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New capital rules to hasten mergers and acquisitions among Nigeria’s banks says Moody’s

Moody’s-Investors-Service

Nigeria’s banking ranks are set to shrink as lenders merge in order to meet tough new capital rules.

The industry faces a 24-month deadline to raise at least 2.82 trillion naira ($2.6 billion) to meet minimum capital requirements announced by the central bank last week.

“We expect that the new regulations will drive significant consolidation within the sector, particularly where it is not feasible for banks to raise the required capital,” Moody’s Investors Service wrote on Thursday. “The exclusion of retained earnings from qualifying capital may complicate recapitalization plans.”
The Central Bank of Nigeria is lifting the threshold for operating an international bank to 500 billion naira ($359 million) from 50 billion naira. Lenders with in-country operations will need 200 billion naira of capital compared with 25 billion naira. The regulator also barred banks from using accumulated earnings and raising debt to meet the new capital requirement.
Out of the 12 listed banks in the West African nation, only the Nigerian subsidiary of pan-African lender, Ecobank Nigeria Ltd does not have to raise capital to meet the new requirement. All other lenders have to seek new investors or ask existing shareholders to purchase fresh stock. There are a total of 25 commercial lenders in the country.

United Bank for Africa Plc has the biggest capital gap of 384 billion naira to fill, according to a breakdown by Lagos-based Asset & Resource Management Co. Stanbic IBTC, the Nigerian unit of South Africa’s Standard Bank Group, has the lowest gap of 90 billion naira.
Banks including Access Holdings Plc and Zenith Bank did not respond to requests for comment on their recapitalization strategy. The central bank gave everyone a month to submit their plans.

Lenders in Africa’s most populous nation are being asked to boost capital buffers amid risks to their loan books from soaring inflation, tepid economic growth and the collapse of Nigeria’s currency, which can increase the local burden of dollar-denominated debt.

The enhanced capital requirements are credit positive for the banking sector, Moody’s said.

Banks “will benefit from a stronger balance sheet and the ability to grow their loan books while absorbing any unexpected credit loss,” the rating agency said.

The last time the Nigerian central bank increased capital requirements was in 2004. The exercise led to a spate of mergers that shrank the number of commercial lenders to 25 from 89. The same thing is expected to happen this time around.

“We will definitely see a reduction in the number of banks,” said ARM banking analyst Oyinkansola Aregbesola. “The tier two banks and the smaller entities will likely consider mergers if they can’t individually raise the capital on their own,” she said.