Recapitalisation fever grips banks

Analysts said N25 billion in 2004 exchange rate, which was about N100/$ to N25 billion, stood at $200 million. Today, the N25 billion at around N760/$ is substantially even lower than $32.43 million.

Ag CBN Governor, Folashodun Shonubi

Collins Nweze

Banks are seeking new capital to shore up their capital base depleted following forex reforms that saw the naira significantly devalued. Naira devaluation from N461/$ to around N760/$, has substantially weakened many banks’ capital base creating room for new wave of capitalisation. Although the lenders are still within the required capital adequacy ratio threshold, the new capital is to strengthen their operations and give them stronger competitive edge. Many banks have already indicated interest in raising new capital for capacity to take on large ticket transactions, writes Assistant Business Editor COLLINS NWEZE

Avoice seeking higher capital for banks recently reverberated from a distant land. It came from the World Bank/International Monetary Fund (IMF) meetings in Washington, United States (U.S.).

If they wish to compete globally, the banks, IMF said, must recapitalise and strengthen their capital base.

The Fund advised the banks to seek higher capital through recapitalisation and also tackle rising Non-Performing Loans (NPLs).

While Nigerian banks were trying to interpret the advice on capital raising, the Central Bank of Nigeria (CBN) devalued the naira after it unified all exchange rates into the Investors and Exporters (I&E) window from N461/$ to around N760/$.

Even previous CBN policy direction had recapitalisation of banks topping the list that include keeping inflation at single digit, and raising non-oil export by $200 billion in three to five years.

Under the recapitalisation plan, banks will raise their capital base above the N25 billion minimum level adopted in 2004.

The CBN guidelines stipulate that regional banks must have a minimum paid-up capital of N10 billion, national banks, N25 billion and banks with international operations N50 billion.

Analysts said N25 billion in 2004 exchange rate, which was about N100/$ to N25 billion, stood at $200 million.

Today, the N25 billion at around N760/$ is substantially even lower than $32.43 million.

The plan of the apex bank was 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.

The 2004 recapitalisation resulted in positioning Nigerian banks not only in Africa, but also being among the banks in the world in terms of capitalisation and it also increased or helped to strengthen the banking industry capacity to take on large ticket transactions- and those are some of the things we badly need today.

So far, many banks have made their intention to raise new capital public. Access Holding took the lead, after announcing in April the completion of a $300 million capital investment into its flagship subsidiary, Access Bank Plc.

Following Access Holding’s move, other banks have been prompted to assess their own capital needs and adopt proactive measures.

Fidelity Bank has a hybrid capital raising plan aimed at sourcing about N90 billion in new equity funds from existing and new shareholders.

In a regulatory filing at the Nigerian Exchange (NGX), Fidelity Bank indicated that it plans to issue 13.2 billion ordinary shares of 50 kobo each to new and existing investors would boost the bank’s capital base.

The board of directors has scheduled an extraordinary general meeting of shareholders for next month, to approve the planned capital raising.

Shareholders are expected to increase the share capital of the bank from N16 billion or 32 billion shares to N22.6 billion or 45.2 billion shares through creation of additional 13.2 billion ordinary shares of 50 kobo each.

Under the plan, the bank is seeking to float a public offer of 10 billion shares and a rights issue of 3.2 billion shares. The rights issue will be allotted on the basis of one new share for every 10 shares held.

At the current market valuation, market analysts estimated that the bank may be able to raise some N90 billion, although the final offer prices may be determined by the market situation and the extent of discount the bank prefers for its rights issue.

The bank explained that it needed the new capital to sustain its current strong growth trajectory in order to increase profitability, domestic and international expansion and enhancement of its digital capabilities.

“Advances in technology, the rapid evolution of the business of banking and changes in the operating landscape make it imperative that the bank remains agile, adaptable and properly positioned to respond appropriately to developments, whilst remaining a competitive and forward looking institution,” the bank stated.

According to the bank, the new hybrid capital raising is aimed at ensuring that the bank can take advantage of emerging business opportunities and secure long term profitability and competitive advantage, while ensuring increased shareholder value.

The board of the bank urged shareholders to approve the resolutions for the hybrid capital raising at the forthcoming meeting.

Shareholders of Ecobank Transnational Incorporated (ETI), the holding group for the Ecobank Group, have also approved a new capital raising for the group.

At the 35th Annual General Meeting (AGM) and an Extra Ordinary General Meeting in Lomé, Togo, shareholders approved the resolution authorising to raise senior-ranked debt, additional Tier 1, Tier 2-qualifying subordinated debt or a combination of any of these forms of instruments as the board of directors may deem appropriate.

Group Chairman, Ecobank Transnational Incorporated, Alain Nkontchou, said Ecobank was a powerhouse in the African banking landscape and has positioned to support and facilitate the growth and development of African businesses as they grasp the immense single market opportunities created by the African Continental Free Trade Area.

