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The global financial crisis is now beginning to rear its head in the Nigerian banking space. In just two weeks, the Naira has lost about 8.5 percent of its value, dropping from an average exchange rate of N118 to the dollar to between N128 and N130 to the dollar at the end of last week in the inter-bank market. Banks actually closed shop in the inter-bank market on Thursday and Friday as the key foreign currencies, the dollar and euro vanished from the market. 
In the unofficial black market, the situation was even more critical as the dollar dropped to a low of N137 to the dollar while the British pound was unavailable. Several reasons have been advanced for the sudden dearth of forex in the foreign exchange market. 
Autonomous inflow of forex into the interbank market is said to have dried out. The main sources autonomous forex inflow were the oil companies, international borrowings by Nigerian banks, Subsidiaries of foreign banks, portfolio investments into the Nigerian capital market and exports by non-government sources. 
The falling prices of crude oil in the international markets has impacted negatively on inflow from oil companies who have suddenly seen their earnings drop by more than 60 percent in a space of two months. Shaky financial institutions abroad have withdrawn their favourable lines of credit to some Nigerian banks. This has forced these Nigerian banks back into the CBN controlled inter-bank foreign exchange market shooting up demands significantly. 
Subsidiaries of foreign banks can also no longer totally depend on their parent companies to meet some of their foreign exchange demand, so as a result they have resorted to the interbank market adding to the demand in the market and putting a downward pressure on the value of the Naira. 
Also with crashing investments in the international markets, foreign institutional investors have to readjust their portfolios. This means putting a lid on further investments or even withdrawing from existing investments. 
A combination of these factors means the autonomous sources of forex are no longer available repositioning the CBN as the major source of forex in the Nigerian foreign exchange market. All the CBN has to meet this demand is its cache of external reserves estimated at about US$57.2 billion or $77.2 billion if the excess crude oil reserves are included. 
So why Nigerian banks, due mainly to early recapitalisation in 2005, have remained strong in the face of the current global crisis, they are suddenly challenged with a new phase of the crisis creeping in form of naira instability. Suddenly improperly hedged banks will see their foreign exchange asset liability position becoming weak in the face of a weak naira. 
Most analysts believe in these critical times, only banks with a strong capital can really weather the storm, especially if the financial crisis get so critical that worsening credit exposure have to be written off. This is where the challenge is for Nigerian banks and most analysts see a second phased consolidation of the Nigerian banking industry. 
Bank PHB seemed to have taken the lead with its strategic offer to acquire Spring Bank Plc, a bank currently under a CBN appointed interim management following a board crisis that rocked the bank. 
Basically, the first consolidation exercise in the Nigerian banking industry has seen the collapse of 89 fragmented and weakly capitalized banks into 25 strong banks. However, a pattern soon emerged with the 25 banks clearly divided into 10 top high growth high performance banks and 15 low growth low performing banks. This led to financial analysts forecasting that there will be further market induced consolidation of the banking industry to take the number of banks operating to anywhere between 10 and 15. 
The first of this merger was between Stanbic, a subsidiary of Standard Bank of South Africa and IBTC-Chartered Bank. This gave birth to Stanbic-IBTC Bank reducing the number of banks to 24. 
The Bank PHB on-going acquisition of Spring Bank is however the first wholly indigenous post consolidation deal in the Nigerian capital market. It could also be classified as the first hostile take-over in the Nigerian capital market between two publicly listed companies. 
Bank PHB is coming into the merger with a lot of financial muscle having successfully raised about N220 billion in an initial public offering in November 2007. The bank currently operates with a tier 1 capital in excess of N250 billion ranking it among the top three most capitalised banks in the country. It’s growth rate has been phenomenal in the Nigerian banking industry with financial analysts putting it at about three times the average growth rate of the Nigerian banking industry. 
