Commercial, merchant and non-interest banks are jostling to meet the new capital requirements announced by the Central Bank of Nigeria (CBN) on 28 March 2024. This comes four months after CBN Governor Olayemi Cardoso first highlighted the need for recapitalisation to enable the sector to support the realisation of the target of a $1trn economy set by President Bola Tinubu.
Some of the Nigerian banks, which have until 1 April 2026 to meet the new target, may either collapse or merge with stronger players – mirroring the country’s last capital raising exercise between 2004 and 2006 when nine of the 89 banks in the country were forced to consolidate, creating Unity Bank Plc. Other banks went on a capital raising spree, which saw shareholder funds increase more than 12-fold.
This new period of recapitalisation comes as the depreciation of the naira has wiped around 90% of banks’ minimum capital requirement in dollar terms.
In the latest change, the minimum capital for commercial banks with international authorisation increased by ten times to N500bn (about $380m), those operating at the national saw requirements rise from N25bn ($18m) to N200bn ($147m) and at the regional level, banks are required to have N50bn ($37m), up 400%.
National merchant banks’ minimum capital was raised by 233% to N50bn, while that of non-interest banks with national and regional authorisation doubled to N20bn and N10bn, respectively.
This new period of consolidation comes as the depreciation of the naira has wiped around 90% of banks’ minimum capital requirement in dollar terms.
Concerns over new capital requirements
A major source of concern regarding the recapitalisation is the exclusion of retained earnings from the new minimum capital, a deviation from the previous practice. The CBN has said the use of bonus issues, other reserves and Additional Tier 1 capital is not allowed to ensure that banks inject fresh capital.
Several stakeholders, including the Institute of Chartered Accountants of Nigeria (ICAN), have raised concerns over the prohibition of retained earnings in the new capital requirement.
We believe the tier one banks will successfully raise the required capital…
“The CBN may consider allowing the inclusion of retained earnings on the condition that they are not impaired by losses, to make it easier for the banks to comply with the new capitalisation policy,” ICAN said in a position paper released this week.
The institute also urged the central bank to extend the 30-day period given to banks to come up with an implementation plan to 60 days, saying it would take some time to obtain the consent from shareholders.
Finance experts at Templars, a Lagos-based commercial law firm, said in a note that a key concern “is whether the affected banks are positioned to attract the required capital within the 24 months deadline set by the CBN”.
The big five
The top five lenders in the country are Access Bank, Zenith Bank, First Bank of Nigeria, Guaranty Trust Bank and the United Bank for Africa.
Of 21 licensed banks in Nigeria, the top five banks account for about 70% of the system assets and accumulate a paid-up capital shortfall of close to N1.5trn, according to S&P Global Ratings.
As of December 2023, the share capital plus share premium of Zenith stood at N270.74bn; Access Bank, N251.81bn; First Bank, N251.34bn; GTBank, N138.19bn; and UBA, N115.82bn.
Three of them – Access, First Bank and GTBank – have a holding company structure and can seek funds by raising debt through their holdcos that can then be injected as equity capital.
“We believe the tier one banks will successfully raise the required capital, given their strong franchise value, market share and consistent dividend payout to shareholders,” said analysts at Agusto & Co, a pan-African credit rating agency based in Lagos.
Last week, the shareholders of Access Holdings, the parent company of Access Bank, approved the plan to raise capital of up to $1.5bn through a share sale or bond offering and N365bn ($312.2m) through a rights issue.
FBN Holdings, which owns Nigeria’s oldest lender First Bank, announced earlier this month that it would seek shareholders’ approval on 30 April to raise up to N300bn ($241m) through a public share offering or private share sale in or outside the country. But the extraordinary general meeting was cancelled this week.
Some small and medium-sized banks may struggle to raise the necessary capital, and could be acquired by larger banks
Zenith Bank shareholders will meet on May 8 and decide whether the lender should establish a capital raising programme in the Nigerian or international capital market.
The following day, GTCO, the parent company of GTBank, will seek approval from its shareholders to raise up to $750m in capital.
UBA has said it would request shareholders’ nod at their annual general meeting on May 24 to raise additional capital through the issuance of securities in the Nigerian and/or international capital markets.
Lower down the food chain
The midsize or tier 2 commercial banks in the country are Fidelity, Ecobank, Stanbic IBTC, First City Monument Bank (FCMB), Wema, Sterling and Union, among others.
Only two, FCMB and Fidelity, have international authorisation, and their new minimum capital is the same as that of the top-tier lenders.
All but one have their shares or those of their parent companies listed on the Nigerian Exchange Limited (NGX). Union delisted from the NGX in November after its acquisition by Titan Trust Bank.
As of December 2023, the share capital plus share premium of Fidelity stood at N129.71bn; FCMB, N125.29bn; Stanbic IBTC, N109.26bn; Sterling, N57.15bn; Unity, N16.33bn; and Wema, N15.12bn, their financial statements show.
