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How realistic is bank re-consolidation?

He said there have been series of boardroom meetings among some bank’s chief executives which may translate into mergers.  “Yes, discussions have started going on…

He said there have been series of boardroom meetings among some bank’s chief executives which may translate into mergers.

 “Yes, discussions have started going on among the industry’s operators over mergers and acquisitions. This type of mergers which we are likely to see this time around may not be regulatory authority driven but it makes sense because it will lead to more profit and efficiency in the sector”, he said. It would be recalled that the last merger and acquisitions were initiated by the CBN in a bid to meet the required N25 billion capital based which was set by the apex bank in 2004

But Nwosu said regulatory driven merger plan may not be necessary since it is the industry measure to survive under the current economic recession.

“This is the time institutions come together for greater efficiency and this has started happening in the US. In Nigeria, I see a greater opportunity for mergers and acquisitions in the banking sector and it will happen soon”, he said

Similarly, in his first interview with Financial Times of London, the Governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, confirmed the possibility of the re emergence of a new banking system. Sanusi, in that interview, said, “my initial feeling is that there isn’t any bank that cannot survive in one form or the other, either in the form of getting some of the stronger banks to put in equity and merge with them or inviting foreign banks and letting them agree on the conditions for them to invest capital and management and revive the bank.”

On the question of whether the envisaged consolidation will be regulatory induced or not, he had replied: “I wouldn’t force any consolidation but I think it’s important to send out signals to the banks that may have difficulties, that merging with stronger banks is certainly a very good possibility to save themselves and save their businesses.

“And we will try to create an environment which encourages that. We will try to encourage foreign banks that are coming, not just with money, but with management and systems, to come in and acquire. But we will not force any bank to merge. We are not going to have a Bank of America-Merill Lynch situation.”

To prove that foreign banks’ interest in the Nigerian banking system, the Standard Bank Group recently revealed that it was poised to increase its shares in the Nigerian banking industry with the expected consolidation programme.

Since the world’s financial crisis, the apex bank has initiated series of measures to protect and safeguard the nation’s banking sector from the serious impact of the crisis. Just a few days ago, the Governor of the CBN directed banks to write off all their exposures to the nation’s capital market and also insisted that banks must have a common or uniform financial reporting in order to ensure accountability and transparency in the sector.

Currently, over N2 trillion of the banking is trapped in the nation’s capital market as a result of price depreciation arising from financial meltdown. With these, reconsolidation is imminent, the shape and its modus of operandi is yet to be known.

The stockbroker also explained that the decision of the apex bank to close the expanded discount window to banks leaves much to be desired, adding that between the fourth quarter of 2008 and the first quarter of 2009, over N1.1 trillion has been given to banks as loans and this, he said, has assisted them.

Also speaking on the theme, “The Nigerian Banking System and the Challenges of the Global Economic Crisis,” at the seminar for finance correspondents and business Editors recently in Makurdi, Benue State, the Managing Director of Bank PHB, Mr. Francis Atuche, had listed regulatory induced consolidation in the banking industry as one of the options open to the country.

He recommended that the apex bank should introduce surgical interventions in the form of injecting liquidity into the banking system via government-funded soft loans, re-capitalisation and regulatory induced consolidation by encouraging the big and stronger banks to acquire the weak and the anaemic ones”.

He said that the liquidation of every weak bank associated with insolvency could result in a severe erosion of confidence in the banking system and could precipitate a run on the banks.

Based on this, he stated that the best approaches are rehabilitation and consolidation. Both methods are considered more economically viable options from a national standpoint, but consolidation is however the most favoured because of its effects on investors’ confidence.

Although it is clear how many of the banks will scale the hurdles, but a newspaper report indicated 15 banks from the current 24.

This has however generated a lot of controvasies among financial experts and economists.

According to Opeyemi Agbaje, an economist and a director in the Business School in Lagos, the action is desirable

“Well it is a desirable action. I saw it coming and this should be a commendation. I used to tell people that the last consolidation where banks raised funds was a total waste and done in error. As you can see, the money raised from the capital market has been a waste. But I want to implore the CBN not to encourage a forced merger. It should also provide incentives to them so that issues arising from the reconsolidation can be resolved.

But I do believe that the exercise will provide a stable financial system.iI will cut down on unnecessary competition but encourage competitions for services that can turn business around in the long run”, he said

Also, Akeem Are of Sicon Securities, said the categorization by an international agency actually revealed the true state of Nigerian banks.

“If they reconsolidate, they become stronger; take big investments while shareholders’ funds will be much more secured. Again, the impact on the stock market will be very great as activities will be returned to the market with shares price gaining momenturn. The reason is simple; no investor will want foreign investors to mop up their shares because the exercise will definitely lead to the return of foreign investors into the market.

“You remember that one of the reasons why the market crumbled was because some foreign investors mopped up their profits in the face of the global economic meltdown. They will return and in order to avoid a repeat of what happened, local investors too will want to protect their investments and this will bring serious activities into the market in order to prevent foreign investors taking over their shares

But Mr Mattew Ogagaviworia, a stockbroker disagreed. According to him, the CBN has not pursued the proposed reconsolidation in the right direction

“Well, as far as am concerned, this is still a speculation. In my opinion, the CBN is not pursuing the exercise in the right direction. Reconsolidation should go beyond reduction in numbers as this may lead to monopoly. I wonder what benefits 15 banks will bring to the banking sector. The CBN should pursue the policies that will guide and protect the sector from all unethical malpractices. A mere reduction in number will not augur well for the development of the banking sector,” he said.