The new report is titled: “Navigating the Horizon: Charting
the Course for Banks amid Plans for Recapitalisation.”
It noted that if the apex bank raised the capital base of
commercial banks in the country by 15-fold from the current N25 billion, 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 $1 trillion economy by 2026.
The current capital base is stratified based on the type of
banking licence – banks with regional, national and international licenses are
currently expected to maintain a minimum capital base of N10 billion, N25
billion and N50 billion 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 N2 billion to N25 billion.
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.
The PUNCH in an exclusive report last year, 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.
Yusuf 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 N2 billion to N25 billion.
“The revised capital requirement was an equivalent of $187
million.
“Today, the same N25 billion is the equivalent of just $32.5
million.
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.
Uwaleke said: “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 $1 trillion 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.”
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. The PUNCH