Indications emerged on Saturday that the chief executive officers and other top executives of Deposit Money Banks had begun moves to raise fresh capital to bolster their respective institutions’ capital base in line with the pronouncement of the Governor of the Central Bank of Nigeria, Dr Olayemi Cardoso.
TechTV confirmed from top sources in the banking industry that the top executives might have also commenced preliminary merger and acquisition talks, as some of the big banks are eyeing some weaker ones for possible acquisition, while some middle strength and weak ones are looking for alliances that may result in mergers.
Cardoso had said in Lagos on Friday that the apex bank would be asking the DMBs to increase their capital base in order to service the $1tn economy projected by President Bola Tinubu.
Speaking at the 58th Annual Dinner of the Chartered Institute of Bankers of Nigeria where he was the special guest of honour, Cardoso said, “In my recent speech at the 370th Bankers’ Committee meeting, I highlighted the economic agenda of the President. The administration has set an ambitious goal of achieving a GDP of $1tn over the next seven years.
“Attaining this target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. It is crucial to evaluate the adequacy of our banking industry to serve the envisioned larger economy.
“It is not just about its current stability. We need to ask ourselves, can Nigerian banks have sufficient capital relative to the finance system needs in servicing a $1tn economy in the near future, in my opinion, the answer is no, unless we take action. As a first test, the central bank will be directing banks to increase their capital.
“Therefore, we must make difficult decisions regarding capital adequacy. As the first step, the CBN will be directing banks to increase their capital.”
He added, “The removal of petrol subsidy and the adoption of a floating exchange rate and other government policies are anticipated to have a positive effect on the economy in the medium term.
“These measures are expected to enhance investors’ confidence, attract capital inflow, stimulate domestic investors and ultimately improve the level of external reserves. Additionally, they are expected to contribute to the stability of the local economy.
“Despite the challenging global and local economic environment, Nigeria’s financial sector has demonstrated resilience in 2023 with key indications of financial soundness largely meeting regulatory benchmarks.
“Stress test conducted on the banking industry also indicates its strength under mild to moderate scenario on sustained economic and financial stress. Although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much to be done in fortifying the industry for future challenges.”
A bank CEO, who spoke to TechTV, welcomed the CBN policy direction regarding the recapitalisation of the banks and said his institution was ready to raise fresh capital though it had yet to conclude the modality.
“Even before the CBN governor made the pronouncement, our bank was already considering raising fresh capital to significantly increase the capital base. This should happen in the first quarter of 2024. So, we are in tune with the CBN governor,” the CEO of a Tier-1 lender told one of our correspondents on Saturday.
In the last few months, First Bank of Nigeria Holdings, Wema Bank and Jaiz Bank have proposed Rights Issues, while Fidelity Bank announced plans to raise additional capital via the issuance of 13,200 billion ordinary shares via public offer and rights issue.
An executive director in a bank with regional presence told Sunday PUNCH on condition of anonymity that the announcement by Cardoso did not come as a surprise, but said the current state of the economy might make raising adequate capital a bit of a challenge, adding that his institution was planning to talk to others for possible merger.
When asked when the talks would begin, the executive director said preliminary discussions would begin this week, but such would be accelerated when the CBN releases the guidelines for the new capital base and how much would be considered as adequate.
Another top bank executive told one of our correspondents that lenders had been exploring merger talks on the periphery before now, but that would be escalated now and that the banks might look more towards institutional investors rather than raise money through public listing due to the current economic situation in the country.
The President, Association of Corporate and Marketing Communications Professionals in Banks, Rasheed Bolarinwa, advised members of the public to wait for the formal unveiling of the recapitalisation plan so as to know the detail.
He told Sunday PUNCH, “Why don’t you wait until this get actualised? Let us wait for a formal announcement with clear guidelines; until then, why not hold your breath.”
On insinuations that a fresh capital raise might shrink the industry, he said, “This observation may happen or not depending on how investors react when the banks go to the market. What is not in contention is that going by the performance of bank stocks on the Nigerian bourse, investors will be receptive to the banks if they approach the market to recapitalise.
