Basel III to spur banks’ M&A – RenCap

With the Basel III policy taking effect, some of Nigeria’s tier-2 and tier-3 banks might opt for mergers and acquisitions (M&A) in order to strengthen their capital positions as the policy requires enhanced capital buffers.

This was the position of experts during the virtual press conference Renaissance Capital Limited (RenCap), on Wednesday.

A merger occurs when two separate entities combine forces to create a new or joint organisation, while an acquisition refers to the takeover of one entity by another.

“With tier-2 and tier-3 banks losing more market share to the big banks, they have grown much smaller creating room for mergers and acquisitions. If there would be M&A it would be between tier-2 and tier-3 banks because now, they are even much smaller in the grand scheme of things,” RenCap’s director, Frontier/SSA Banks and Fintech, Adesoji Solanke said.

Solanke noted that the implementation of Basel III should see the minimum regulatory capital ratio rise to a base of 17 percent from 15 percent for Systemically Important Banks (SIBs).

“This would likely spur capital raises and lead banks to be more conservative on loan growth and dividend pay-outs near term.” Noting that many Nigerian banks are well-capitalized, he said “The central bank for the next six months starting this November have started to pilot the rolling out of Basel III and that increases the CAR of SIBs to 17 percent from 15 percent.”

“What that means is that it reduces the headroom the banks have to drive credit growth so what we may see in the near term is more capital conservation by the banks who might reduce dividend payouts in the near terms so that they can improve their ability to drive loan over the medium term but generally speaking the banks are fairly well capitalised,” Solanke said.

The Basel III policy states that the capital buffers shall be in the form of Common Equity Tier 1 (CET1) and should be above the minimum CET1, tier-1 and total capital adequacy levels and that the capital buffers shall comprise the sum of the Capital Conservation Buffer (CCB1) of 1.0 percent of TRWA; and a Countercyclical Capital Buffer (CCB2) of between 0 percent to 2.5 percent of Total Risk Weighted Asset (TRWA), as may be determined by the CBN based on the prevailing economic and industry circumstances.

Acting chief executive officer, Renaissance Capital, Samuel Sule, also explained that with Access Bank leading the trail with the first additional tier-1 capital, more banks would be looking at raising funds from both the foreign and local currency markets.

“We think going forward the push to Basel III from the Central Bank of Nigeria (CBN) with its newly released guidelines will be a thing. Those Basel III guidelines have created a new instrument in the form of additional tier 1. We have seen Access Bank having partnered with RenCap on the first additional tier-1 capital in Nigeria to do this successfully. We expect there is more from where that came. Additional tier-1 enables banks to tap markets for capital in a very undiluted way,” Sule said.

The Basel Accords (I, II, III) are sets of regulations for the banking sector established by the Basel Committee on Banking Supervision (BCBS) which is a committee of banking supervisory authorities established by the central bank governors of various jurisdictions.

On September 2, 2021, the CBN issued a circular to all banks in Nigeria titled Basel III implementation by all deposit money banks.

The circular aims to inform all banks of the issuance of guidelines for the implementation of the Basel III standard which is a voluntary global regulatory framework that addresses bank capital adequacy, stress testing, and market liquidity risk. The implementation of Basel III started globally in January 2013 and places importance on strong liquidity and capital for financial stability.