• Tuesday, May 28, 2024
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BusinessDay

What CBN recapitalisation means for banks, economy

Nigeria says FX inflows in Q1 represents 136% of 2023 level

The Central Bank of Nigeria (CBN) last week announced an upward review of the minimum capital requirement for commercial, merchant, and non-interest banks in Nigeria.

According to Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest,the banking sector recapitalisation programme is a regulatory initiative of the CBN that requires banks to increase their minimum paid-in common equity capital to a specified amount according to their license category within two years. Banks are also given the option to downgrade the scope of their activities in exchange for lower capital requirements.

The overall aim of the recapitalisation is to ensure that Nigerian banks have the capacity to take bigger risks and stay afloat in times of trouble, support different sectors of the economy, and improve confidence in the banking system.

Ebo recalled that the last bank recapitalisation was in 2005 when the minimum capital requirement for national commercial banks was increased from N2.0bn to N25.0bn (equivalent to $187m and worth only $32.5m today). This reduced the number of banks from 89 to 24. There have been 10 different phases of recapitalisation between 1952 and 2005 in Nigeria.

The CBN raised the minimum capital base for banks with international authorisation at N500 billion.

The apex bank also increased the minimum capital base for commercial banks holding national authorization to N200 billion, and for those with regional authorization to N50 billion. Merchant banks now have a minimum capital requirement of N50 billion, while non-interest banks holding national and regional authorizations must adhere to new minimum requirements of N20 billion and N10 billion, respectively.

What are the implications?

For Banks, it means increased liquidity in the banking sector could lower lending rates in the medium to long term., stronger ability to absorb loan losses and withstand economic shocks.

Ebo said a larger capital base will enable banks to underwrite bigger levels of credit in the economy and ultimately generate higher income. The new single obligor limit based on the new capital will enable banks to finance larger ticket transactions.

It will lead to a potential increase in the cost of capital due to the higher cost of equity capital relative to debt.

“The banks must work harder to ensure that the capital raised is deployed in profitable opportunities to create value for investors.

Economy of Scale: The Tier-1 banks control over 70 percent of total assets and revenue in the sector. This implies that scale has a major role to play in this space. The recapitalisation will reposition the banks to be more efficient, resulting in increased capacity.

Looking at the implication for the economy, Ebo said a stronger financial system will provide great support for the Nigerian economy as it works towards evolving into a $1.0tn economy in 2030.

Attract Foreign Investments: Given the estimated required additional capital for banks (N3.3tn), the banks will have to attract foreign portfolio & direct investors to invest in the capital raise. This will increase FX liquidity in the economy and ultimately support naira stability.

Increase in business activities: To deliver value to shareholders, the banks will need to expand their business activities, especially lending in the medium to long term. “We hope this will impact the SMEs space, which has enjoyed minimal support from the commercial banks.”

Initial loss of jobs due to mergers and acquisitions or downgrade of licence (e.g. from national to regional will mean reduced number of branches).

Increased business for capital market players: Equity capital raises involve several stakeholders in the capital market, including investment bankers, regulators, solicitors, and so on. “Hence, we expect improved earnings from fees from the capital raise.”

Johnson Chukwu, group managing director/CEO of Cowry Asset Management Limited, voiced his opinions and concerns, emphasizing the premature nature of speculating about potential bank mergers, stating, “I think it’s very presumptuous to talk about which bank is going to merge.”

He highlighted that banks have a 24-month window to recapitalize, urging stakeholders to focus on each bank’s action plan. He emphasized the need to await the submission of these plans to the CBN by the end of the next month before discussing potential mergers or acquisitions.

Reflecting on past recapitalization exercises, Chukwu pointed out the transformative potential for banks, citing examples such as Access Bank and Fidelity Bank. He noted that banks which were once considered small had significantly grown their capital base over time, cautioning against premature judgments regarding which banks would successfully recapitalize.

Regarding the CBN’s decision to exclude retained earnings from the recapitalization requirements, Chukwu expressed disagreement, deeming it a mistake. He argued that retained earnings represent distributable income, which could be utilized for dividends or shareholder reinvestment through rights issues. Chukwu proposed that including retained earnings could mitigate the need for banks to resort to special dividends followed by rights issues, thus streamlining the recapitalization process.

Chukwu’s insights shed light on the complexities and considerations surrounding the CBN’s recent directive, sparking a broader discussion within the banking industry about the most effective strategies for meeting the recapitalization requirements while optimizing shareholder value.

The options from which the CBN allows banks to source capital includes: to inject fresh equity capital through private placements, rights issue and/or offer for subscription, mergers and acquisitions (M&As); and/or upgrade or downgrade of licence authorisation.

“This implies that banks can only raise capital via equity. The debt capital option is totally excluded,” Ebo said.