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Why Only Seven Banks Can Meet CBN Recapitalisation Requirements – Report

CBN

No fewer than 17 out of the existing 24 Deposit Money Banks may be unable to meet the Central Bank of Nigeria’s capital requirement if it is increased from its current N25bn, according to a report by Ernst and Young.

The new report, titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation”, noted that if the apex bank raised the capital base of commercial banks in the country by 15-fold from the current N25bn, only seven banks may survive.

The CBN Governor, Olayemi Cardoso, had in several fora stated that the apex bank would consider an increase in the minimum capital base of banks in the country as part of its efforts to strengthen their capacity to support Nigeria’s drive to become a $1tn economy by 2026.

The current capital base is stratified based on the type of banking license – banks with regional, national and international licenses are currently expected to maintain a minimum capital base of N10bn, N25bn and N50bn, respectively.

The proposed increase in the capital base is coming nearly two decades after the CBN’s 2004 banking reform, which led to an increase of the then prevailing capital base from N2bn to N25bn.

The 2004 banking reform was characterised by massive mergers and acquisition activities, which ultimately resulted in the reduction of the number of banks in the country from 89 to 25 banks.

In an exclusive report last year, it was indicated that chief executive officers and other top executives of Deposit Money Banks had begun moves to raise fresh capital to bolster their respective institutions’ capital base through preliminary merger and acquisition talks.

In the last few months, FBN Holdings, Wema Bank and Jaiz Bank had proposed Rights Issues, while Fidelity Bank announced plans to raise additional capital via the issuance of 13,200 billion ordinary shares via public offer and rights issue.

Ernst and Young, a global financial services company, said in the report that some banks may depend on different recapitalisation options, which include mergers and acquisitions, initial public offerings, placements and/or right issues and undistributed profit (retained earnings) despite financial soundness indicators show that Nigerian banks were largely safe and resilient as of 2023.

According to the report, the recent plan by the CBN to increase the capital base of banks will lead to a series of mergers and acquisitions as witnessed during the last recapitalisation exercise in 2004/2005.

The report read partly, “The recent plan by the CBN to increase the capital base of banks could again lead to M&A activities but not as widespread as was the case in 2004/2005 given the relatively solid financial positions of the banks today as well as the occurrence of several M&A activities in the banking sector over the past 10 years.

“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three licence types) that may fall below the new minimum capital thresholds.

“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.”

The report noted that the plan to recapitalise banks was premised upon the recent devaluation of the naira in 2023.

It explained that the exchange rate as of 2005 during the last exercise in 2005 stood at N132.9/$ but the naira currently exchange for over N1400/$.

According to the firm, this implies that the recapitalisation may require a capital multiplier of 10 or more based on the exchange rate differentials.

“On this basis, a worst-case scenario given a 15x capital multiplier for 24 banks will be considered based on the type of banking licenses held. We have benchmarked the current capital of these banks against the current capital requirement and four recapitalization scenarios,” it noted.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, in an earlier interview with our correspondent, welcomed the move to increase banks’ capital base, adding that the current capital base was grossly inadequate.

He said, “The minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency. During the banking consolidation of 2004, the minimum capital requirement for banks was raised from N2bn to N25bn. The revised capital requirement was an equivalent of $187m. Today, the same N25bn is the equivalent of just $32.5m.

Also, a Professor of Capital Market at the Nasarawa State University, Uche Uwaleke, urged the CBN not to coerce banks into increasing their capital base as was the case during the last recapitalisation drive; rather, they should be incentivised.

“The idea of recapitalisation of banks is a welcome one. Capital is needed to finance big-ticket projects, especially when the government is targeting a $1tn economy in a few years. But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion,” he said.

Uwaleke, who is also the President of the Association of Capital Market Academics of Nigeria, added that several Deposit Money Banks were already making moves to increase their capital base.