CEO News ; Are Banks Ready For Cardoso’s New Capitalization

Are Banks Ready For Cardoso’s New Capitalization

© Are Banks Ready For Cardoso’s New Capitalization
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The Central Bank of Nigeria (CBN) new minimum capital requirements for banks, pegging the minimum capital base for commercial banks with international authorisation at ₦500 billion, in measures to put the banks in good stead for the envisioned N1 trillion economies.

In a circular by the Director of the Financial Policy and Regulation Department, Haruna Mustafa, to all commercial, merchant, and non-interest banks and promoters of proposed banks, he 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.

In the new dispensation expected from April 1, 2026, the new minimum capital base for commercial banks with national authorisation is now ₦200 billion, while the new requirement for those with regional authorisation is ₦50 billion.

Merchant banks would be expected to raise their capital to ₦50 billion, while the new requirements for non-interest banks with national and regional authorisations are ₦20 billion and ₦10 billion, respectively.

The CBN governor Olayemi Cardoso had continuously drummed the new capital regime since November 2023, preparing the industry to service the new economy envisaged by President Bola Tinubu’s administration. This serves as the reason why he has continually warned banks not to spend or pay dividends from the huge forex gains by the industry in the wake of the unification of the foreign exchange windows that have accrued huge earnings for the banks.

The last time the CBN increased the capital base for banks was in 2005, when the current Anambra State Governor, Charles Soludo, as the apex bank chief ordered the capital base of banks to go up to ₦25 billion from N2 billion.

Only last week, Wunmi Bewaji advised the apex bank to prioritise the conduct of stress tests in the banking sector and not to adopt an arbitrary figure in its proposed recapitalisation moves. He said that conducting a stress test ahead of recapitalisation across respective categories of banks will reveal banks’ reaction to crises, and how to stimulate the economy in a situation of market shock owing to a lot of changes that have taken place in the economy and the banking sector between now and the last recapitalisation era.

Ernst and Young in its report titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation”, prepared the banking system for what to come, and noted that only seven of the existing 24 banks may survive the new capital regime.

Cardoso may have heeded Muda Yusuf, the immediate past director general of the Lagos Chamber of Commerce and Industry (LCCI), who requested time for the new capital regime having agreed that it is time for a new capital base for the industry owing to the exchange rate depreciation that has massively eroded the value of the current minimum capital base.

Recapitalisation is the process of infusing funds into banks to enable them to meet the man­datory capital adequacy set by a central bank. It is also to stabilise a company’s capital structure and secure shareholders’ funds.

Checks by InsideBusinessNG revealed that Zenith Bank Plc, United Bank for Africa Plc, FBN Holdings Plc, Ecobank Transnational Incorporated (ETI), Guaranty Trust Holding Company Plc (GTCO), and Access Holdings Plc have over N1 trillion in total equity as of September 30, 2023.

Zenith Bank closed September 30, 2023, with N1.9 trillion total equity from N1.31 trillion reported in 2022, while UBA declared N1.78 trillion total equity as of September 30, 2023, from N922.1 billion reported in the 2022 full financial year.

As Access Holdings announced N1.64 trillion total equity as of September 30, 2023, from N1.23 trillion reported in 2022, FBN Holdings Plc declared N1.37 trillion total equity as of nine months ended September 30, 2023, from N995.74 billiion in 2022.

In addition, Guaranty Trust Holding Company Plc reported N1.27 trillion total equity in the period under review from N931.15 billion in 2022, as Ecobank Transnational Incorporated posted N1.34 trillion total equity as of September 30, 2023, from N934.7billion in 2022.

The only financial institution with a deficit in total equity is Unity Bank Plc. The retail bank reported N190.22 billion as of September 30, 2023, from N274.95 billion deficit in 2022.

Providus Bank Limited, a commercial bank founded in 2016, was reported to have taken bold steps to acquire a majority stake in Unity Bank, as part of the former’s business expansion plan.

