Analysts at ARM Research have said that achieving the disclosure deadline for the implementation of the recapitalization plan for Nigerian banks, set for April 30th, 2024, may not be attainable due to the regulatory complexities involved.
The financial analysts stated this in their equity research for the banking sector update on the recapitalization report seen by Nairmetrics.
- “We are of the view that the notice period given to disclose the implementation plan (April 30th, 2024) might not be attainable, given the regulation involved.
- However, we opine that the 24 months timeline given for the actual exercise gives room for banks to make the necessary adjustments by way of either seeking for fresh capital in the capital market, merging with other banks or considering downgrading its operating license,” they said.
- Overall, we posit that the increased capital requirements will help banks absorb losses without the risk of banking failure, allow for increased lending capacity and market confidence,” they said.
Exclusion of retained earnings
The analysts noted that the incorporation of retained earnings into the proposed capital raise for Nigerian banks would undermine the objectives of the recapitalization initiative.
They argue that many of these banks, particularly Tier-1 institutions, would require minimal or no additional capital raising.
- “After the release of the circular, there had been concerns around the exclusion of retained earnings in the new minimum capital calculation.
- However, we posit that the inclusion of retained earnings would have defeated the purpose of the recapitalization exercise as most of these banks would need minimal capital raising or none as is the case for Tier-1 banks.
- We should recall that in 2023, the CBN Governor, Mr Cardoso, at the 60th anniversary of the Chartered Institute of Bankers of Nigeria (CIBN) stated that the banks do not have sufficient capital to service a USD1trillion economy, an ambition of the President Bola Ahmed Tinubu administration,” they said.
Available options to meet the minimum capital requirement
They noted that the recapitalization exercise is long overdue, considering the last time it was done in 2005 and the devaluation of the Naira (approx. NGN132/1USD in 2005 vs. NGN1,300/1USD in 2024) within the period.
- “We could see all available options to meet the minimum capital requirement play out in the banking financial system within the stated timeframe,” they said.
The analysts stated that options such as Mergers and acquisitions as well as Injection of fresh equity capital through private placements, rights issues, and/or offers for subscription are very likely.
They noted that elsewhere, before the release of the bank recapitalization exercise, Access Holdings had announced their plans to raise additional capital of N365 billion.
Effect of the FX revaluation policy and PMS subsidy removal
According to them, the passthrough effect of the FX revaluation policy and PMS subsidy removal on the Nigerian economy led to the deterioration of the quality of banking loans and consequently lower overall asset quality.
- “Although, the policy saw the banks record abnormal profits during the period. We opine that the exclusion of retained earnings in determining the minimum capital aligns with the CBN’s goal of ensuring the banks have a robust capital base to absorb potential losses and avoid systemic shocks,” they said.
