Pros and Cons of Banking Sector Recapitalisation

Nume Ekeghe writes on the recent directive by the Central Bank of Nigeria on banking sector recapitalisation, its gains and concerns

The recent move by the Central Bank of Nigeria (CBN) to revise the minimum capital requirements for Nigerian banks marks a pivotal step in fortifying the resilience and stability of the country’s banking sector.

Aimed at addressing the challenges posed by currency devaluation and aligning with international regulatory standards, this recapitalisation initiative holds significant implications for the financial landscape in Nigeria.

The directive, disclosed in a statement by CBN’s acting Director of Corporate Communications, Mrs. Hakama Sidi Ali, mandated commercial banks with international authorisation to maintain a minimum capital base of N500 billion. Similarly, banks with national authorisation are required to uphold a minimum capital threshold of N200 billion, while those with regional licenses must maintain a capital base of N50 billion.

The CBN’s announcement came on the heels of recent urgings for financial institutions to expedite action on recapitalisation to bolster the country’s financial system.

Signed by Director of the Financial Policy and Regulation Department, Mr. Haruna Mustafa the circular stipulates a 24-month compliance window commencing from April 1, 2024, and ending on March 31, 2026. This timeline underscores the regulator’s commitment to facilitating a smooth transition for banks to meet the new capital requirements. The recapitalisation initiative, initially disclosed by CBN Governor Mr. Olayemi Cardoso, underscores the regulator’s strategic vision to enhance banks’ resilience, solvency, and capacity to support Nigeria’s economic growth. To meet these requirements, banks are encouraged to explore various avenues, including equity capital injections, mergers and acquisitions, and license authorisation adjustments.

Importantly, the CBN clarifies that the minimum capital shall comprise paid-up capital and share premium only, excluding retained earnings from the computation. While this exclusion may pose challenges for some banks accustomed to including retained earnings in their shareholders’ funds, it aligns with the regulator’s focus on injecting fresh capital and ensuring the quality of capital.

Furthermore, banks are reminded of the importance of strict compliance with minimum capital adequacy ratio (CAR) requirements, with breaches necessitating additional capital injections to rectify positions. The directive also extends to new banking license applications, which must meet the revised capital requirements.

In response to the directive, banks are expected to submit comprehensive implementation plans by April 30, 2024, outlining strategies for meeting the new capital thresholds. The CBN pledges to monitor and enforce compliance within the specified timeline, ensuring a seamless transition for the banking sector.

The implications of these regulatory changes are profound, particularly for existing banks recalibrating their capital structures to align with the new requirements. With paid-up capital and share premium as the primary components of minimum capital, banks must strategize effectively to raise the requisite funds. This is evident in the significant capital adjustments projected for banks across various authorization categories, necessitating proactive measures to meet regulatory standards.

As the banking sector embarks on this journey of recapitalization, collaboration between regulators, banks, and stakeholders will be crucial. By fostering transparency, innovation, and strategic alignment, the industry can navigate these changes effectively, paving the way for a more robust and resilient financial ecosystem in Nigeria.

Strategic Vision

At its core, the CBN’s recapitalisation directive underscores a strategic vision to enhance the robustness of the banking system and its capacity to support economic growth. By setting differentiated minimum capital thresholds based on banking authorisation, the regulator seeks to instil confidence in the financial markets, mitigate systemic risks, and elevate the competitiveness of Nigerian banks on the global stage. The prescribed compliance timeframe of two years underscores the urgency of action, urging banks to proactively chart a course toward compliance and strategic resilience.

 Navigating Capital Injection Dynamics

Industry experts, commend the emphasis on injecting fresh capital into the banking system, citing its resonance with international best practices and the imperative to counteract the erosion of capital value amid currency devaluation. However, concerns raised regarding the exclusion of retained earnings from the capital base calculation underscore the need for a nuanced approach to capital augmentation. Balancing the imperative for fresh capital infusion with the optimisation of existing resources will be critical for banks seeking to meet the revised thresholds efficiently.