Unity Bank has been struggling to beef up its minimum capital requirement since 2017, has termed a business combination, and was being monitored by the CBN.

The CBN in 2004, announced the recapitalization of the banking sector from N2 billion to N25 billion with effect from 2005. The initiation of increasing the banks’ minimum capital base to N25 billion in 2006 led to a remarkable reduction in number of banks from 89 to 24.

Some of the banks merged and some were completely taken over by the stronger banks.

As of September 30, 2023, Stanbic IBTC Holdings Plc, Fidelity Bank Plc, FCMB Group Plc Sterling Financial Holdings Company Plc and Wema Bank Plc are listed below the N500 billion mark.

Only Fidelity Bank and Wema Bank have pursued new capital raising from their shareholders.

The Managing Director, of Fidelity Bank, Nneka Onyeali-Ikpe stated that the bank was growing in leaps and bounds and needed to expand its capital base to take advantage of emerging opportunities.

“We will also use the additional capital to enhance our technology infrastructure to enable us to serve more customers,” Onyeali-Ikpea added.

For Wema Bank, the management plans to execute a share placement to raise N40 billion in a move to scale total equity to N160 billion. For GTCO, it was in the news that the management is exploring a capital raise of up to N525 billion. Sources at GTCO have identified an urgent need to raise capital in line with an expected directive from the apex bank.

According to the source, the bank is considering raising between N450 billion and N525 billion through a public offer. The proceeds from the offer will be used to bolster its share capital and provide the bank with working capital.

However, an announcement is imminent, according to the source. The source also revealed that the bank will be adopting a “non-dilutive” approach in the capital raise, suggesting the public offer might take the form of a rights issue.

Some insiders at the bank suggest that the capital is required as it boosts the bank’s ability to “book large ticket transactions,” which would be difficult to finance with its current balance sheet.

GTBank also has the smallest number of deposits and Net Assets, with N6.3 trillion and N1.2 trillion respectively, as of September 2023.

Reports also indicate that the single obligor limits of most banks have been affected by the devaluation of the Naira, meaning they will need to shore up capital to partake in big-ticket lending.

Analysts opine that GTCO finds itself in a position where it may have to undertake a subordinate status in transactions it could have led.

Stakeholders welcome CBN’s directive

Industry analysts expect operators to begin, without delay, moves to raise fresh capital to bolster their respective institu­tions’ capital bases.

Reacting to banking sector recapitalisation, Nigeria’s first professor of capital market, Prof. Uche Uwaleke welcomed the banking sector recapitalisation move by the apex bank, stressing that capital is needed to finance big-ticket projects especially when the government is targeting a $1 trillion economy in a few years.

Uwaleke, who is also the President of the Capital Market Academics of Nigeria, however, expressed, “I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion.”

He said some Deposit Money Banks (DMBs), especially FBN Holdings Plc, Access Bank Plc, Zenith Bank Plc, Guaranty Trust Holding Plc, and UBA are already making efforts to increase their capital base.

He added “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.”

Capital market analyst and stockbroker, Charles Fakrogha, also welcomed the banking sector recapitalisation, stressing that the exercise is long overdue.

He, however, expressed that rather than CBN recapitalising the sector, the apex banking regulating body could have strengthened the sector’s corporate governance.

Fakrogha in his words said, “The financial sector, most especially banks have always dominated the stock market. Most Tier-1 and Tier-2 banks have exceeded whatever considerations the CBN may be considering right now. N25 billion is now N2.5 billion looking at the exchange rate. Having a direct impact on the stock market is what we cannot say right now.

“On a personal note, it is not about the recapitalisation that is the main issue affecting the sector but corporate governance and running these banks ethically.

“The last exercise 2015-2016 when we witnessed the emergency of merger banks but at the end of the day, some banks went down. It is a corporate governance issue that CBN should be looking at right now. Let’s have professionals running our financial institutions and let the apex bank be up and running with their operations.”insidebusiness


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