Credit ratings agency, Agusto & Co, has stated that the banking recapitalisation exercise is necessary to provide the funding needed to drive the $1 trillion economy the current administration is trying to achieve.
The agency pointed out that an inflow of N4 trillion is expected to meet the new capital regulation and that it anticipates significant pressure on the Central Bank of Nigeria (CBN) to use the total shareholders’ funds for the computation of regulatory capital or at least to include retained earnings.
This was made known in its position on the on the new rule introduced by the CBN. The CBN on 28 March, 2024 reviewed the capital requirement for commercial banks, merchant banks and non-interest banks operating in Nigeria.
Agusto & Co pointed out that should the retained earnings be used for the computation, it expects a reduction in the capital inflow to N1.5 trillion.
The firm noted that given the information in the available financial statements, none of the banks have paid-up capital above the proposed minimum but considering the N10 billion raised by Jaiz Bank Plc (a non-interest bank which requires a relatively less stringent paid-up capital requirement) through a private placement in March 2024, it is the only bank with paid-up capital exceeding the proposed regulatory minimum.
It further noted that the proposed recapitalisation exercise was with merit, given the massive naira devaluation since the last regulatory-induced recapitalisation exercise was implemented in 2004.
It expressed optimism that the recapitalisation exercise will strengthen the Industry’s capital base and provide additional buffers to navigate the turbulent operating climate.
“Based on the experience of the last regulatory-induced recapitalisation exercise, we believe new sectors will be created while some existing industries will be expanded as the banks seeks to generate returns for the enlarged capital base. Thus, addressing the declining consumer purchasing power, strengthening the judiciary and other institutions that ensure the sanctity of contracts, de-risking some sectors of the economy, and reducing the bureaucratic bottlenecks at various government institutions and other challenges will be necessary to support the anticipated $1 trillion economy. The banks will also need to be innovative and increase de-risking activities in businesses and industries that are attractive but above the risk threshold.
“The recapitalisation exercise is expected to significantly increase the size of the banking industry and the complexity of transactions supported. Thus, we believe upscaling the CBN to effectively supervise a banking industry with such size is imperative; given the events that occurred following the 2004 recapitalisation exercise.
“Should the recapitalisation exercise be implemented as stated by the CBN, we anticipate a revolution in the banking industry which could exceed those witnessed during the 2004 exercise. New shareholders and institutional investors are expected to take advantage of the available opportunities. Given the low valuation of Nigeria banks (in USD terms), the relatively good performance of the banks and the appetite for banking licenses as reflected in the number of applications pending with the CBN, we believe the Industry should be able to attract the needed investments to shore up the capital base. We also anticipate some mergers and acquisitions similar (sic) 2004 when the regulation-induced recapitalisation exercise reduced the number of banks to 25 from 89,” it added.
Agusto & Co said the recapitalisation exercise, in its view, was needed to strengthen the banking industry, support the rejuvenation of the economy and attract foreign currency inflow.
It, however, said adequate measures must be instituted to ensure that the exercise is not used as an avenue for laundering illicit funds and also urged the CBN ensure that each bank has the adequate governance structure and risk management framework to support the new financial institution.
