Nigeria markets digest $2.6bln bank rescue

The stock exchange placed a two-week suspension on trading in Afribank , Finbank , Intercontinental Bank , Oceanic Bank and Union Bank , to prevent their shares collapsing while investors digest the news.

The naira currency weakened slightly on the interbank market but volumes were thin, with most foreign banks reluctant to trade with their Nigerian counterparts amid the uncertainty, one senior bank executive said.

The central bank on Friday injected 400 billion naira ($2.6 billion) into the five banks, four of which it said had been close to collapse, and dismissed their chief executives in an effort to prevent a systemic banking crisis. ⅛ID:nTAT446691⅜

The five institutions, which between them account for 40 percent of banking sector credit in sub-Saharan Africa’s second-biggest economy, had run up bad loans worth a total of 1.14 trillion naira ($7.6 billion).

Analysts said the move by new Central Bank Governor Lamido Sanusi, who has been in the post only two months, would be positive for Nigeria in the long-term.

“Finally it seems the authorities have grasped the nettle and tackled the problems in the banking system,” said Stuart Culverhouse, chief economist at London-based frontier markets brokerage Exotix.

“We will see some near-term uncertainty in the naira as the scale of the problem is probably bigger than this, but it’s a positive move. I do not think people will expect it to affect the whole system,” he told Reuters.

President Umaru Yar’Adua, central bank officials and the new teams brought in to manage the five institutions launched a campaign to reassure depositors that their money was safe, amid concern that there could be a bank run.

“I wish to assure Nigerians and all the customers of these five banks that there is no cause for alarm, with the recent central bank intervention these five banks are now strong,” Tunde Lemo, one of the central bank’s deputy governors, said in a message broadcast on Nigerian television.

“You have no reasons to fear any more. Don’t panic and don’t embark on withdrawals of your money or close your accounts.”

Depositors calm, markets digest news

There were no signs of panic at banking branches in the commercial hub Lagos or the capital Abuja.

“Before the day runs out I’ll have taken a decision on what to do but I’m still watching the situation to see how things unfold. That’s my state of mind for now,” said Nzeribe Abangwu, a lawyer with accounts at Intercontinental and Oceanic.

Analysts said it was less clear how corporate or high net worth customers — who account for the lion’s share of deposits at Nigerian banks — would be reacting.

“What you can’t tell by looking at banking halls is what’s happening in terms of institutional customers, are they calling to break placements, to shorten the tenor ... It could be a while before you see the impact,” one Nigerian analyst said.

The naira currency rose to 158 to the dollar on the interbank market after opening at 156.80, dealers said, before stabilising at around 157.80. The currency was also stable on the black market at around 155/156 to the dollar.

“A lot of people are not giving quotes and only two foreign banks are in the market. It’s very sensitive at the moment,” said one Nigerian bank executive who asked not to be named.

“The naira is hovering around 158/159 to the dollar ... The foreign banks have just held back and are being very cautious. They are just reacting by not fully participating in the market at the moment with Nigerian counterparties,” he said.

Interbank lending rates, which reflect the readiness of banks to lend to their peers, spiked to 20 percent on Friday but dropped back to around 10 percent on Monday, said Bolanle Akomolafe, head of the money market desk at Fidelity Bank.

President Yar’Adua said on Sunday he had instructed law enforcement agencies to help recover the bad loans. He also nominated risk management expert Kingsley Chiedu Moghalu as a new central bank deputy governor and strengthened its board as the apex bank manages the five institutions in its custody.

Analysts said the measures should heighten transparency, long a major disincentive to foreign investors in Nigeria.

“In time, confidence is likely to be restored. We still see a high likelihood of further foreign investment in Nigeria’s banking sector ... which should result in considerable inflows into the Nigerian market,” said Razia Khan, head of Africa research at London-based Standard Chartered.