Nigeria takes control of five banks that failed stress tests

The upheaval in Nigeria’s banking sector deepened yesterday when the central bank dismissed the management of five lenders and effectively brought them under state control with a $2.6bn rescue package.

Lamido Sanusi, who launched an audit of banks’ bad debts after taking over as central bank governor in June, dramatically revealed that five had already failed his stress tests.

While banking sectors in other emerging markets have suffered through contagion from the subprime crisis in the US, Nigerian banks’ woes are largely of their own making.

“A few Nigerian banks, mainly due to huge concentrations in their exposure to certain sectors . . . but due to a general weakness in risk management and corporate governance, have continued to display signs of failure,” Mr Sanusi said.

The governor repeated his pledge that none of the country’s 24 banks would be allowed to fail. However, he said the N400bn ($2.6bn, €1.8bn, £1.6bn) bail-out would have to be repaid by raising new capital, and added: “There will be opportunities for investors, local and foreign, and for banks, local and foreign, who would like to consider entering into discussions with our advisers on this.”

Officials familiar with the governor’s thinking say he is keen to see fewer, stronger banks.

“The challenge for him is to do it without inducing a systemic crisis,” said a senior Nigerian banking executive. Nigeria’s banks have grown rapidly since reforms launched in 2004 sharply raised minimum capital requirements and forced a wave of consolidation.

However, many banks went on to make loans for speculative investments on the stock market that soured when the Nigerian bourse slumped last year to 60 per cent below its peak.

Lenders also dabbled in the lucrative fuel imports business – both through financing traders and with their own funds – but suffered heavy losses when the oil price collapse from highs above $140 a barrel last year to lows closer to $30 a barrel. While the five mid-tier banks – Afribank, Finbank, Intercontinental, Oceanic and Union – were declared close to insolvency, five others emerged from the audit intact. The central bank hopes to audit the remaining 14 banks by the middle of next month.

Some analysts warned that the naming and shaming of the five institutions could lead depositors to panic in a country where financial literacy is low.

One industry insider said he expected the ousted executives, some of whom own large stakes in the banks they run, to mount legal challenges.

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