Why CBN injected N700bn bailout in Unity Bank-Providus Bank merger

• Auctions $876m to Banks at N1,495 per dollar

The Central Bank  of Nigeria  approved a financial package worth N700 billion to support the proposed merger between Unity Bank Plc and Providus Bank Limited, according to a document seen by Daily Trust.

According to the apex bank, the bailout is aimed at strengthening the stability of Nigeria’s financial system, as confirmed in an official letter from the CBN, which detailed the terms and structure of the financial accommodation.

The letter, addressed to the Managing Director of Unity Bank, outlines a 20-year term loan designed to ensure the operational stability of the merged entity.

This represents the first financial bailout of a commercial bank under Yemi Cardoso as Central Bank Governor. It is also coming on the heels of the liquidation of Heritage Bank which many had thought was a sign that the apex will not be bailing out banks.

According to other terms of the transaction seen by our reporter, it contained terms that require that Unity Bank settle existing obligations of N303.7 billion from the bailout funds.

This includes a N92.00 billion exposure from First Bank of Nigeria related to clearing obligations,

Another N51.70 billion financial accommodation from the CBN N25.00 billion under the Anchor Borrowers Programme.

Others include N135.00 billion obligation to NIRSAL (Nigeria Incentive-Based Risk Sharing System for Agricultural Lending).

These obligations will be deducted from the N700 billion financial accommodation.

The remaining balance of N396.30 billion from the financial accommodation will be invested in a 20-year Federal Government of Nigeria (FGN) bond.

This investment will qualify as a Tier 2 capital instrument, contributing to the shareholders’ funds of the new entity.

The letter also states that Unity Bank’s current CRR shortfall of N117.90 billion will be waived ensuring that Providus Bank’s CRR balance post-merger will serve as the opening balance for the new entity.

CBN auctions $876m to Banks at N1,495 per dollar

The Central Bank  has auctioned $876.3 million to 26 banks at a cut off rate of 1,495 naira per dollar to ease pressure on the local currency and promote price discovery.

The sales were undertaken after calling on authorized dealer banks to provide a list of all outstanding FX demand by end users.

The sale follows “growing unmet foreign exchange demand” which has “continued to increase the demand pressure in the foreign exchange market, with adverse impact on the exchange rate of the naira,” the CBN said.

Central Bank dollar gross reserves have risen to $36.79 billion as at July 31st 2024 (up some $3 billion in a month), giving the apex bank firepower to restore the naira to its preferred trading level.

The currency weakened 2.9% to 1,617 a dollar on Friday, according to latest data from FMDQ. It has declined about 70% over the past year, following reforms to allow it trade freely and lure inflows.

The central bank in the past carried out retail and wholesale currency auctions to supply dollars to the market. While it sold dollars directly to customers using the retail auction instrument, it sold to banks through the wholesale auction.