Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN) has recently announced a new plan to recapitalise the banking sector to support the country’s economic growth and development.
Cardoso said this last Friday during the 58th Annual Bankers’ Dinner in Lagos, organised by the Chartered Institute of Bankers of Nigeria (CIBN).
“It is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability,” Cardoso said.
“As a first step, we will be directing banks to increase their capital,” he said.
According to Ayodele Akinwunmi, the exercise will position the industry well to take advantage of the expected growth in the economy.
“In addition, the recapitalisation process will attract foreign investors into the banking industry through Foreign Direct Investments, therefore helping the country to drive part of the much-needed long-term foreign currency investment into this important and attractive sector to stabilise the value of the naira,” he said.
The CBN governor, the current capital requirements for banks, which were established in 2004, are insufficient to support the demands and opportunities presented by an expanding economy.
He noted that recapitalisation would empower banks to extend greater credit to the productive sectors, contributing to the achievement of a $1 trillion Gross Domestic Product (GDP) by 2025.
“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? I believe the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy,” Cardoso said.
He, however, gave no indications of how much more capital will be required and over what time frame.
Analysts at CSL Stockbrokers Limited, said in a recent note that in dollar terms, banks have seen a significant reduction in capital given the recent steep devaluation of the naira.
“During the banking consolidation exercise of 2004, the minimum capital requirement for banks was raised from N2 billion to N25 billion. The dollar equivalent of N25billion at that time is significantly lower than what it is today, and many believe this may be the reason behind the proposed recapitalisation,” they said.
What is bank recapitalisation?
Bank recapitalisation is the act of beefing up the long-term capital of a bank to the level at least required by the monetary authorities and to ensure the security of shareholders’ funds.
It is a strategy to improve its financial stability or overhaul its financial structure.
The main objective of bank recapitalisation as stated by CBN is to mitigate the crises in the financial sector.
History of bank recapitalisation in Nigeria
Nigeria’s banking sector has undergone numerous reforms since 1952, with a recurring theme of increasing the minimum paid-up capital requirement.
In 2004, the CBN announced a significant recapitalization of the banking sector, raising the minimum capital requirement from N2 billion to N25 billion, effective December 31, 2005.
This substantial increase in capital requirements led to a dramatic consolidation of the industry, reducing the number of banks from 89 to 24 in 2006.
The consolidation process involved mergers and acquisitions, with some banks merging and others being absorbed by stronger institutions. The 2006 consolidation aimed to enhance the efficiency and profitability of Nigerian banks thereby fostering economic growth.
Despite the recapitalisation efforts, the Nigerian banking sector was not immune to the global financial crisis that erupted in 2008.
Triggered by the subprime mortgage meltdown in the United States in August 2007, the global financial crisis sent shockwaves through the European financial system, with ripple effects extending to developing economies, particularly oil-exporting nations like Nigeria.
A surge in stock market panic prompted investors to liquidate their holdings to cover loan obligations, triggering a precipitous decline in the Nigerian stock market. The stock market crash not only eroded the financial performance of several banks but also amplified their risk exposure.
How will banks raise capital?
Gloria Fadipe, head of research at CSL Stockbrokers Limited, highlighted that banks have the option to raise capital either through public offers or by incorporating foreign debt into their financial portfolios.
“We would see banks opting for public offers to raise funds in the market,” Fadipe said.
She also noted that in the short term, there might be an earnings dilution as they raise capital through public offers. However, over time, as banks effectively utilize the raised capital and become profitable, the earnings per share (EPS) should stabilize or even increase in the medium to long term.
“Initially, there will be an increase in the number of shares, and immediate profitability might not occur. As profitability grows, EPS will even out or potentially grow as banks leverage the capital raised,” Fadipe said.
She also noted an alternative approach where banks avoid public offers, they utilise US foreign debt in their portfolios, but the key to profitability in this scenario lies in efficiently deploying the capital.
Requirements of CBN capitalisation
Currently, the CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15.0 percent while banks without international subsidiaries maintain a CAR of 10.0 percent.
The minimum requirement for systemically important banks is 16.0 percent (although the CBN has been giving a forbearance). Following the implementation of BASEL III, an additional tier 1 capital is required for a Capital Conservation Buffer of 1.0 percent of Total Risk Weighted Assets.
A Countercyclical Capital Buffer, to be determined by the CBN periodically taking into consideration the prevailing macroeconomic conditions and developments within the financial sector may also be required.
Implications of proposed recapitalisation for individuals
Fadipe of CSL noted that recapitalization empowers banks to expand in size and strength, enabling them to withstand economic shocks and support larger enterprises.
“If they can actively raise capital, they could also increase profit,” she said.
However, she noted that banks, in pursuit of profitability, might increase risk, leading to the emergence of non-performing loans and provisions that could erode the top line.
She also added that another implication of recapitalisation is the potential for mergers and acquisitions, depending on the capital requirements set by Cardoso.
“Smaller banks unable to meet these requirements may face consolidation, reducing the overall number of banks in the market. This implies that only larger, well-capitalized banks will survive,” she said.
Others are improved access to credit, reduced risk of bank failures and stabilised financial markets.