The bank’s 2007/2008 full year result release in November shows that it closed 2008 financial year with gross earnings at N87 billion, 141 percent higher than the gross earnings of N36 billion made in 2007. This is almost twice the estimated banking industry growth rate of 76 percent within the same period. Profit before tax at N26 billion was 153 percent higher than the profit of N10 billion in the previous financial year against the estimated banking industry growth rate of 81 percent. Profit after tax at N19 billion was also more than twice the N7 billion presented to you last year. 
Bank PHB’s closing deposit base of N718 billion ranks it among the top five in deposits in the Nigerian banking industry with a growth rate of 133 percent over a deposit base of N306 billion in 2007 showing the steady increase in confidence of the banking public in the bank. The bank not only surpassed the industry growth rate in deposits of 86 percent in the period under review but now control a healthy 6 percent of Nigerian banking industry deposit market. The bank closed the year with an asset base in excess of N1.15 trillion. 
A cursory look at the financials showed that the bank places strong emphasis on shareholders’ wealth maximisation. The bank has consistently paid cash dividends to shareholders in the last three years. It also made a bonus issue (1 for 4) in the 2007 financial year. A comparative analysis in July 2008 by Moneywise Magazine, Nigeria’s leading personal finance paper, shows a N1 million investment made in Bank PHB in January 2006, translated into a current market value of N13.73 million, an average return of 977 percent in 18 months, the highest return offered by any Nigerian bank listed on the Nigerian Stock Exchange (NSE) within the same period 
The bank’s financial performance however contrasts sharply with its acquisition target. Spring Bank’s financial status is vague having been unable to release any financial statement in the last three years due to a board crisis that almost crippled its operations until the CBN had to intervene. Besides, Spring Bank has not been able to pay any cash dividend to its shareholders in the last three years. 
But for a technical suspension placed on its shares which has kept it frozen at N5.59 in the last one year, those in favour of the acquisition believe the bank’s shares would have been selling at a significantly lower value. 
This is why they argued that the N7 price that Bank PHB is currently offering for Spring Bank’s shares is very attractive and well above the bank’s fair price considering the current bearish trend in the market. 
However, those who are opposed to the acquisition comprising Legacy Citizens Bank plc, Legacy Fountain Trust Bank plc, Legacy ACB International Bank plc and Legacy Omega Bank plc, the federating banks that merged together to form Spring Bank plc had the purchase price. The banks’ solicitors, Biodun Adesanya and Dele Adesina, both senior advocates, in a Caveat Emptor published last week noted that the same shares had been sold to Westcom Technologies & Energy Services Limited at a premium of N8.00 per share in April this year, adding that “No explanation has been offered for the depreciation of the value of this shares”.
They also affirmed that Bank PHB and the Securities and Exchange Commission (SEC) had flouted court injunctions by going ahead with the Spring Bank acquisition.
According to the solicitors, “It is legally untenable, indeed for the regulatory authorities to compromise this pending cases by purportedly giving approval to Bank PHB with a view to over reach the court and render nugatory its eventual decision in a manner contrary to the government’s commitment to rule of law and due process”, they stated.  
However, analysts say Bank PHB is looking at the potential synergies of the acquisition which will take the emergent Bank PHB’s branch network to more than 400, ranking it among the top three in the country. 
For most analysts however, it is the bigger picture of Bank PHB Spring Bank deal that attracts them. “It takes a weak bank off the shelves of the Nigerian banking space while strengthening a strong player. That is the best strategy in weathering the current global financial crisis”, said a financial analyst at Source Capital that will rather not be named. 
Analysts generally agree that if the global financial crisis intensifies, Nigerian banks operating in the lower 14 strata of the Nigerian banking industry will find themselves operating in an increasingly difficult environment as their cost of funds rise and their profit margins thin out. Looking for bigger stronger banks to take them up will be good survival strategy. Bank PHB’s on-going acquisition of Spring Bank may just be the first step in the expected second phase consolidation exercise in the Nigerian banking industry stem the effect of the global financial crisis and create stronger banks with the muscle to grow the Nigerian economy.