Speaking to THISDAY, The Special Adviser to the Senate Committee on Banking, Insurance, and Other Financial Institutions, Uche Uwaleke, contextualised the move by recalling the CBN’s previous capital base adjustment in 2005. 

Uwaleke highlighted the adverse impact of currency depreciation on banks’ capital base in dollar terms, necessitating the recalibration to enhance competitiveness on the global stage.

He emphasised the need for fresh capital injection, which he envisioned would proffer a safer and more resilient banking system in line with international standards.

He said: “For banks with international authorization, that has had the effect of eroding capital base in dollar terms and these banks wouldn’t have the base to compete internationally so there is a need to ramp up the base of banks. 

“In 2005 the CBN had allowed the entire shareholders’ funds to constitute the capital base. Shareholders’ funds comprise of share capital, share premium, and reserves of banks. All of that are to belong to shareholders and these reserves can either be revenue reserves or from retained earnings over the years. What the CBN is saying now is that for this recapitalisation, all we want to allow is paid-up share capital. The emphasis is on bringing in fresh capital and I think it would go a long way to strengthen the financial system and ensure that banks have enough capital to absorb losses because the whole idea of capital is to serve as a buffer. 

“Going forward our banks are going to safer, stable, and sound. I am sure the idea is to have a more resilient banking system again this is in line with international standards. 

“If the CBN had allowed retained earnings, a number of our banks today already have shareholders’ funds in the excess of N500 billion. The CBN is focusing on the injection of fresh capital, core capital, and also after the quality of capital. If you include revenue reserves, some of the reserves may be associated with high-risk assets or speculative ventures which would have an effect of diluting the capital and that is why the focus on core capital.”

On his part, the immediate Past President of the Chartered Institute of Bankers of Nigeria (CIBN), Uche Olowu, lauded the initiative as a timely intervention to address capital erosion amid currency devaluation. 

Olowu anticipated a high compliance rate among banks within the 24-month window, with some likely opting for mergers or regional focus to navigate the evolving landscape.

He said: “There was a devaluation in the naira and that devaluation means Nigerian banks’ capital has been eroded and most banks, also do corresponding banking with external parties domiciled all over the world. So, you need to confer that assurance and that confidence. 

“It has been expected because when capital has been eroded by devaluation, you need to need to shore-up your capital. It is designed to help banks do better. I think it is a welcome development.”

He added that having a 24-month window at least five or six banks would meet it easily.

“Within this window, we should expect at least 75 per cent of the banks would meet the target while the others may merge,” Olowu said.

Speaking, the Group Chief Executive Officer, Cowry Asset Management, Johnson Chukwu, scrutinized the exclusion of retained earnings from the capital base calculation, advocating for their inclusion to incentivise banks to recapitalise without incurring additional costs.  

Chukwu urged the CBN to align the new capital requirements with industry dynamics to facilitate a seamless transition.

He said: “For international banks to have a capital base of N500 billion is an average of $500 million and for local banks to have a capital base of N200 billion is about $200 million. And if you look at the calculation as at the last time and now is about the same.

“Given the devaluation of the currency overtime and given the size of transaction tickets of banks today, the new capital requirement is not out of place.  On increasing it, many of the international banks may have a capital base that handles the new capital requirement. Many of them may go to the capital market to raise additional capital. 

“The only adjustment the Central bank needs to do is that the new capital requirement should include the retained earnings of banks. Because if you exclude retained earnings, you will incentivize banks to incur costs to recapitalise.”

“The retained earnings of banks should be recognised by the CBN as share capital so they don’t pay dividend and bring back the money for rights issues. The only adjustment I would recommend is to allow retained earning count.”

On his part, the Head of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, noted CBN’s decision to solely rely on paid-up capital for regulatory capital qualification. He expressed concerns over the exclusion of retained earnings, underscoring the potential challenges in raising additional capital for banks.

He said: “Everyone was expecting the CBN to increase the minimum capital requirements However, nobody thought the CBN would go this route by only allowing their paid-up capital to be used for qualification as base regulatory capital.

