Retail investors may reconsider their investments in bank stocks following the recent loss of N1.6 trillion.

Banking stocks listed on the Nigerian Exchange have experienced a significant decline in their market capitalization, with an estimated loss of approximately N1.62 trillion since the Central Bank of Nigeria (CBN) issued a directive for banks to recapitalize.

In late March, the CBN issued a circular instructing Deposit Money Banks to increase their capital base. According to the circular, commercial banks with international authorization are required to raise their capital to N500 billion, while national banks must achieve a capital base of N200 billion. Regional banks, on the other hand, are expected to meet a minimum capital requirement of N50 billion.

Furthermore, non-interest banks with national and regional authorizations are mandated to increase their capital to N20 billion and N10 billion, respectively. The CBN circular specifies that only the share capital and share premium items on the shareholder fund portion of the balance sheet will be recognized in this particular recapitalization exercise.

The ”pex bank has set a timeline for banks to meet the minimum capital requirement, with a commencement date of April 1, 2024, and a deadline of March 31, 2026. Banks are provided with options to raise additional capital, engage in mergers and acquisitions, or change their license to meet the required capital levels.

In order to meet the new capital base requirements, the banking sector will need to raise approximately N3.972 trillion. Several banks have responded to this announcement by seeking investors to acquire a portion of their shares. These banks include Fidelity Bank, Access Holdings, Guaranty Trust Holding Company, Zenith Bank, Wema Bank, and FCMB Group.

Concurrently, 13 banking stocks listed on the Nigerian Exchange Limited have experienced a collective decline of approximately N1.62 trillion in their combined market capitalization. The affected banking stocks include FBN Holdings, Access Holdings, Guaranty Trust Holding Company, United Bank for Africa, Zenith Bank, Wema Bank, Fidelity Bank, FCMB Group, Stanbic IBTC Holdings, Sterling Financial Holding Company, Ecobank Transnational Incorporated, Unity Bank, and non-interest bank, Jaiz Bank.

As of March 28, 2024, following the announcement of a new recapitalisation directive by the regulator, the total market capitalisation of banking stocks reached N8.08 trillion, with GTCO and Zenith Bank leading the market.

By the conclusion of trading on Friday, August 2, however, the market capitalisation for banking stocks had decreased to N6.46 trillion, reflecting a decline of approximately 20.04 percent or a loss of N1.62 trillion for investors in this sector.

The weekly market report from the NGX, released on Friday, indicated that the year-to-date returns for the Banking Index had fallen to 9.13 percent, a deterioration from -8.69 percent the previous week, and significantly lower than the All-Share Index's year-to-date return of 30.72 percent. Investigations revealed that regulatory pressures and the pricing of rights issues and public offerings are hindering banks' attempts to secure additional capital in the market. This information was obtained through various discussions with market participants regarding investor sentiment.

A recent study by Comercio Partners on the effects of pricing on these offerings indicated that Fidelity Bank and Wema Bank are currently trading at a premium, with Wema Bank exhibiting the highest premium at 37.34 percent, thus encouraging the exercise of rights. Conversely, Access Holdings, GTCO, and Zenith Bank are trading at a discount, with Access Holdings showing the largest discount at -6.33 percent, leading to doubts about their rights issues.

The analysis noted, "The primary incentive for exercising rights is value proposition; the opportunity to purchase additional shares at a price lower than the current market value. Otherwise, should one be exercising for the love of the brand? Another reason could be staying in the game (maintaining ownership stake)."

In the aftermath of the CBN's recapitalisation directive, as banks sought to raise the necessary funds, regulations from both the apex bank and the Federal Government influenced investors' decisions.

Recently, the government has implemented a 70% windfall tax on banks’ profits realized in the 2023 fiscal year. This tax will also apply retroactively to foreign exchange profits accrued since the implementation of the new foreign exchange policy until the end of 2025.

Prior to this, the Central Bank of Nigeria (CBN) excluded retained earnings from the recognized capital base of banks. This move, as suggested by Meristem Securities in its Banking Sector Update, may have been a deliberate attempt to capture revaluation gains through the windfall tax.

Furthermore, the CBN recently directed banks to transfer funds from dormant accounts to its custody for safekeeping.

However, concerns have been raised regarding the lack of coherence in government policies, particularly with respect to the windfall tax. These concerns were expressed by Dr. Tayo Aduloju, Chief Executive Officer of the National Economic Summit Group, during a recent press conference in Lagos.

“The problem with the conveyor belt of reforms is that when it is just coming out piece by piece, it’s hard to coordinate and therefore the outcome will have some unintended consequences.

“So at a time you are telling investors to bring funds into Nigeria, some reforms are creating a more difficult environment for those same investors. You have a tax holiday on food, on drugs, that will affect your import bill, but you also increase your demand for forex,” he stated.

A stockbroker, who requested anonymity due to the sensitivity of the matter, indicated that there was considerable initial interest when the CBN made the announcement. However, it is important to note that this interest has since waned.

“A lot of investors were looking forward to the offers but since then, a lot has happened – the pressure from CBN and the Federal Government. We have had restrictions on the use of retained earnings as a capital-raising instrument, we have seen recently the windfall tax and the dormant account. All of these increased regulatory actions are disincentives to investors.

“If you look at the pricing of the offers, my personal view was that the pricing would encourage the investors to pick up their rights but what we are seeing is that investors would rather buy stocks in the secondary market than take up their rights. So the pricing is a big deal,” the stockbroker stated.

The stockbroker mentioned that there were discussions among some market participants regarding a potential review of market regulations that could result in the temporary halt of trading in banking stocks on the capital market during their offers.

Meanwhile, Tunde Amolegbe, a former President of the Chartered Institute of Stockbrokers, expressed that it was premature to gauge investors' interest accurately, but he highlighted concerns about the pricing of the offers.

He noted that while many retail investors seemed inclined to subscribe to Rights Issues, the pricing of certain offers might deter some investors.

Amolegbe emphasized that banks like GTCO and Zenith Bank, issuing rights to existing shareholders, should concentrate on persuading shareholders to take up their rights to achieve their goals.

On the other hand, institutions like Access Holdings and Fidelity Bank, offering public or hybrid options, would need to work harder to communicate their positive narratives and attract investors.

As the Managing Director of Arthur Steven Asset Management Limited, Amolegbe also suggested that the introduction of the NGX E-offering platform could potentially increase participation from younger investors.