Fortifying Nigeria’s financial future

A strong and resilient banking sector bolsters economic growth and enhances shareholder returns. Efficient financial intermediation reduces the cost of capital, enhances capital accumulation, bolsters total productivity, and fosters investor confidence. However, with total banking assets estimated at $73 billion (bn) (52 percent of GDP), Nigerian banks lag behind their peers like South Africa ($429 billion), Brazil ($2.3 trillion), and Indonesia ($729 billion). A low asset-to-GDP ratio weakens the banking sector’s resilience to economic shocks, potentially heightening macroeconomic instability and constraining credit access for businesses, households, and even governments.

To fortify the banking sector, ensure financial stability, and foster economic growth, the Central Bank of Nigeria (CBN) recently increased the capital requirements of all banks to N500bn for banks with international footprints, N200bn for national banks, and N50bn for regional banks. This is the second bank recapitalisation exercise in two decades. The first was in 2004/05.

A legacy of strength, innovation, and market leadership in banking During the first recapitalisation exercise of Nigerian banks in 2004/05, FBN Holdings successfully raised N100 billion, surpassing the minimum requirement and positioning itself as a leader in the sector.

Funds were raised through public share issuance and private placements, attracting significant local and international investor interest. This solidified FBNHoldings position in the Nigerian banking industry and led to a significant boost in its financial and operational performance.

Post-recapitalisation, gross earnings increased by 32 percent, while net income surged by 57 percent. Strategic investments in technology strengthened its digital banking platform, meeting the growing demand for online banking. These efforts reflected the positive impact of the reform on FBN Holdings growth.

Strengthening capital for growth and stability

In response to the new capital requirement by the CBN, like other banks, FBN Holdings is raising N149.56 billion through a rights issue. The bank’s strong performance in the last five years positions it well to leverage this additional capital for continued growth.

FBN Holdings has witnessed impressive growth, with gross earnings rising by 156 percent from N627 billion to N1.59 trillion, profit before tax surged by 328 percent to N358 billion, and profit after tax also increased from N73 billion to N310 billion in five years.

This is a reflection of the bank’s efficient management and optimised income streams, especially in the area of digital banking. Shareholders’ funds have more than doubled, from N661bn to N1.7 trn, positioning the bank for stability amid economic challenges. Total assets grew from N6trn to N16.9 trn, enhancing FBN Holdings lending capacity.

Within this period, the cost-to-income ratio improved from 69 percent to 46 percent, while non-performing loans reduced from 26 percent to 4.7 percent, strengthening asset quality. The company’s share price surged by 325 percent, showing investor confidence.

First Bank of Nigeria, one of the country’s oldest and largest financial institutions, independently met the CBN’s 2004 recapitalisation requirement of N25 billion. With thirteen decades of resilience in the banking sector. The company has consistently maintained its position as a Tier 1 Nigerian bank with a balance sheet size of N27 trillion, 732 branches, and over 43 million customer accounts. This success is driven by its extensive branch network and strong customer base.

The N149.56 billion rights issue is well-timed to support FBN Holdings growth, support its ability to meet regulatory capital requirements, and explore new opportunities; the discounted rights issue price of N25 presents an attractive opportunity for existing shareholders.

The additional capital will further cushion the bank against economic shocks, maintain its competitive advantage, and enhance its capacity to explore new growth opportunities. However, the success of this capital raise will depend on effective fund deployment and sustaining the bank’s growth momentum.

Robust growth potential, but watch for risks

FBN Holdings is positioned to drive shareholder value through a strengthened balance sheet and a revitalised leadership team, ready to pursue sustainable growth and operational excellence. FBN Holdings’ rights issue presents a solid opportunity for existing shareholders, offering an attractive entry price of N25 per share, below the market price.

With a stronger capital base, FBN Holdings is well positioned to navigate economic challenges and offer long-term growth potential. The bank’s impressive financial performance suggests that additional capital could accelerate further expansion.

In a competitive landscape with banks offering attractive fees and interest rates, FBN Holdings faces the risk of tighter profit margins and higher customer churn. Economic volatility and regulatory changes add further complexity to its operations. To stay ahead, FBN must navigate market pressures, innovate, and differentiate its services. Strategic responses to customer needs and regulatory shifts are key to maintaining a strong market share. FBN Holdings’ ability to adapt will determine its continued success.

Additionally, non-participating shareholders may face dilution of ownership and voting rights as other investors acquire additional shares.