A pledge by Nigeria’s new central bank governor, Lamido Sanusi, to take tough action to clean up the financial sector has triggered a sharp sell-off on the Nigerian Stock Exchange amid fears he may force banks to declare big losses.

In a recent interview with the Financial Times, Lamdio Sanusi said he would conduct an audit of banks’ exposure to the local capital market as a first step to tackle an overhang of bad debts that have sapped trust in the system. Sanusi also vowed to remove bank executives he found unfit for office, warning it was “criminal” to lie about results — an explosive statement in an industry rife with suspicions about opaque accounting.

“The tone of his language is what’s causing the panic,” said Kato Mukuru, a banking analyst with Renaissance Capital. “We want to see steps to reform the system — but what he said in the interview has put us back to where we started in terms of uncertainty.”

Mr Sanusi said on Thursday that he would like to see a sustainable recovery in the market brought on by improved regulation and disclosure. “When regulatory decisions are subject to censorship by stockbrokers or shareholders then we are in trouble,” he told the Financial Times.

Many investors have urged the central bank to conduct exactly the kind of overhaul Lamido Sanusi proposes, to instil discipline in a sector where internal controls have often failed to keep pace with the banks’ exponential growth.

Analysts say, however, Lamido Sanusi’s frank language and pledge to confront the system’s exposure to bad share-related loans gave rise to concerns among some investors that he will force banks to write down losses this year that they might otherwise have been able to defer.

“It may be that a small number of banks who are worried about the implications of the audit process are moving around their positions — and they are having a disproportionate impact on the market,” said Ike Chioke, Managing Director of Afrinvest West Africa, a leading stock broker. The Nigerian Stock Exchange has shed some 9.66 per cent of its value — or Naira 637bn ($4.3bn) — since the interview was published on Monday, led lower by banking stocks that make up about 55 per cent of market capitalisation, according to Renaissance Capital.

Zenith Bank, Oceanic Bank, and Union Bank have all fallen by almost 20 per cent since Friday’s close.

Lamido Sanusi said he believed weaknesses in the sector may prompt a further round of consolidation, that would reduce the number of banks from 24 to 15. He referred to potential risks facing weaker banks that might be “systemically important”.

He also pledged to lift a ban on foreign takeovers of banks.

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Source(s):
Financial Times