Last week’s circular issued by the Central Bank of Nigeria (CBN) regarding new capital requirements is poised to significantly impact both banks and the capital market landscape. With these revised regulations, financial institutions are compelled to reassess their capitalisation strategies, leading to a flurry of activities aimed at meeting the stipulated thresholds, reports Festus Akanbi
At last, the Central Bank of Nigeria (CBN) last week, set the terms for the long-awaited recapitalisation of commercial banks in the country when it unveiled a threshold for minimum capital requirement in a process which must be completed within 24 months commencing from April 1, 2024, and terminating on March 31, 2026.
In the new dispensation, the apex bank pegs the minimum capital base for commercial banks with international authorisation at N500 billion, N200 billion for national authorisation, while the new requirement for those with regional authorisation is N50 billion.
According to the new order, the new minimum capital for merchant banks would be N50 billion. In contrast, the new requirements for non-interest banks with national and regional authorisations are N20 billion and N10 billion, respectively.
A circular signed by the Director, of the Financial Policy and Regulation Department, Mr. Haruna Mustafa, to all commercial, merchant, and non-interest banks and promoters of proposed banks emphasised that all banks are required to meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026.
Options
To enable them to meet the minimum capital requirements, the CBN urged banks to consider injecting fresh equity capital through private placements, rights issues and/or offers for subscription; Mergers and Acquisitions (M&As); and/or upgrades or downgrade of license authorisation.
However, the apex bank disclosed that the minimum capital shall comprise paid-up capital and share premium only. It stressed that the new capital requirement shall not be based on the Shareholders’ Fund.
“Additional Tier 1 (AT1) Capital shall not be eligible for meeting the new requirement. Notwithstanding the capital increase, banks are to ensure strict compliance with the minimum capital adequacy ratio (CAR) requirement applicable to their license authorisation.
New Requirement Ruffling Feathers
As expected, the CBN’s directive has begun to ruffle feathers as some bankers are already kicking against the stringent conditions stipulated in the apex bank’s guidelines.
In particular, some of them who spoke on condition of anonymity frowned at the CBN’s decision to omit retained earnings from the share capital calculation in the recapitalisation guidelines.
In defining share capital, the apex bank had excluded retained earnings from the calculation. Instead, it specified that share capital comprises only the banks’ ordinary share capital and share premium.
According to the guideline, “For existing banks, the capital requirements specified above shall be paid-in capital (Paid-up plus Share Premium) only. Bonus issues, other reserves and Additional Tier 1 (AT1 Capital shall not be allowed or recognised to meet the new minimum capital requirements.”
In accounting terms, retained earnings are considered a component of a company’s equity because they represent profits that have not been distributed as dividends but are instead reinvested in the bank.
Many bankers, argued that the decision to exclude retained earnings from share capital calculations is flawed.
They argue that this approach fails to acknowledge the actual value that these earnings represent which goes against the conventional and legal treatment of a company’s capital structure.
Some bankers also expressed the opinion that while the Central Bank prefers banks to retain most of their earnings to reinforce their capital base, it should not concurrently prevent them from counting these undistributed earnings as part of their capital.
Critics say the CBN seems to be prioritising direct capital injections into banks rather than relying on accounting entries to satisfy recapitalisation requirements. They noted that although the Central Bank has permitted mergers and acquisitions, this suggests it anticipates that some banks might struggle to meet the new capital requirements.
It is argued that if retained earnings are accommodated almost all the banks would meet the new requirement without a fresh capital injection.
Cash on the Table Recapitalisation
However, some banking industry observers applauded the apex bank for the bold move. For instance, one analyst told THISDAY that with its stand on retained earnings, it is obvious that the CBN is going for Cash on the Table Recapitalisation. He explained that the measure was aimed at two objectives, to drain the system of excess liquidity and to show that the apex bank has no confidence in the retained earnings of banks. “They cannot be reporting massive retained earnings and still go to the CBN for forbearance. That era is over,” he stated.
The Central Bank stated that the purpose of raising capital is to “engender the emergence of stronger, healthier and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030” in line with the Renewed Hope agenda of the Tinubu administration.
It explained that larger banks with substantial capital bases are essential, as they can offer more significant levels of credit. This capacity is deemed critical to facilitating and accelerating the growth of the national economy.
Although the full-year 2023 reports of most of the banks are not ready, many of them have by their third quarter 2023 report been in good standing to meet the new threshold without problem. These are banks with significant shareholders’ funds although the new rule does not accommodate shareholders’ funds and retained earnings in the calculation of share capital. Banks in this category include Zenith Bank Plc N1.92 trillion shareholders’ fund. The list includes United Bank for Africa, with a total shareholders fund of N1.778 trillion as of Q3, 2023. Access Holdings is another Tier 1 capital bank with a total equity of N1.64 trillion in its Q3, 2023 result. Others are Ecobank- N1.37trillion, GTCO Holdings – N1.27trillion, Stanbic IBTC Holdings – N471billion, Fidelity Bank Plc – N411 billion, FCMB -N373.7billion and Sterling Financial Holdings – N165.84billion.
A similar exercise in 2005, which ran for 28 months under the supervision of Prof Chukwuma Soludo as the apex bank governor, left the system with 25 healthy banks, 14 scrapped and the system cleared. Three years after, 14 Nigerian banks made it to the top 1,000 banks in the world, and two of them made the top 300 banks in the world.
Under the current scenario, options available to the banks include injection of fresh equity capital, through private placements, rights issues and/or offers for subscription; Mergers and Acquisitions (M&As); and/or upgrades or downgrade of license authorisation.
Sources said already, some banks are on the verge of going to the capital market to raise funds, while some operators are considering outright mergers and acquisitions.
Analysts warned that unless the regulators and banks learn from the pitfalls of the 2005 consolidation, where some strange bedfellows were joined together by the desperation to meet the deadline for recapitalisation, the exercise may produce delinquent banks which would in turn haunt the industry.
Another cause of concern is the current state of the economy which they argue may not be ready to support the right issues/offer for subscription, which are considered one of the shortest routes to attain the new capital threshold.
However, some analysts said the new exercise may bring back some level of portfolio investment, especially for banks seeking foreign funds to beef up their positions.
Whatever happens, the latest circular from the apex bank will continue to engender activities in the economy going forward and the overall economy will be better for it if it is well managed.
