AS Nigerian banks are scrambling for funds to meet up with the Central Bank of Nigeria’s (CBN) recapitalisation directive, a new report by the Private Equity and Venture Capital Association of Nigeria (PEVCA) has detailed reasons discerning investors would be looking out for valuation multiples for these banks.
According to the report, regulatory environment will impact the equity story of banks and their ability to raise capital as investors assess the uncertainties created by policies such as windfall tax as it relates to the profitability of banks in 2024, among others.
Despite extreme macroeconomic realities in Nigeria, the top banks have certainly demonstrated resilience. The report observed that share prices of many banks rose dramatically in the last 12 months amid currency depreciation and major policy adjustments.
The PEVCA Nigeria’s 2024 Mid-Year Review and Outlook, a publication that delves into the key trends, challenges and opportunities shaping Nigeria’s private equity and venture capital landscape further noted: “So, one question to ask will be if the current valuation will excite investors. Relatedly, how can the banks attract foreign capital given the posture of foreign investors, which has been largely mild in recent years.
“Again, the government recently proposed a windfall tax on the realised gains on all foreign exchange transactions of banks in the 2023 financial year. Clearly, this will impact the equity story of banks and their ability to raise capital as investors assess the uncertainties created by this windfall tax as it relates to the profitability of banks in 2024 or the probability that any exceptional return in the future may be taxed in a similar manner.”
According to the report, regulatory compliance is another complex issue to consider. Many banks have recently opted for the Holdco structure to enhance regulatory compliance on one hand and to enable the parent entity to take advantage of emerging opportunities that abound across the financial services value chain on the other hand.
Accordingly, the question of how to navigate the regulatory complexity in the local and foreign jurisdictions must be answered in view of meeting the latest regulatory capital requirement.
It noted that beyond the above, tax and capital market requirements are other regulatory areas for which many banks will also need to put into consideration.
Customer ‘flight to safety’ is a major concern for banks. Therefore, the report stated that depositors will typically run to safety if they get a hint that all is not well or something may impact on banks’ ability to meet their obligations when the need arises.
“Accordingly, managing depositors’ confidence and avoiding potential panic triggers is a critical consideration for banks amid efforts to chart a pathway for capital raise.”
“Beyond the immediate requirement to meet regulatory capital requirement, banks will also be considering how all these fit into their growth ambitions as well as medium to long term strategic priorities, or put differently, how their growth plans and strategic priorities can be realigned or reassessed to accommodate the recapitalisation requirement.”
Critical considerations will therefore include assessing how meeting the capital requirement will affect customer footprints and preferences, reassessing licensing categorisation, balance sheet resilience, the overall return profile and competitive positioning.
The PEVCA report observed that while the race among banks is already on, with four to six banks out in the market to raise capital by way of public offer/right issues or have approached the CBN for a merger, the pathway is categorised into two: capital raise, the preferable option for most banks, and corporate restructuring/business combination, the less desirable option but the most likely pathway for capital raise.
“This pathway is clearly the preferred option for many operators, especially the listed banks, many of whom have approached the public with offers.
“As such, we expect more banks to seek fresh equity capital injection from the capital market as a pathway to meet the CBN regulation via Initial Public Offers (IPOs), Public Offers (POs) and Rights Issues.
“Alternatively, banks that have adapted the Holdco structure may have the option of getting capital injection via their parent company, who may raise the capital via other acceptable means,” it stated.
To buttress this point, Unity Bank and Providus Bank have already gotten approval from the CBN to merge. Stakeholders expect other banks to make announcements soon.
It must, however, be noted that given the current macroeconomic realities in Nigeria vis-à-vis the strict definition of paid-up capital by the CBN, the recapitalisation exercise may be challenging for some banks.
To this end, it must be said that not all public offers or right issues (i.e. option A) will be successful.
Again, engaging issuing houses as underwriters to the transaction, may also not guarantee success. Observably, merger and acquisition (M&A) is not being prioritised by many banks (judging by the number of banks that have announced their Public Offers compared to the merger announcements in the news) at the moment, as such, a lot of banks may be forced into poorly planned, last-minute M&A processes, as they race to meet the CBN’s deadlines the report concluded.
The report emphasises that the M&A process takes time and those that start early stands to reap significant benefits.
“Thus, our view is that banks with limited options for capital raise via the capital market need to begin the process of meeting the regulatory capital requirement via M&A early, to avoid the rush that greeted numerous unsuccessful mergers in the mid-2000s.
“From our M&A experience, a thorough counterparty assessment in an M&A process before a merger or acquisition is an essential ingredient for success. This will significantly reduce the risk of banks racing into a merger or a last-minute business combination exercise that may not make sense and may ultimately result in corporate failure.
“To succeed, our recommendation is for operators to be strategic and engage well-experienced advisers that can handhold them through the process. This will involve critical assessment of the response pathways with a fallback plan that can be deployed very early to ensure overall success at the end of the day,” it advised.
Access Bank, FCMB, Fidelity and GTbank have kicked-off the process of raising capital to meet up with the regulatory capital requirement ahead of the deadline and have all launched their Public Offers and/or Rights Issues. They are all in the market appealing to shareholders, customers and the public to take advantage of the regulation and to buy into their equity story.
Relatedly, the CBN recently approved the application of Unity Bank and Providus Bank to merge with a N700 billion support for Unity Bank.
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