According to the new report by the organization titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation”, noted that if the apex bank raised the capital base of commercial banks in the country by 15-fold from the current N25bn, only seven banks may survive.

Recalled that Mr. Olayemi Cardoso, the CBN Governor, had in several fora stated that the apex bank would consider an increase in the minimum capital base of banks in the country as part of its efforts to strengthen their capacity to support Nigeria’s drive to become a $1tn economy by 2026.

The current capital base is stratified based on the type of banking license – banks with regional, national, and international licenses are currently expected to maintain a minimum capital base of N10bn, N25bn, and N50bn, respectively.

The proposed increase in the capital base is coming nearly two decades after the CBN’s 2004 banking reform, which led to an increase of the then prevailing capital base from N2bn to N25bn.

The 2004 banking reform was characterized by massive mergers and acquisition activities, which ultimately resulted in the reduction of the number of banks in the country from 89 to 25 banks.

According to a report last year, chief executive officers and other top executives of Deposit Money Banks had begun moves to raise fresh capital to bolster their respective institutions’ capital base through preliminary merger and acquisition talks.

In the last few months, FBN Holdings, Wema Bank and Jaiz Bank had proposed Rights Issues, while Fidelity Bank announced plans to raise additional capital via the issuance of 13,200 billion ordinary shares via public offer and rights issue.

Ernst and Young, a global financial services company, said in the report that some banks may depend on different recapitalization options, which include mergers and acquisitions, initial public offerings, placements and/or right issues, and undistributed profit (retained earnings) despite financial soundness indicators show that Nigerian banks were largely safe and resilient as of 2023.

According to the report, the recent plan by the CBN to increase the capital base of banks will lead to a series of mergers and acquisitions as witnessed during the last recapitalisation exercise in 2004/2005.

The report read partly,

“The recent plan by the CBN to increase the capital base of banks could again lead to M&A activities but not as widespread as was the case in 2004/2005 given the relatively solid financial positions of the banks today as well as the occurrence of several M&A activities in the banking sector over the past 10 years.

“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds.

“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.” The report noted that the plan to recapitalize banks was premised upon the recent devaluation of the naira in 2023.

It explained that the exchange rate as of 2005 during the last exercise in 2005 stood at N132.9/$ but the naira currently exchange for over N1400/$.  According to the firm, this implies that the recapitalisation may require a capital multiplier of 10 or more based on the exchange rate differentials.

“On this basis, a worst-case scenario given a 15x capital multiplier for 24 banks will be considered based on the type of banking licenses held. We have benchmarked the current capital of these banks against the current capital requirement and four recapitalization scenarios,” it noted.

Dr. Olayemi Cardoso, Governor of the CBN, speaking at the 58th annual bankers’ dinner and grand finale of the 60th an­niversary of the Chartered Institute of Bankers of Nigeria (CIBN) noted that banks in the country will be directed to increase their capital base because they are not liquid enough to service the $1 trillion economy President Bola Tinubu is aiming for in the near future.

The last time CBN enforced banks to recapitalise was in 2004, when Charles Soludo, former CBN governor, raised their capital base from N2 billion to N25 billion. ­

As a result of the new recapitalisation plan, the apex bank is looking at between eight and ten big national banks, while others may opt for lower grades or oper­ate as fintechs.

Recapitalisation is the process of infusing funds into banks to enable them to meet the man­datory capital adequacy set by a central bank. It is also to stabilise a company’s capital structure and secure shareholders’ funds.

Financial industry analysts expect operators to begin, without delay, moves to raise fresh capital to bolster their respective institu­tions’ capital bases.

Market capitalisation, according to Stephen Iloba, a Lagos-based financial analyst, “is one of the indices to measure how strong a commercial bank is. Other measures of the strength of a bank are the value of its as­sets and depositors’ funds, among other things.”

The planned recapitalisation, among others, is to guarantee capital adequacy and to fortify the industry for future challeng­es.

Incidentally, plans by some banks to shore up their capital predated the CBN’s new pro­nouncement. FBN Holdings, Wema Bank Plc, and Jaiz Bank are already planning to shore up their capital bases.

These banks have proposed rights issues, while Fidelity Bank announced plans to raise additional capital via the issu­ance of 13,200 billion ordinary shares via a public offer and rights issues.

Looking at the 2023 third quarter results of some banks, there are signs that most banks are ready to play big in the fresh recapitalisation exercise.

Banks like Zenith Bank, Unit­ed Bank for Africa, Access Hold­ings, FBN Holdings, Ecobank, and GTCO Holdings have a base of over N1 trillion and may not have any serious issues with the recapitalisation exercise.

These entities are in a posi­tion to acquire smaller banks to spread their operations across the country.

As of the end of September 2023, Zenith Bank has a capital base of N1.92 trillion from N1.31 trillion in 2022, followed by Unit­ed Bank for Africa with a capital base of N1.778 trillion from N992 billion in 2022.

Access Holdings stands at N1.64 trillion from N1.231 trillion in 2022; FBN Holdings capital base rose from N1.287 trillion in 2022 to N1.37 trillion as of Septem­ber 2023.

Ecobank’s N1.37 trillion cap­ital base was an improvement from the N935 billion recorded in 2022, while GTCO Holdings, the parent group of GTBank, has a total equity of N1.273 trillion, a year-to-date increase of 36.7 per­cent from the N931 billion record­ed at the start of 2023.

With these six banks that ap­pear set for the challenge of a tril­lion-dollar economy, other banks may scramble for the few spaces in the new era of banking in the country.

While Nigerians await the position of the CBN on the re­capitalisation exercise, there are fears over whether the Nigerian capital market can repeat its feat of 2005, when many banks were able to raise money through public offers.

A cross-section of analysts is strongly of the opinion that the current state of the economy might make raising adequate cap­ital a bit challenging considering the weakness of the naira in the foreign exchange market.

Cyril Ampka, an Abuja-based economist, said the rate at which the naira was depreciating at the foreign exchange market will be the greatest impediment to the process.

He said, “The main reason for the call for the recapitalisation of banks is because of the state of the naira. If this continues, the recapitalisation exercise will not achieve the desired goal.”

[Source]