When the Central Bank of Nigeria (CBN) Governor, Dr Yemi Cardoso, amplified President Bola Tinubu’s call for the upgrade of the Nigerian economy to $1 trillion GDP at the 58th annual bankers’ dinner last November, some players within the banking community thought he was kidding.
Cardoso, who did not budge, said the move would start with retooling and recapitalising the banks so they are more fortified and resilient.
He said it was time for them to quit their comfort zones and stretch themselves to undertake fatter portfolios needed to buoy a $1 trillion economy.
To walk the talk, Cardoso, at the weekend, unveiled the new recapitalisation blueprint with a two-year compliance window starting from April 1, 2024, and terminating on March 31, 2026.
Under the new arrangement, the minimum capital base for commercial banks with international authorisation has been pegged at N500 billion from N50 billion, while that of commercial banks with national authorisation is now N200 billion, up from N25 billion. and those with regional authorization now put at N50 billion from N10 billion.
Again, the new minimum capital base for the merchant banks would be N50 billion, while the new requirements for non-interest banks with national and regional authorisations are N20 billion and N10 billion, respectively.
Before now, the last capital augmentation exercise for the banks was in 2004/2005 when Prof Charles Soludo was the CBN Governor.
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Banks had to grow their capital requirements to N25 billion and that action reduced their number from 89 to 25.
However, to meet the latest minimum capital requirements, banks may consider any of the following options: inject fresh equity capital through private placements, rights issues, and/or offer for subscription. Another option, which is the most considered is mergers and acquisitions (M&As) and the final option is upgrade or downgrade of licence authorization in the event banks cannot meet up with the new rules of engagement.
Nonetheless, a recent report from Ernst and Young estimated that 17 out of 24 banks might not meet the capital requirement of the CBN if it is increased 15-fold from its current N25 billion.
While the 17 banks remain eclipsed, Sunday Sun gathered that 11 of them are ripe for total acquisition by the stronger banks.
Top five banks that are likely to acquire additional banks are; First Bank, Access Bank, UBA, Guaranty Trust Bank and Zenith Bank. They achieved a market capitalisation of at least N1 trillion each on NGX in January.
Ernst and Young’s report predicted a repeat of the mass mergers and acquisitions witnessed in 2004.
An analysis by Nairametrics further revealed that 11 banks may need to raise N2.61 trillion to meet up with the CBN’s target by March 31, 2026, though some bankers have criticised the CBN’s decision to omit retained earnings from the share capital calculation in its recent recapitalization guidelines.
On a broader analysis, the financial results of the top five banks show that their combined paid-up capital and share premium stand at N1.037 trillion, representing a shortfall of N1.472 trillion.
The figure, when dissected in granular details, shows that Access Corporation, the parent company of Access Bank, has paid-up capital and share premium of N251.811 billion according to its 2023 full-year result released yesterday hence a shortfall of N248.189 billion.
FBN Holdings, the parent company of FirstBank has paid-up capital and share premium of N251.3 billion, hence a shortfall of N248.66 billion, according to its Q3’23 results
The paid-up capital and share premium of GTHoldco, the parent company of GTBank stands at N138.186 billion as of Q3’23, hence a shortfall of N361.814 billion
UBA has paid-up capital and share premium of N115.815 billion, hence a shortfall of N384.185 billion according to its Q3 ‘23.
Zenith Bank has a paid-up capital and share premium of N270.745 billion, hence a shortfall of N229.255 billion.
CBN’s position is that the minimum capital shall comprise paid-up capital and share premium only and shall apply to all new applications for banking licenses submitted after April 1, 2024.
Shareholders’ funds are totally insulated from the recapitalisation liquidity.
Meanwhile, the CBN, the Economic and Financial Crimes Commission (EFCC) and other law enforcement agencies are set to closely supervise the process to prevent the injection of illicit funds into the banking system.
This was disclosed by the apex bank in a circular signed by Mr Haruna Mustafa, the director of the Financial Policy and Regulation Department.
The circular was specifically addressed to commercial, merchant, and non-interest banks, including promoters of proposed banks, on the new minimum capital requirements for banks.
The circular mirrors the apex bank’s strong resolve to block any attempt by bank owners and their promoters from warehousing proceeds of criminality in the banking system or using such ‘dirty funds’ to fortify their capital base.
Arising from that, banks are required to conduct comprehensive anti-money laundering screening checks. This includes Know Your Customer (KYC), Customer Due Diligence, and monitoring suspicious transactions to prevent the use of illicit funds in the recapitalisation exercise.
In his assessment of the new rules of engagement designed by the CBN for the banks, Prof Uche Uwaleke, Nigeria’s first professor of the capital markets, told Sunday Sun that the apex bank’s move was a welcome development that would help strengthen the country’s financial system and a potential boost to the stock market
“In view of naira devaluation following unification of exchange rates, the new calibrated minimum capital requirements seem okay unlike the uniform capital base of N25 billion stipulated in 2005.
“Shareholders’ funds comprise paid-up share capital plus reserves.
“If my memory serves me right, this was permitted in 2005, but now disallowed possibly from the experience of the last exercise.
“I believe the FUGAZ (FBN, UBA, GTB, Access and Zenith) banks with international authorization will have no difficulty meeting this requirement.
“The stock market (option 1) presents the most feasible option as few will likely go the M&A route. Access Bank has already announced it is raising N365 billion via Rights issue.
“I also think the two years period allowed is sufficient to implement recapitalisation.
“A number of banks, including FBN, Access and Fidelity had already commenced the process of recapitalisation before now, especially since the CBN Governor made the announcement in November last year.
“I equally think that since the new capital base is based on the type of authorization (international, national or regional), the CBN may consider applying a differentiated CRR according to the category of license instead of a uniform rate (currently 45 per cent) for commercial banks.
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“In view of the young age of non-interest banks in Nigeria, they should be allowed a longer period, say, three years to meet the minimum capital requirements”, he advised.
For Dr Muda Yusuf, the director general, Centre for the Promotion of Private Enterprise (CPPE), the move was already foretold by the CBN Governor.
“There are strong reasons to justify the recapitalisation proposition.
“The last major recapitalisation was done in 2004 when Prof Soludo was the CBN Governor. Minimum capitalisation was N25 billion, which was an equivalent of about $190 million. At current exchange rate, this is an equivalent of over N250 billion.
“In essence, the recapitalisation proposition was essentially adjusting for inflation.
“An economy deserves a stable banking system. Adequate capitalisation is one of the key attributes of banking system stability. It positions the banking system to manage its exposures and withstand shocks.
“It is laudable that the CBN gave a two-year notice to the banks. This would give the banks sufficient time to strategise for a new capitalisation regime.
“Meanwhile, it is important to assure the banking public that all our banks are safe and sound. All financial soundness indicators are positive for all our banks. The recapitalisation story should be managed professionally to avoid creating vulnerabilities for the banks and banking system”, he advised.