FILLIP TO BANKS’ RECAPITALIZATION

The Central Bank of Nigeria (CBN) has again sent the nation’s banks racing on the labyrinthine tracks of recapitalization. The last time they travelled that road was some 19 years ago. That was in 2005 during the Olusegun Obasanjo administration when the Prof. Charles Soludo-led CBN supervised a ritzy and massive consolidation exercise that reduced the then 89 banks to 24.

The apex bank, this time in setting the parameters of the exercise, which received a rousing acclamation of the banks and financial experts, erected some buffers on the tracks for banks to navigate relatively easily as they scout in the market of funds. Some loony areas in the parameters are, however, stirring industry fuss.

The CBN came out with a statement on Thursday, March 28, 2024, which reviewed the minimum paid-up capital for commercial banks, merchant banks and non-interest banks in the country.

The recapitalization, in the apex bank’s estimation, is expedient for banks to enhance their resilience, solvency and capacity, so they could continue to support the growth of the nation’s economy in the face of “the prevailing macroeconomic challenges” accentuated by “external and domestic shocks and headwinds.”

Very few keen industry watchers would, however, be taken aback by the recapitalization policy in view of the dwindling fortune of the naira, which has overtime whittled banks’ capital base, and the concomitant economic downturn. Hence, the massive reform through consolidation is CBN’s robust response to the impact of the recurrent devaluation of the national currency on the banks’ capital.

The exercise is aimed at building enough capital buffer for the banking industry to support the $1 trillion economy being envisioned by the Tinubu administration by 2030. And it is, of course, to promote financial stability.

In the apex bank’s statement, signed by its Director, Financial Policy and Regulations Department, Haruna B. Mustafa, commercial banks, which have international authorization are to recapitalize to the tune of a minimum capital of N500 billion. And the minimum capital requirement for commercial banks that have national authorization is N200billion

Regional commercial banks are to shore up their minimum paid-up capital to the tune of N50 billion, while for national merchant banks, it is N50 billion as well. It is N20 billion for non-interest banks with national authorization and N10 billion for regional non-interest banks.

The apex bank, however, changed the composition of the regulatory capital for the banks this time. Shareholders’ funds were used as regulatory capital in the previous exercise. But only the paid-up capital, made up of the share capital and share premium, is allowed as regulatory capital this time.

Other components of the shareholders’ funds, which include retained earnings and additional tier-1(AT-1) instruments are to be excluded in the computation of the minimum capital requirements in the latest exercise.
New banks— that is, those whose licences are still being processed— are required to meet the new conditions spelt out in the recapitalization programme as part of the requirements to fulfill before a banking licence can be issued to them. Existing banks and those with approval-in-principle(AIP) have 24 months, beginning from April 1,2024, to shore up their minimum paid-up capital. The deadline is March 31, 2026.

They are given the following options to source funds: 

1)Injecting new capital through private placements, right issues and/or offer for subscription.
2)Mergers and acquisitions.
3)Upgrade or downgrade of licence authorization. Banks whose paid-up capital is below the proposed minimum are required to submit their plan to shore up the shortfall to the CBN not later than April 30,2024.

The recapitalization policy landed to a tumultuous applause of the Deposit Money Banks (DMBs) and financial experts. They are unanimous in their surmise that the injection of fresh capital into the banks is imperative at this time in view of the dynamic evolution of the banking industry, on one hand, and the shocks and headwinds that have assailed the operating climate since the last recapitalization exercise, on the other.

The Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), the umbrella platform of all  banks’ spokespersons and the voice of the industry, in a statement, commended the CBN for its thoughtfulness on the recapitalization modalities.

The statement, signed by its President, Rasheed Bolarinwa, noted that while Nigerian banks are globally regarded as safe, resilient and thriving, there is always room for growth. The banks, through ACAMB, then allayed the fears of the banking public concerning the banks’ capability to meet the requirements.

“As it stands,” they assure, “banks are on the same page and as such, there is no need for any fear, as the banks have the capacity to meet the recapitalization in line with allowable options stipulated by the apex bank.”

They added: “All facts point to a win-win for the Nigerian banks, the financial market and the economy under capitalization. The Nigerian capital market where banks are the most influential group, has the depth to meet the capital requirements of banks.
“The extended timeline till 2026 provides ample opportunity for each bank to follow through its capitalization plan without undue crowding effect. With their background of good returns and liquidity, banking stocks are the toasts of domestic and foreign investors.”

