April 2, 2024/CSL Research
Over the past weekend, the Central Bank of Nigeria (CBN) made significant announcements regarding the capital requirements for various categories of banks. The changes entail a substantial increase in minimum capital bases across board: Commercial banks with international authorization must now maintain a minimum capital base of N500bn, up from the previous N50bn
requirement.
National banks are required to increase their capital to N200bn from the earlier N25bn while regional banks are expected to raise their minimum capital base to N50bn, a significant jump from the previous N10bn threshold. Merchant banks are also affected by the new regulations, with their minimum capital requirement being raised to N50 billion. Non-interest banks, both with national and regional authorizations, are mandated to strengthen their capital to N20bn and N10bn respectively.
It is noteworthy that the CBN emphasized that banks must comply with these new capital requirements within a timeframe of 24 months, starting from 1 April 2024. More importantly, the assessment will focus solely on paid-up capital and share premium.
In November last year, the Governor of the CBN hinted at the possibility of further increasing the minimum capital base for banks. The Governor indicated that such an increase might be necessary due to many banks not being sufficiently capitalized to support an economy aiming for a GDP size of US$1 trillion, a 2026 target set by the Federal Government of Nigeria. The proposed hike in the capital base comes almost twenty years after the CBN’s 2004 banking reform, which raised the prevailing capital base from N2bn to N25bn.
However, multiple devaluations have significantly eroded the value of the N25bn figure in dollar term, which is currently equivalent to approximately US$19.1 million (using an exchange rate of N1309/US$ as of Thursday, March 28, 2024), significantly lower than c. N189.29bn when the exchange rate was 132.07/US$. There are also views that the CBN has decided to go on with this recapitalisation now, despite reported stability of the banks, in the hope that banks can attract investments in foreign currency to support recent drive to stabilise the Naira. This, we believe is unlikely in the near term.
While the 2004 recapitalization exercise resulted in numerous mergers and acquisitions (M&A), reducing the number of banks in the country from 89 to 25, we anticipate that the current exercise may see fewer mergers. There are a few reasons for this: firstly, there’s already a significantly smaller number of banks following the previous consolidation. Secondly, the banks have been granted a longer timeframe to meet the new capital requirements.
Thirdly, the current size and stability of the tier 1 banks will likely make them reluctant to see acquisition as the best option, given the complexities involved. Deposit Money Banks (DMBs) have a variety of recapitalization options available to them to raise the necessary funds such as Initial Public Offerings (IPOs), right issues and private placements. With the announcement of Access Bank’s right issue, it may be safe to say that many eligible banks will likely see that as a first option.
Additionally, banks may choose to upgrade or downgrade their operating licences. This may be a strong possibility for banks with minimal international operations. Furthermore, we believe holding companies can potentially source debt and inject it into their banking subsidiaries as equity capital, subject to approval by the CBN. This flexibility in recapitalization options may reduce the necessity for widespread mergers and acquisitions in our view.
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