“Based on the circular of yesterday, almost all the banks need to raise additional capital. Although some of their shareholders funds are in excess; however, CBN is excluding retained earnings which is a major controversial issue.”

“One of the major concerns is CBN excluding retained earnings for composition of regulatory capital, the only thing that can make sense is that CBN wants them to bring in fresh funds. And if you look at the top banks some of them would need to bring in as much as N200 to N300 billion which is a huge ask.

“Some think that CBN wants the banks to bring in foreign investors because getting such an amount in the Nigerian market might be challenging.

“We think there may be some discussion within the CBN and we anticipate that the CBN may allow retained earnings. However, if CBN maintains they are only allowing paid-up capital, there would be a lot of realignment in the industry, “he said.

He added that within the provisional period, banks would begin to raise capital.

He said: “Banks need to raise capital. They need to do rights issues and they’ll need to start talking to their shareholders on how much additional share capital existing shareholders would be willing to bring forward and if existing shareholders can’t take them to the finish line, they should start courting the institutional investors or new investors that have the capacity to support the banks.”

Responses and Market Dynamics

In response to the regulatory mandate, Nigerian banks are poised to undertake a spectrum of strategic initiatives aimed at bolstering their capital bases and ensuring regulatory compliance. Mergers, acquisitions, and strategic partnerships may emerge as viable avenues for consolidating resources, optimising operational efficiencies, and enhancing market competitiveness.

Concurrently, banks are expected to explore diverse capital-raising mechanisms, such as rights issues, private placements, or debt financing, to fortify their capital buffers within the prescribed timeframe.

Based on the revised computation method considering paid-up capital and share premium, several banks, both international and national, face significant capital adjustments to meet the new regulatory standards set by the CBN.

For international banks like Access Bank, which currently boasts a minimum capital of N251.81 billion, the new requirement of N500 billion necessitates raising an additional N248.19 billion. Similarly, Ecobank, with a minimum capital of N353.51 billion, must secure an extra N146.49 billion to comply with the updated regulations. Other major players in the international banking arena, such as First Bank of Nigeria Holdings (FBNH) Plc, FCMB, GTB, and Fidelity Bank, face substantial capital raises ranging from N248.66 billion to N384.70 billion to meet the new thresholds.

Among national banks, Stanbic IBTC, with a minimum capital of N109.26 billion, is required to augment its capital by N90.74 billion to reach the N200 billion threshold. Similarly, Sterling Bank, currently standing at N57.15 billion, needs to secure an additional N142.85 billion to meet the new minimum capital requirement.

Furthermore, other international banks like UBA, with a minimum capital of N115.82 billion, and Zenith Bank, with N270.75 billion, face capital shortfalls of N384.18 billion and N229.26 billion, respectively, under the new regulatory framework.

These adjustments underscore the significant capital challenges that banks, both domestic and international, must address to ensure compliance with the CBN’s stringent requirements.

Engaging Investors and Stakeholders

The recapitalisation drive is likely to catalyse heightened investor interest and stakeholder engagement within the Nigerian banking sector. Institutional investors, in particular, are poised to play a pivotal role in providing the requisite capital infusion, thereby influencing banks’ strategic direction and growth trajectory. The potential inclusion of retained earnings in the regulatory capital calculation could shape investor sentiment and market dynamics, influencing investment preferences and risk perceptions across the banking sector.

Regulatory compliance

As Nigerian banks navigate the intricacies of regulatory compliance and strategic adaptation in the wake of the CBN’s recapitalisation directive, collaboration and synergy between regulators, banks, and investors will be paramount. By adopting a holistic approach encompassing prudent capital management, strategic risk mitigation, and stakeholder engagement, banks can not only enhance their financial resilience but also serve as catalysts for sustainable economic growth and development in Nigeria. The recapitalisation drive, far from being a mere regulatory mandate, represents a transformative opportunity to fortify the foundations of Nigeria’s banking system and position it for long-term stability amidst evolving market dynamics.