Recapitalisation: More bank mergers expected, as foreign investors shun process

There are strong indications that more Nigerian banks may go the way of Unity and Providus banks, which recently received the approval of the Central Bank of Nigeria (CBN), to proceed on a planned merger, in a bid to survive the current recapitalisation heat.

It is even more so with growing uncertainties in the nation’s business environment making the stakes of the lenders everything but attractive to foreign investors, whose patronage would have more speedily provided the required boost.

The Nigerian banking sector has lately become a focal point for investment following a directive by the apex bank, mandating the banks to shore up their minimum capital base.

The CBN had in March directed deposit money banks (DMBs) in the country to recapitalize. According to the apex bank, commercial banks with international authorisation are to increase their capital base to N500bn and national banks to N200bn while those with regional authorisation are expected to achieve a N50bn capital floor. Similarly, non-interest banks with national and regional authorisations will need to increase their capital to N20bn and N10bn, respectively.

It explained that only the share capital and share premium items on the shareholder fund portion of the balance sheet will be recognized in this particular round of recapitalisation.

The apex bank said the banks must meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026, using the options of raising additional capital, mergers and acquisitions and license change.

This has seen 26 banks storm the capital markets and other investment platforms, seeking to raise funds to strengthen their financial stability and resilience.

The fresh capital raise is intended to bolster the sector’s ability to support economic growth, enhance its robustness against financial shocks, and ultimately contribute to a more stable and dynamic economic environment.

While more banks are still expected to enter the market to raise funds, five major banks are currently on course to raise N1.36tn in the capital market.

Zenith Bank has commenced plans to raise about N290bn in fresh capital, which is higher than the N230bn it needs to meet the fresh recapitalisation mandate of the CBN, while Fidelity Bank has expanded the scope of the bank’s capital raising from its initial target of N127.1bn to N205.45bn.

While Access Holdings is raising N351bn from existing shareholders while Guaranty Trust Holding Company is seeking N400.5bn from the public, FCMB Group has launched its public offer seeking to raise N110.9bn additional capital through the issuance of 15.2 billion shares at N7.30 per share.

According to the Afrinvest ‘2024 Nigerian Banking Sector Report’ currently, international banks, which include: Access, First Bank, FCMB, GTCo., First Bank, Fidelity, Zenith, and UBA, have together a capital of about N1.3 trillion and would require at least N2.2 trillion to reach the new capitalization requirements.

For the National licenced banks, which include: Ecobank, StanbicIBTC, Citibank, Keystone Bank, Standard Chartered, Sterling, Union Bank, Unity Bank, Polaris, Wema Optimus, and Premium trust bank, their gap, according to the report, is N1.6 trillion in additional capital to get them to N2.2 trillion. The report also showed a N545 billion capital gap for regional banks, N200 billion for merchant banks and N14 billion for non-interest banks.

Unlike under the 2004 recapitalisation when the entirety of shareholders’ funds was used, the CBN is using a distinctive definition of minimum capital as an addition of share capital and share premium under the ongoing recapitalization. With this approach, nearly all banks need to raise funds to retain their banking license.

Regulatory red-flag

However, in the days and weeks following the CBN recapitalisation directive and as the banks moved to the market to raise the required funds, there were regulations from the apex bank and the Federal Government that weighed on investors’ decisions.

The latest of the developments is a 70 percent windfall tax, which will be applied retrospectively to banks’ profits realized in the 2023 financial year and will extend to all foreign exchange profits accrued from the implementation of the new forex policy until the end of 2025.

Earlier, the CBN had excluded retained earnings from the recognized capital base of banks, a move, which Meristem Securities in its Banking Sector Update, suggests may be a deliberate attempt to capture the revaluation gains via the windfall tax. Recently, the CBN also directed banks to move funds in dormant accounts to its custody for safekeeping.

During a recent media parley in Lagos, the Chief Executive Officer of the National Economic Summit Group, Dr. Tayo Aduloju, expressed worry over, what he described, as the lack of cohesion in the policies of the government, especially as it pertains to the windfall tax.

“The problem with the conveyor belt of reforms is that when it is just coming out piece by piece, it’s hard to coordinate and, therefore, the outcome will have some unintended consequences”, Aduloju said.

“So at a time you are telling investors to bring funds into Nigeria, some reforms are creating a more difficult environment for those same investors. You have a tax holiday on food, on drugs, that will affect your import bill, but you also increase your demand for forex”.

A financial analyst, who preferred anonymity, observed that there was significant interest when the CBN made the announcement (recapitalization directive) but stressed that the interest had since slowed down.

“A lot of investors were looking forward to the offers but since then, a lot has happened – the pressure from CBN and the Federal Government. We have had restrictions on the use of retained earnings as a capital-raising instrument; we have seen recently the windfall tax and the dormant account. All of these increased regulatory actions are disincentives to investors”, the analyst said.

Recipe for merger

In a recent interview with Bloomberg, an analyst at S&P Global Ratings, Samira Mensah, noted that increase in the minimum capital requirement for banks to operate in Nigeria is likely to force the country’s smaller banks to combine with rivals before the 2026 deadline.

The analyst, who considers about half of Nigeria’s 26 lenders as small banks, said individual banks’ size and solvency level would determine how they end up in the exercise, with tier-one and mid-sized lenders likely to meet the deadline.

She added that investors were, particularly, concerned about banks currently benefiting from regulatory forbearance regarding their solvency ratios.

The analyst noted, “Top-tier banks, in particular, have always had a very strong track record of accessing the capital market and the Eurobond, so they are well known to investors.

“We speak to investors regularly and they are interested in which banks could potentially be under regulatory forbearance when it comes to solvency ratio as a result of the naira depreciation, so they are more worried about those banks.”

In April, the Chairman of the Bank Directors Association of Nigeria, Mustafa Chike-Obi, said it may be very difficult for some lenders to meet the recapitalisation requirement owing to an unfavourable operating environment that dampens the industry’s attraction to investors.

The apex bank at various fora had insisted that further capitalisation of banks in the country was for the common good of the nation.

The CBN Governor, Olayemi Cardoso, represented at a book presentation in Lagos recently by Mr. Philip Ikeazor, Deputy Governor, Financial System Stability Directorate, said, “Again, I think by coincidence, if you check the quantum of the capital, minimum capital levels that we require, it’s pretty similar, because international banks are moving from N50 billion to N500 billion, which is 10 times, similar to Soludo’s 12 and a half times, and national banks are moving from N25bn to N200bn, roughly about eight times. Why would you think this is a quantum leap?

“Basically, when you do consolidations, you will look at the macroeconomic headwinds, and the macroeconomic conditions on the ground, and, of course, apply your stress tests. And when you apply stress tests today, which I’m sure some of the big banks have done, they would have taken a guess, where the capital levels were going to land.

“If you compare the bank assets in Nigeria to GDP, and compare it to similar economies in Africa, you can see they were way behind. So, this exercise is also to strengthen the financial system, make it robust to be able to meet the expected headwinds.”