Flashnotes – Issue 16 – 24 April 2024 – Financial Services

CBN Bank recapitalisation

Highlights

• We anticipate that the move by the CBN will enhance the
  stability and capacity of the banking industry as well as attract
  greater investments to the sector.




• The new capital requirement as defined by the CBN has
  triggered a call to action by ALL banks who are impacted to
  different degrees.




• Data suggests a significant capital shortfall of N4.2
  trillion across all license categories, with available options for
  banks including capital raise (as much as between 35% – 90% of the
  new minimum capital); mergers and/or acquisitions; and the
  downgrade of license authorisations.




• We recommend a proactive monitoring of market dynamics
  to identify and address any systemic risks or disruptions that may
  arise during the recapitalisation phase to preserve the stability
  of the financial system.

Event

The Central Bank of Nigeria (CBN) recently announced an increase
in capital requirements for banks operating in Nigeria across the
different license categories. An integral part of the announcement
is the definition of minimum capital to include only paid-up
capital and share premium, thereby excluding the industry’s
significant retained earnings reserves as well as other forms of
capital.

CBN Capital Requirements by License Category

The increase in capital requirement by the CBN is aimed at
strengthening the resilience of the banking industry to withstand
challenges arising from global and domestic headwinds. The higher
capital requirement will enhance financial system stability as
banks become better positioned to absorb financial shocks or
unexpected losses. In addition, the upward adjustment will help
boost investor confidence in the banking system as investors tend
to perceive well-capitalised banking systems as being ‘too big
to fall’.

The last banking sector reform introduced by the CBN in 2004 led
to a significant 1,150% increase in the minimum capital requirement
for banks, from N2 billion to N25 billion.

The reform was marked by extensive M&As, leading to a
notable reduction in the number of deposit money banks in the
country from 89 to 25.

Consequently, banks were better positioned for financial
intermediation to support economic growth and development. Bank
credits to private sector as a ratio of GDP rose to as high as
19.6% in 2009 when banks were allowed to operate as regional,
national and international banks while market capitalisation
increased to about $85bn in the immediate periods following the
last bank recapitalisation in 2004.

With the current reform agenda, the stringent definition of
minimum capital which has left significant reserves unavailable for
capitalisation, is driving a widespread impact on the banking
industry with changes to the competitive landscape expected as a
fallout. The capital shortfall for banks ranges between 35% to 90%
of the new minimum capital requirement, with an estimated total
capital shortfall of about N4.2 trillion across the entire
industry.

Several options are available to banks in their effort to raise
additional capital, a route we anticipate to be the first line of
action for most banks in achieving the new capital requirement, and
these include public offerings, rights issues, private placements,
etc. However, consideration for potentially value accreting mergers
and acquisitions as an alternative option may prove invaluable for
players who adopt a broad-based approach to the reform.

In conclusion, we welcome the recapitalisation of banks with
optimism as it is necessary to enhance the resilience of the
banking system and support the growth agenda of the economy through
greater financial intermediation. However, we recommend a proactive
monitoring of market dynamics to identify and address any systemic
risks or disruptions that may arise during the recapitalisation
phase to preserve the stability of the financial system.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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