Onome Amuge
A new report by multinational professional services partnership Ernst and Young (EY), has drawn attention to the fact that as many as 17 of Nigeria’s 24 deposit money banks (DMBs) may not be able to meet the capital requirements proposed by the Central Bank of Nigeria (CBN).
The report, which is titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalization,” highlights the impact of a possible increase in the minimum capital base for commercial banks, from N25 billion to N375 billion. If the CBN were to go ahead with the proposed increase, EY cautions, it could potentially leave 17 banks in the cold.
The CBN governor, Olayemi Cardoso, has previously indicated that the apex bank is considering raising the minimum capital base for banks as part of its efforts to make Nigerian banks more resilient and enable them to contribute to the country’s economic growth.
Under the current guidelines, the minimum capital base for banks varies depending on the type of banking licence: N10 billion for regional banks, N25 billion for national banks, and N50 billion for international banks. While no official decision has been made on whether to increase the capital base, Cardoso has said that such an increase would support the CBN’s goal of reaching a $1 trillion economy.
EY’s report pointed out that some banks may need to explore various options to raise their capital base in order to meet the new requirements. These options include mergers and acquisitions, initial public offerings (IPOs), placements and/or rights issues, and retained earnings.
Despite the soundness of the banking sector as of 2023, EY notes that the new capital requirements could have a significant impact on the sector, possibly leading to a wave of consolidation similar to the one that followed the 2004/2005 recapitalisation exercise.
While a repeat of the widespread consolidation seen in the 2004/2005 period is not anticipated, EY noted that the new capital requirements could still spur some mergers and acquisitions (M&A) in the banking sector.
However, there are speculations that the impact may be less pronounced than it was in the past, given the overall stronger financial positions of banks and the fact that several M&A transactions have already taken place in the sector in recent years.
“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three licence types) that may fall below the new minimum capital thresholds.
“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital,” it stated.
The report highlighted that the CBN’s decision to increase the capital base of banks is linked to the recent weakening of the naira, which saw the exchange rate increase from N132.9/$ in 2005 to over N1,400/$ currently. This devaluation has put pressure on banks and other businesses, as it has led to higher costs and reduced the value of assets denominated in naira. The CBN is hoping that the proposed increase in capital requirements will help to strengthen the banking sector and offset some of the effects of the naira’s devaluation.
EY suggested that, based on the significant difference between the exchange rate in 2005 and the current rate, the CBN’s plan to increase the capital requirements may entail a multiplier effect of at least 10 times.
According to the report, the worst-case scenario would be a 15x capital multiplier for the 24 banks based on their current licences. This scenario, it noted, would consider the current capital levels of each bank, as well as four different scenarios for recapitalisation, based on the type of banking licence each bank holds.
