Central Bank Governor Lamido Sanusi said Friday's rescue of Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank should restore confidence to the markets in the long term.
But the scale of the problems uncovered at the five institutions by a central bank audit and uncertainty about which other banks may have similar issues unnerved investors.
"The shock is too much for the market to bear," said one Nigerian fund manager with 5 billion naira ($32 million) under management, asking not to be named.
The five institutions, which between them account for 40 percent of banking sector credit in sub-Saharan Africa's second-biggest economy, had run up bad loans worth a total of 1.14 trillion naira ($7.6 billion).
The stock exchange placed a two-week suspension on trading in the five to prevent their shares collapsing. But other banking stocks—including First Bank, Guaranty Trust Bank, Zenith Bank and United Bank for Africa—all fell the maximum five percent limit.
The naira weakened just over one percent to 158.60 to the dollar on the interbank market, but volumes were thin, with foreign banks reluctant to trade with Nigerian counterparts amid the uncertainty, one senior bank executive said.
The central bank on Friday injected 400 billion naira ($2.6 billion) into the five banks, four of which it said had been close to collapse, and dismissed their chief executives in an effort to prevent a systemic banking crisis.
"What we have done is something that is the beginning of the process of the restoration of confidence," recently-appointed central bank governor Lamido Sanusi said.
"We have said for a long time that there has been lax regulation ... that there are questions about disclosure, questions about risk management and the quality of management in some of these institutions," he told CNBC Africa television.
Sanusi said the capital would be convertible into "some form of Tier 2 debt or preference shares", repeating that the intention was to find investors as quickly as possible and for the government simply to provide liquidity if needed.
Long-Term Benefit
Analysts said they expected the move by Sanusi, who has only been at the helm of the apex bank for two months, to cause some short-term market volatility but said it was vital to improve transparency, long a major disincentive to foreign investors.
"Finally it seems the authorities have grasped the nettle and tackled the problems in the banking system," said Stuart Culverhouse, chief economist at London-based frontier markets brokerage Exotix.
"We will see some near-term uncertainty in the naira as the scale of the problem is probably bigger than this, but it's a positive move. I do not think people will expect it to affect the whole system," he told Reuters.
President Umaru Yar'Adua, central bank officials and the new teams brought in to manage the five institutions launched a campaign to reassure depositors that their money was safe, amid concern that there could be a bank run.
"You have no reasons to fear any more. Don't panic and don't embark on withdrawals of your money or close your accounts," Tunde Lemo, one of the central bank's deputy governors, said in a message broadcast on Nigerian television.
There were no signs of panic at banking branches in the commercial hub Lagos or the capital Abuja although analysts said it was less clear how corporate or high net worth customers, who account for the lion's share of deposits, would react.
"What you can't tell by looking at banking halls is what's happening in terms of institutional customers, are they calling to break placements, to shorten the tenor ... It could be a while before you see the impact," one Nigerian analyst said.
Adeniyi Falade, managing director of Crusader Sterling Pensions, said he was not immediately removing any funds from the affected banks.
"The funds have central bank guarantee so there is no need. For me the worst is over, though I'm a bit cautious in placing more funds (with the five banks). But it's not as if I am going to withdraw what I have with them," he told Reuters.
Interbank lending rates, which reflect the readiness of banks to lend to their peers, spiked to 20 percent on Friday but dropped back to around 10 percent on Monday, said Bolanle Akomolafe, head of the money market desk at Fidelity Bank.
"In time, confidence is likely to be restored. We still see a high likelihood of further foreign investment in Nigeria's banking sector ... which should result in considerable inflows into the Nigerian market," said Razia Khan, head of Africa research at London-based Standard Chartered.
