Banks face N15bn bill over CBN recapitalisation plan

By Moses Obajemu

Nigerian banks, now bracing up for an impending recapitalisation exercise whose hint was given last week by Godwin Emefiele, governor of the Central Bank of Nigeria, could spend as much as N15 billion on cost of the exercise, banking industry sources told business a.m. over the weekend.

The costs are listed as consultant related fees, cost of system integration, culture alignment, training, as well as other sundry costs.

Experts knowledgeable on the matter said most of the banks may raise fresh capital via equity and debt, both of which involve costs such as interest expense in the case of debt and filing cost, payment to advisers and consultants in the case of equity.

They noted that the cost of the 2004 recapitalisation exercise was huge. In most cases, they said the process may lead to merger and acquisition, which will require the engagement of professionals for their services in carrying out due diligence tests, advisory services, valuation services, among others.

They, therefore, said banks must choose the best and most cost effective method of raising capital so that the cost of raising the capital will not deplete  what is raised in the final analysis.

While unveiling his five –year action plan from now to 2023, reappointed CBN governor, Godwin Emefiele, underscored the need for stability of the banking system, the need for public confidence in the sector and above all, the need to strengthen the banks to be able to take on large ticket transactions.

According to him, the 2004 recapitalisation undertaken by former CBN governor, Charles Soludo has weakened, substantially.

His words, “In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will therefore be required to maintain higher level of capital, as well as, liquid assets in order to reduce the impact of an economic crisis on the financial system.

“It was governor (Chukwuma) Soludo, in 2004 who did the last recapitalisation we had. Moving the capitalisation from N2 billion to N25 billion. I must commend that effort because it resulted in positioning Nigerian banks, not only in Africa, but to become among top banks in the world, in terms of capitalisation.

“It also helped  strengthen the banks to take on large transactions and those are the things they badly needed. Today, when you relate N25 billion in 2001 exchange rate, which was about N100/$1, N25 billion was about $200 million . Today if you relate N25 billion at N360/$1, you can see that it is substantially lower than $75 million ,” Emefiele explained.

However, some financial industry analysts have called for caution during the recapitalization exercise to avoid  creating unintended and dysfunctional outcomes.

While the Chartered Institute of Bankers of Nigeria (CIBN) lauded the plan, saying it would strengthen the banks to compete and be competitive internationally, some stakeholders said it would bring both the good and the bad, with others describing it as a doubled edged sword.

Segun Abidoye, an analyst at FBNQuest said: “While on the one hand, enhanced capital buffers will translate to improved stability of the financial sector, adding capital, by extension, will likely result in a reduction in banks’ ROAEs post-recapitalisation. It is impossible to provide extensive commentary on the ROAE reduction risk given the absence of a numeric recapitalisation target.

“However, assuming the banks are required to increase their capital base by c.N50bn i.e. an absolute increase, and credit extension remains within our forecast trajectory, we expect to see an average ROAE reduction of c.100bps.

“A relative increase is more likely, keeping with the Basel Accord trends. All things being equal, Nigerian banks should be able to take on transactions of larger sizes. We also expect the drive for financial inclusion by the CBN and the imminent kick-off of payment service banks (PSB) to result in pressure for the banks on the e-payment front due to increased competition from Telco-backed PSBs. We should add that the financial inclusion target appears aggressive,” he commented.

While lauding the CBN’s objective of achieving double-digit growth, they however said a potential downside risk to the objective is a slump in oil prices, particularly against the backdrop of limited diversification of government revenues.

Muda Yusuf, director general of the Lagos Chamber of Commerce and Industry lauded the plan but called for caution.

“The idea of recapitalization of banks is not a bad idea.  It would strengthen the capacity of banks to support the economy better, especially with regards to large projects.  It will also be beneficial in bolstering the capacity of the banks to withstand macroeconomic shocks.

“However, the recapitalization programme should be undertaken in the manner that would not inflict damaging disruptions to the banking system.  The process must be properly thought through to ensure minimum shocks on the financial system. Care should be taken not to trigger a confidence crisis in the banking system”, he said.