The Centre for the Promotion of Private Enterprise (CPPE) also lauded the CBN for the recapitalization, adding that since the last recapitalization 19 years ago, the value of banks’ minimum capital has been significantly eroded. The CPPE said for example, the official exchange rate in 2005 when the last recapitalization took place was about N130 to the dollar.

“This means that the N25 billion capital for a national bank, for instance, was equivalent to $192 million. The naira equivalent today is N250 billion. For the international banking licence, it would be about $384 million, an equivalent of about N500 billion. The reality is that the capitalization requirement has not increased materially in real terms. That is, when adjusted for inflation,” CPPE noted.

The statement signed by its director, Muda Yusuf, added: “The real issue is that inflation has weakened the value of money overtime, which makes capitalization imperative and inevitable. The essence is to ensure the safety of the financial system, deepen the resilience of the banking system and reposition the banks to support growth.

Yusuf said reports from the CBN attest to the fact that Nigerian banks have good soundness indicators. “Nigerian banks,” he attests, “are adjudged to be generally healthy. But this does not diminish the need for the regulatory authority to ensure that this soundness and stability are preserved and improved upon, especially because of the recent macroeconomic headwinds.”

Augusto & Co, a research, credit rating and credit risk management firm, also gave the CBN a thumbs up for the exercise on the same premise of the massive naira devaluation since the last regulation-induced recapitalization was implemented in 2005.

It noted that “Although some banks implemented capital raising exercises subsequently while also growing the capital base organically through retained earnings, the capital base has continued to decline in USD terms. Conversely, the persistent naira devaluation and the harsh operating environment have continued to bloat the risk- weight assets of Nigerian banks.”

The financial firm, therefore, believes that the recapitalization will strengthen the industry’s capital base and provide additional buffers to navigate the turbulent operating climate.

However, one of the grey areas that financial experts see as a blight on the recapitalization requirements and for which the apex bank is being given blistering knocks, is the exclusion of the reserves of the banks and limiting their options for sourcing funds to share capital and share premium.

For the regulatory CBN, this appears to be deliberate. And its motive is crystal clear. It actually wants the banks to capitalize afresh to make them stronger, healthier and bigger. But experts are not comfortable with the apex bank on this.

For example, a chartered financial analyst, Femi Ademola, told a national daily that although the announcement of the recapitalization was not unexpected, the exclusion of additional tier—1, such as preference shares and convertible debt as well as the banks’ other reserves, especially retained earnings, came as a surprise.
Ademola, who is the Managing Director of AIICO Capital, counselled: “Since retained earnings are distributable earnings that belong to the shareholders, it is expected that it should count as part of the capital available to run the business.”

Another financial expert, Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management, gave the CBN a roasting, positing that the peculiar definition of minimum capital by the CBN “implies that the banks will need to raise fresh funds because if retained earnings had been allowed, they may not even need to come to the(capital)market at all to meet the new requirements.”

Amolegbe, who is a former President of the Chartered Institute of Brokers(CIS), said: “We now have a situation where virtually all the banks have about 50 per cent of the requirements and they will all, on aggregate, need a cumulative of more than N2 trillion of fresh capital to remain in business.”
In our view, like we noted earlier, the CBN may have deliberately excluded the reserves from the options available to the banks, to make them source fresh funds. That is, perhaps, why the apex bank provided the buffer of a flexible timeline of two years, as a way of incentivising the banks and allowing them ample time to navigate without forced options.

While we laud the CBN for its thoughtfulness in putting the whole gamut of recapitalization parameters together and the adequate timeline allowed to meet the capital requirements, we also share the views of some of the experts, who have counselled the apex bank to make the exercise smoother for banks by tinkering with the modalities to, if possible, include retained earnings among the options for raising their minimum capital requirements.

This will significantly ease navigation and put paid to shocks, dislocations and disruptions in the banking system as well as minimise, if not totally eliminate, possible mergers and acquisitions, as the wheels of recapitalization whirr slowly but seamlessly.

In the final analysis, the overall potential outlook of the banks post-recapitalization that we foresee is positively robust and rock solid. It is, therefore, a sound and laudable policy that will boost the growth of the economy, especially now that it is undergoing rejuvenation.

The injection of the proposed volume of capital into the banking system, we believe, will significantly increase the size of the banks and strengthen their muscles to play fairly well in the global market and attract foreign currency flow. Besides, as envisaged, it will also provide the needed funding to drive the $1 trillion economy being planned by the current administration by 2030.