over, according to Bisi Onasanya, Group Managing Director and Chief Executive Officer of First Bank Nigeria Plc.


Onasanya told Oxford Business Group (OBG), the global publishing, research and consultancy firm, that financial risk exercises undertaken last year by the Central Bank of Nigeria (CBN) and the forthcoming elections had both contributed to a dip in loan growth.


Figures show that lending growth turned a corner to reach 5% by the end of last year after plummeting in the wake of the 2008 global financial crisis, which was exacerbated in Nigeria by troubles in the domestic banking sector.


“Lending growth was suppressed last year, partly due to a conservative response from banks following the stress test which the CBN conducted in 2010,” he said. “The elections are slowing loan growth for the first half of 2011, but there will be a major increase after elections in April. I expect loan growth of 10% in 2011, which is double the 5% figure for 2010.”


Onasanya’s input helps inform the comprehensive analysis of Nigeria’s banking sector that appears in The Report: Nigeria 2011, OBG’s forthcoming guide on the country’s economic activity and investment opportunities. OBG’s report will include a detailed, sector-by-sector guide for foreign investors, together with a wide range of interviews with the most prominent political, economic and business leaders, including the US Under Secretary of State Maria Otero, the Managing Director of the World Bank Ngozi Okonjo-Iweala and the Chairman and CEO of Cisco, John T. Chambers.


Onasanya acknowledged that businesses in Nigeria still faced an uphill struggle to obtain credit from banks, despite CBN Governor Lamido Sanusi’s high-profile campaign to encourage growth by stimulating SME financing. Onasanya believes banks are unlikely to increase lending to smaller businesses, which are viewed as a higher risk than big corporations, unless lending rules are relaxed.


“Although SMEs have access to some credit, the risk tolerance limit is too high,” he said. “The banks can’t be blamed since they have to meet provisions when the CBN tests their portfolios. The government and the Central Bank should consider implementing risk sharing to increase the flow of credit to higher risk areas.”


With bidding for Nigeria’s unhealthy banks drawing nearer, Onasanya highlighted the importance of ensuring that the selling process was clearly laid out in a framework if legal wrangles and lengthy court cases were to be avoided.


Ten of Nigeria’s banks are up for sale after they failed to meet standards set out in an audit undertaken by the CBN in the wake of the 2008 crisis. The move is set to bring consolidation to the sector, with observers expecting the process to reduce the number of players to 15.


“Due process must be followed involving the boards of directors and shareholders,” he said. “Otherwise, if the distressed banks are sold by the CBN rather than by the actual owners, each acquisition will go into irreconcilable litigation.”


Onasanya also highlighted the importance of ensuring that adequate capital in real terms is brought to the table rather than virtual funds. “The CBN must ensure that the acquiring institutions do not over-leverage in their attempt to acquire an institution,” he said. “Otherwise, the acquirers could start to take funds out of the acquired institution to service the cost of the acquisition which is counterproductive.”


The Report: Nigeria 2011 will mark the culmination of almost a year of on-the-ground research by a team of analysts from OBG. It will provide information on opportunities for foreign direct investment into Nigeria’s economy and will be a guide to the many facets of the country, including its macroeconomics, infrastructure, political landscape, banking and sectoral developments. OBG’s new report will provide in-depth analysis of the development of equity finance in Nigeria and the creation of a corporate bond market. It will also consider the implications of the Petroleum Industry Bill and explore the prospects for incoming fiber optic cable capacity. The Report: Nigeria 2011 will be available in print form or online.