Ecobank and Union had a share capital plus share premium of N193bn and N148.10bn, respectively, as of 2022, according to FSDH Research.
Stanbic IBTC Holdings Plc has announced a plan to establish a debt issuance programme of up to N400bn, which would be tabled at its annual general meeting on 16 May.
We also anticipate some mergers and acquisitions – similar to 2004, when the regulation-induced recapitalisation exercise reduced the number of banks to 25 from 89
Wema Bank raised N40bn last year, with his CEO Moruf Oseni saying early this month that regulators’ final verification was being awaited. He said the lender will accelerate its capital management plans and “ensure we embark on the journey to raise the required capital as quickly as possible”.
The other national banks are Standard Chartered Bank Nigeria, Titan Trust, Citibank Nigeria, Globus, Heritage Banking Company, Keystone and Polaris. Data from Agusto & Co show that most of them need more than three times their current capital to meet the new requirements.
The lenders operating at the regional level are Parallel, Optimus, Providus, SunTrust and Premium Trust.
Struggles, mergers, buyouts ahead
The race to raise fresh capital will be an uphill task for some banks and the struggle to meet the new requirements will spur mergers and acquisitions.
Fitch Ratings has described the announced increases in the capital requirements as “significantly larger than we expected”.
“Some small and medium-sized banks may struggle to raise the necessary capital, and could be acquired by larger banks,” the global credit rating agency said in a 10 April note.
Certain domestic systemically important banks have particularly high capital ratios, but are significantly below the new paid-in capital requirements and may prefer to consider acquisitions over seeking fresh capital injections, it said.
Access Bank is one of the lenders with a track record of acquiring rivals and has grown to become the largest in terms of assets.
S&P Global Ratings said the increase of banks’ minimum paid-up capital would likely shake up the banking sector landscape and support banks’ credit loss absorption capacity.
Analysts at Agusto & Co said some midsize and small banks will scale down their scope of operations to comply with the minimum capital directive.
“We also anticipate some mergers and acquisitions – similar to 2004, when the regulation-induced recapitalisation exercise reduced the number of banks to 25 from 89,” he said.
FSDH Research, in its latest Macroeconomic Update report, said there will be fewer but stronger banks in Nigeria as some banks might be unable to independently meet the capital requirement.
“It sounds speculative to say ‘this bank will struggle; this bank will raise capital’. I have witnessed an instance where a bank that was considered an inconsequential small-time operator has become one of the biggest banks in the country,” Johnson Chukwu, chief executive officer of Cowry Asset Management Limited, said.
“Let’s wait and see what happens,” he said, adding that the banks’ recapitalisation plans expected to be submitted to the CBN by April 30 will give a preview of what may happen.
Is there capital out there?
The capital shortfall for banks ranges between 35% to 90% of the new minimum capital requirement, with an estimated total shortfall of about N4.2trn across the industry, according to KPMG Nigeria.
“Capital does not sit idle waiting for the Nigerian banking system to be recapitalised. Capital goes to where it will get the most return at the lowest possible risk,” Chukwu said.
He said global capital would go to an economy where there are no major restrictions on repatriation of capital.
…the Nigerian banking system is very attractive for both local and international investors
“I would not say there is money waiting for Nigerian banks, but I believe there is enough economic resources to support any sector that presents opportunities for good returns,” he said.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank, is optimistic that the banks will be able to secure some of investible capital around the worldlooking for attractive returns.
“I think the Nigerian banking system is very attractive for both local and international investors,” he said. “Of course capital will always go to where there is security and attractive returns. Today, the Nigerian banking system is very attractive with strict and efficient regulators.”
Jimi Ogbobine, head of consulting at Agusto Consulting, said the macro environment in which banks can raise new capital is better.
Some of the midsize and small banks may have to consider coming to the stock market. The last time, it was mergers that made some banks to list,” he said.
What will larger banks deliver for the Nigerian economy?
Agusto & Co expects a revolution in the sector that could exceed what was witnessed during the 2004 exercise.
“Given the low valuation of Nigeria banks [in US dollar terms], the relatively good performance of the banks and the appetite for banking licences as reflected in the number of applications pending with the CBN, we believe the industry should be able to attract the needed investments to shore up the capital base,” it said.
The recapitalisation can help to strengthen Nigerian banks’ competitive position against international and pan-African banking groups, S&P Global Ratings said.
Akinwunmi said well-capitalised banks would be able to support large transactions in the country.
“The Nigerian economy needs a lot of funds; think about oil and gas, solid minerals, manufacturing, infrastructure, and real estate. A well-capitalised banking system will spur economic growth; banks will be able to finance bankable projects and this will lead to job creation, and increased productivity,” he said.
(The Africa Report)
