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By Chinwendu Obienyi
Nigerian banks are in a race to meet the new capital requirements set by the Central Bank of Nigeria (CBN). This follows the approval of fund-raising initiatives by shareholders to help banks achieve these targets.
The CBN underscores that recapitalisation is essential to support Nigeria’s ambitious economic growth plans, aiming for a $1 trillion economy by 2030. These measures are also crucial for maintaining financial stability and ensuring banks can absorb economic shocks. “Bigger banks with larger capital bases and capacity can underwrite larger levels of credit, which is critical to lubricate and catalyze the economy’s growth,” the CBN stated.
The new capital base requirements are substantial: Commercial banks with international licenses: N500 billion (up from N50 billion); National lenders: N200 billion (up from N25 billion); Regional lenders: N50 billion (up from N10 billion); Non-interest lenders: N20 billion (from N5 billion); Regional non-interest lenders: N10 billion (from N5 billion).
All banks, including tier-1 and tier-2, are ramping up their capitalization to enhance lending and bolster their competitiveness regionally and internationally. Shareholders have approved these moves during various annual general meetings (AGMs).
By December 2023, the largest Nigerian banks had a combined market capitalization of N4.2 trillion. In January 2024, tier-1 banks hit the N1 trillion capitalization mark, driven by investor appetite. However, by April 2024, their market capitalization had dropped by N2.27 trillion.
Despite these fluctuations, bank stocks are currently appreciating on the Nigerian Exchange (NGX), even though the NGX Banking Index is down by 8.47% year-to-date. For instance, Fidelity Bank Plc, Access Holdings Plc, and Zenith Bank Plc accounted for 1.351 billion shares worth N20.222 billion in 6,631 deals, contributing significantly to total equity turnover volume and value in the previous week.
The Financial Services Industry led the activity chart with 2.176 billion shares valued at N31.741 billion traded in 17,295 deals, contributing 82.64% and 72.72% to total equity turnover volume and value respectively.
However, the recapitalisation efforts face several challenges, including volatile market conditions, regulatory compliance issues, and negative investor sentiment. Market operators attribute the negative position of the NGX Banking Index to these factors. They note that the potential for additional equity issuances at discounted prices has made existing shareholders hesitant to offload their holdings.
Olatunde Amolegbe, Managing Director of Arthur Stevens Asset Management Limited, explained, “The announcement and timeline by CBN opened the eyes of investors. They saw that these banks would come to the market for capital raising. The issuance of additional shares is typically at a discounted market price. Existing shareholders might offload their holdings to participate in the new issuance.”
David Adonri, Vice-Chairman of Highcap Securities, noted that investor disappointment stemmed from CBN’s directive that banks should not use gains from foreign currency revaluation to pay dividends. This led to a mass exodus from banking stocks. “It was because the dividend payout fell below investors’ expectations. Many investors rushed into the banking sector after the FX windfall, expecting major gains to be shared. But the CBN restrained banks from paying out dividends from the FX gains,” he said.
Damilare Asimiyu, Macroeconomic Strategist at Afrinvest, recalled a similar scenario when the naira depreciated significantly in 2005, slashing the value of banks’ assets. He predicted that all tier-1 banks would likely raise the necessary funds cleanly, while tier-2 banks might see consolidation.
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In conclusion, Nigerian banks are actively working to meet the CBN’s capital requirements through various fundraising strategies. These efforts are critical for maintaining the stability and resilience of the banking sector, especially in the face of economic challenges.