“If you look at the capitalise base of some banks, are they not already overcapitalised? And what if those who choose to approach the market perform creditably due to investor confidence in bank stocks?
“The regulator is well resourced and knows what it needs to do at any point in time in managing Nigeria’s banking sector, including the recapitalisation process, which was mulled yesterday (Friday) in Lagos.”
Experts advise banks
The Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, welcome the move to increase banks’ capital base, adding that the current capital base was grossly inadequate.
He said, “The minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency. During the banking consolidation of 2004, the minimum capital requirement for banks was raised from N2bn to N25bn. The revised capital requirement was an equivalent of $187m. Today, the same N25bn is an equivalent of just $32.5m.
“This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalisation of the banks has therefore become imperative. It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system.”
A professor of Capital Market at the Nasarawa State University, Uche Uwaleke, urged the CBN not to coerce banks into increasing their capital base as was the case during the last recapitalisation drive; rather, they should be incentivised.
“The idea of recapitalisation of banks is a welcome one. It goes without saying that capital is needed to finance big-ticket projects, especially when the government is targeting a $1tn economy in a few years’ time. But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion,” he said.
Uwaleke, who is also the President of the Association of Capital Market Academics of Nigeria, added that a number of Deposit Money Banks were already making moves to increase their capital base.
He said, “Some DMBs (especially many in the FUGAZ category) are already making efforts to increase their capital base. The CBN can use prudential guidelines to strengthen the present tiered arrangements. The use of the CAR (the ratio of a bank’s capital to risk weighted assets) is a good example.
“The apex bank can also use differential cash reserve requirements as well as preferential participation in the forex market for well-capitalised banks as some of the incentives. For whatever it is worth, smaller banks playing at the regional level should not be regulated out of existence.”
Echoing Uwaleke’s stance, an economist and former Vice-Chancellor of the University of Uyo, Prof Akpan Ekpo, warned that the planned move might lead to mergers and acquisitions, creating unemployment, economic uncertainty and discouraging investors.
Rather, Ekpo said the banks should be incentivised to stay vibrant, adding, “Well, the central bank has to be careful because you don’t force banks to recapitalise. The last time this happened, there was a serious problem. You will have to give them incentives for those who will want to go through that process, but never should the apex bank force them to recapitalise.
“Otherwise, it will result in mergers and acquisitions, and that will create unemployment, adding to the already high rate in the country, which will send uncertainty and anxiety into the system. That is not good for the economy. The CBN governor talked about the plan by the current administration to create a $1tn economy, but don’t hound banks to recapitalise; rather, give them incentives.
“The last CBN governor printed so much money through Ways and Means. What they have to do is stick to the rule, which says that the CBN can only give the government five per cent of the previous year’s annual revenue. Once that is adhered to, there will be no issues, but I don’t think it’s a good idea to force banks to recapitalise.”
Another economist, Leo Ukpong, said bank recapitalisation meant raising the capital base through more borrowing or the issue of new equity of banks.
He said, “If additional funds are acquired from borrowing more debt, the debt level of the company will rise compared to equity. This could raise the default riskiness of such banks. If it’s done through the issuance of new stocks to investors, this will raise the equity ratio of the bank and spread future profit or loss among more investors. In other words, raising additional capital through new equity could reduce the default risk of banks.”
Listing the advantages of such a move, the financial economist stated that a raise in capital would imply more available funds for loans and private investments.
He explained, “More loans could be made to the private sector investors and the public sector for national infrastructural development, and for household consumer loans. It will help spread the lending or default risks among several investors and risks diversification.
“Also, it could be more of a window dressing to give the investors the impression that the bank is now larger and more stable.”
He, however, added a caveat that “all banks must channel the additional funds raised through recapitalisation to the capital projects and not lend the funds to state and federal governments to be used for buying SUVs for legislators and presidential yachts.”
A former Chief Economist at Zenith Bank Plc, Marcel Okeke, argued that before looking at the banks, the apex bank needed to look inwards at some of its policies, those of the Federal Government and their unintended consequences, which were casting a shadow over the economy.
punch