According to Nkontchou, Ecobank is the solution for SMEs and corporates as strength of its borderless payment, collection, working capital and financing solutions exemplifies this.

Chief Executive Officer, Ecobank Group, Jeremy Awori, said Ecobank in 2022 demonstrated strong financial results and performance, despite the challenging economic conditions of high interest rates, inflation, and Ghana’s debt restructuring.

FBN Holdings Plc is also said to be planning to sell some of its shares as it bids to raise additional capital.

Financial analysts expect that issues around new capital raising may be discussed at the bank’s Annual General Meeting (AGM) scheduled for August 15.

The capital raising transaction is expected to be a way of Rights Issue but will be ultimately determined by the directors, subject to obtaining the approvals of relevant regulatory authorities such as Central Bank of Nigeria (CBN) and Securities Exchange Commission (SEC). The capital raising may be either through Public Offer or Rights Issue.

Stakeholders’ stand

At the last Monetary Policy Committee (MPC) meeting held last week in Abuja, Acting CBN Governor, Folashodun Shonubi, explained that in the banking system, Financial Soundness Indicators (FSIs) remained stable and strong.

The Capital Adequacy Ratio (CAR) stood at 11.2 per cent, Non-Performing Loans (NPLs) ratio of 4.1 per cent and Liquidity Ratio (LR) of 48.4 per cent, as at end June 2023.

Forecasts for key macro-economic indicators for the economy indicate that the economy will continue to recover moderately through 2023 to grow by 2.66 per cent (CBN), 4.20 per cent (FGN) and 3.20 per cent (IMF).

In a writeup in one of his social media handles, Managing Director, Dexterpro Limited, Olusegun Badaru, said the devaluation of the naira leads to a decrease in the value of assets held by Nigerian banks, which can significantly impact their balance sheets, as the value of loans, investments, and other assets denominated in foreign currencies will decline when converted into naira.

“As a result, banks may face challenges in maintaining their capital adequacy ratios and meeting regulatory requirements. Moreover, the increased cost of doing business is another consequence of the naira devaluation. Banks often rely on foreign suppliers for various goods and services, including technology infrastructure, software licenses, and equipment. With a weaker naira, the cost of importing these essential resources will rise, putting additional strain on the banks’ operational expenses,” he said.

Badaru explained that another area of concern is the reduced lending capacity of Nigerian banks.

He said: “Naira devaluation typically leads to inflationary pressures, which erode the purchasing power of consumers and businesses. To mitigate the risk of default, banks may become more cautious in extending credit, resulting in a slowdown in lending activities. This can adversely affect economic growth as access to finance becomes more challenging for businesses and individuals,” he said.

He explained that recapitalisation serves several purposes. Firstly, it strengthens a bank’s capital base, improving its ability to absorb potential losses and maintain stability. Adequate capitalization provides a buffer against unexpected shocks and helps instill confidence in depositors, investors, and regulators.

“Secondly, recapitalization enables banks to meet regulatory requirements and comply with capital adequacy ratios set by regulatory authorities such as the Central Bank of Nigeria (CBN). Compliance with these ratios is crucial for maintaining a sound and resilient banking system,” he said.

Furthermore, he said recapitalization can provide banks with the necessary financial resources to support their growth, enhance their lending capacity, and invest in technology and infrastructure. It allows banks to seize opportunities, adapt to changing market conditions, and remain competitive in the industry.

Additionally, he said banks can explore alternative sources of funding, such as debt capital markets, to complement equity capital. This diversification of funding sources can help banks meet their capital requirements without solely relying on shareholder investments.

Other financial markets analysts said recapitalisation, would provide more funds for the banks to do business, especially consumer credit, mortgage finance, which they have not been given any consideration.

According to them, recapitalisation will give banks the power to take advantage of opportunities in the industry, and lend more to the real sector.

Many banks, they said, had eroded their capital due to the high level of NPLs, adding that recapitalisation will present a new lifeline for the banks.

“For us, recapitalisation of the banks is fine. I have no problem with that, rather, I see opportunities that it presents to the economy and the lenders. It will be a healthy development for the banks to recapitalise. Normally, from time to time, there is always a need for recapitalisation of the banking sector. For banks with regional operations, recapitalisation will enable them to raise the needed capital for more coverage,” they said.

According to them, recapitalisation would help the banks remove toxic assets from their balance sheets which make it difficult for them to lend.

The exercise, they added, will help the lenders attract new foreign and local investors that will provide the needed capital for them to take bigger roles, including investment in infrastructure.

They said the banks were not lending as expected, adding that recapitalisation will provide them with the right capital mix to lend to larger segments of the economy.

The Nation