The Nigerian banking sector appears to be under pressure to raise capital to meet the Central Bank of Nigeria (CBN) recapitalization requirements, as the current capital gap stands at N4 trillion.
Recall that in March 2024, the CBN announced new minimum capital requirements for banks, setting the minimum capital base for commercial banks with international authorization at N500 billion.
The Afrinvest ‘2024 Nigerian Banking Sector Report’ shows that currently, international banks such as Access, First Bank, FCMB, GTCO, Fidelity, Zenith, and UBA have a combined capital of about N1.3 trillion and would require at least N2.2 trillion to meet the new capitalization requirements.
According to the report, nationally licensed banks like Ecobank, Stanbic IBTC, Citibank, Keystone Bank, Standard Chartered, Sterling, Union Bank, Unity Bank, Polaris, Wema, Optimus, and Premium Trust Bank have a gap of N1.6 trillion to reach N2.2 trillion.
However, the report states that for regional banks, there is a N545 billion capital gap, N200 billion for merchant banks, and N14 billion for non-interest banks.
While presenting the report on Wednesday in Abuja, the Chief Executive of Afrinvest Group, Ike Chioke, noted that the gap highlights the challenge of the anemic growth that the Nigerian economy has suffered over the last two decades, from 2004 to 2024.
Chioke said that the banking industry may soon witness mergers and acquisitions, as well as the downgrading or upgrading of bank licenses.
He maintained that all other sectors of the economy must grow alongside the banking sector if the nation is to achieve its $1 trillion economy target.
“When you want to think about growing the Nigerian economy to $1 trillion, it’s not just the banks that will need to grow. Every other aspect of the economy needs to grow alongside it.
“So the retail earnings that banks have had for many years will not be counted. You need to raise capital and put it in as paid-up share capital. That’s a very tall order. But that also brings in all sorts of advantages, strengthens the balance sheet, strengthens their credit rating, and makes them stronger.
“But there’s also the concern that if you think of where the banking sector is and the current size of loans they have created, and suddenly within a space of one and a half years, they double up, that means that all their return numbers will go down, return on equity will go down, return on assets will go down. They can’t easily go on and start increasing the risk assets they’re giving by lending more money to customers. If there are no safeguards, they’ll end up losing that money. So there are issues to think about.
“But at the same time, when they’re raising money, there are all sorts of other challenges in terms of the current cash reserve ratios and liquidity ratios being quite high. At the same time, you have a government that’s running its budget on a deficit. That means they’re printing more money to put cash into the system.
“And that same cash, you’re trying to quarantine at the central bank. So there are a lot of mixed signals. In the same economy where many of us feel challenged by the cost of living crisis, I would say that yes, in this room we are among the privileged, but all of us are feeling the pinch of inflation, the pinch of exchange rate devaluation, and yet it’s the same little income that we have that we need to put aside and invest back in stocks, so there are lots of complicated issues that we need to deal with,” he said.
ALSO READ: PDP accuses Police of harassing, intimidating members in Edo
The Governor of the CBN, Olayemi Cardoso, who was represented by John Simeon Onoja, said that the banking sector recapitalization exercise requires all commercial, merchant, and non-interest banks operating in the country to increase their paid-in capital to levels suitable for their license categories and authorizations to be achieved within 12-24 months.
Cardoso explained that one of the reasons behind the decision to increase the share capital was the need for banks to have this liquidity to be able to lend more to relevant sectors.
He stressed that to meet the requirements, many banks have begun issuing ordinary shares, public offers, rights issues, private placements, mergers, and acquisitions, adding that those unable to meet the current capital category they are in are allowed to downgrade.
“This means a national bank can downgrade to a regional bank, and still effectively serve the Nigerian people. Now, why did we come out with this? Some of the reasons are for macroeconomic development. We’ve just come out of the COVID pandemic, and a lot of businesses went under, so it’s about macroeconomic development across the globe. We also look at the outcome of the stress test.
ALSO READ:Bonds more transparent than soft loan, Gov Alia replies critics
“This is to remind us that the Central Bank of Nigeria normally conducts a stress test to check how financial institutions will react to shocks at different levels in the economy. Based on the results, management decisions are taken to ensure that in the event of various shock levels in the economy, the financial institutions will be able to survive,” he said.
He further noted that the exercise has led to an increase in foreign direct investments, evident in the increased foreign exchange earnings for the country.
He also said that the exercise has presented an opportunity for smaller investors to own partial shares in financial institutions, which have always performed well. “The equity market is already being boosted, and this activity will increase tendencies and further activities in the capital market.
“A lot of people have been asking. This guideline came out a few months ago. Already, at least four banks are currently raising funds through the capital market. We all know them; some of us have bought into them already. We are currently working with the banks, reviewing their capital plans, and other activities related to the capital range.
“We are also conscious of the fact that the capital imported into the country, especially from foreign direct investors, will not suffer any form of devaluation loss, and they will be able to return home with their currency and value as deployed in the country.
“Over the past years, between 2010 and 2015, records have shown that investments in bank shares yielded an average of 17% per annum. So the recapitalization exercise of the Nigerian banking sector is a pivotal strategy aimed at further strengthening the resilience of Nigerian banks and promoting sound financial systems in Nigeria. Importantly, it will support the government’s goal to achieve a GDP of $1 trillion by 2030,” he added.
and then