Banks May Explore Licence Downgrade For New Capital Base

As the board of banks sit to deliberate on the options they can explore to meet the new capital requirements, analysts and operators in the banking industry have said some may be forced to consider downgrading their licences.

The CBN had on Thursday announced new minimum capital requirements for commercial banks, non-interest banks and merchant banks in the country which they have to meet by March 31, 2026, a two-year time frame. 

However, the banks have been mandated to lay their recapitalisation plans before the apex bank by April 31, 2024.

Experts say that besides the options of raising  fresh capital through public offers, private placement, mergers and acquisitions among others; some banks may be pushed to consider reclassification which could mean the downgrading of banking licences. 

Recall that LEADERSHIP reported that 25 banks operating in Nigeria would need to raise not less than N3.894 trillion in fresh capital to meet up with the new minimum capital base. According to the new requirement, commercial banks with international licences are required to have a capital base of N500 billion while their national and regional counterparts are required to have capital base of N200 billion and N50 billion respectively.

Similarly, the capital base of national non-interest banks were raised to N20 billion while that of regional non-interest was raised to N10 billion. Merchant banks capital base was also raised to N50 billion.

With almost all the banks faced with a shortfall in capital, sources in the banking industry say, the top five banks in the country may be the only ones that would be able to attract foreign investors and raise the required N500 billion capital.

Experts believe that the top five named FUGAZ, First Bank, United Bank for Africa, Guaranty Trust Bank, Access Bank and Zenith Bank would be the toast of investors whilst First City Monument Bank and Fidelity Bank may have to consider a downgrade to national banking licence.

Recapitalisation: Business Restriction Looms For Low Capitalised Insurers

A source in the banking industry noted that for FUGAZ, the major shareholders will easily fund the banks with foreign exchange that they have stashed. “They will recapitalise their banks with foreign currency inflows. These foreign currency inflows will further assist in shoring up the value of the naira somehow. ”However, according to another source, it will be difficult for an individual to pump so much money into any bank anyhow now because regulatory guideline does not permit an individual to own more than five percent stake in a bank now. Moreso, he said, injection of slush fund into any bank would expose such individuals.Commenting on this, head of Financial Institutions at Agusto & Co, Ayokunle Olubunmi, noted that for many banks asides the top five, their options would be to merge or reclassify their licences. According to him, the first thing that most of them will consider is if they want to raise capital or they want to partner with somebody.

“For those that have a significant amount of money to raise, they will be thinking of probably going ahead to raise the fund or look for another bank that also has that challenge, they come together and have a formidable entity.

“Another challenge that a lot of banks will face will be getting the right partners, particularly those that want to go the route of mergers, because if they merge with a bank that they don’t share the same vision with, the institution will fail from day one. After the last consolidation, there were some that from day one the board was always fighting.”

New CBN Capital: 25 Banks Need N3.89trn Fresh Funds To Meet Requirements

He noted further that although the situation is improving, attracting foreign investors might be a challenge for some of the banks adding that the banks cannot afford to have foreign portfolio investors, rather they will have to seek out “institutional investors who will be here for the long haul. Investments in Nigeria are not for the short term, particularly for banks. They need to understand the terrain. And it is not everyone that understands Nigeria’s environment. So, that might be a challenge.”

For the merchant banks, he said “there are some banks that the investors will say are not worth it. Like the merchant banks which have not been profitable and they have a very low capital base. It is also the same for banks that are not that profitable. It will be a challenge because the current investors will not want to invest more in something that is not that profitable and if they are going to get foreign investors they might not be able to get a good valuation on the banks.

“For the banks that are doing well it should not be a burden for them to get the right investors. But then if you look at the valuation of Nigerian banks in dollar terms it is actually low. If their valuation is converted to dollars and compared to their counterparts outside the country. Also there is the challenge of devaluation because no matter how profitable you are, by the time it is converted to dollars it is no longer as big as it seems.”

Olubunmi further posited that merchant banks may be forced to either close shop or raise capital and convert their licences to regional banks as merchant banks have not been profitable in the country. “If you look at the international banks, the temptation for FCMB and Fidelity to downgrade to national banks is higher because of the huge amount that they actually need.

“It is higher for fidelity because they have just one subsidiary, Fidelity UK, however for FCMB, they have had FCMB UK for a long while but then the temptation to downgrade is still high. For Ecobank, the performance has not been all that great and the resolve of ETI (the parent body of the banks) to continually support Ecobank will be tested this time.

“For the new banks, a lot of them, particularly those with national licences, the temptation for them to downsize to regional banks is very high. Luckily for some of them, they don’t even have branches in more than two regions so they can first scale down and then upscale as they raise more capital.”

Also commenting, professor of Law and developmental economist Tayo Bello, whilst noting that the recapitalisation exercise for banks is already long overdue, considering the devaluation of the naira noted that many banks will not be able to survive the recapitalisation.

“Not all of them will be able to cross the hurdle. When Soludo brought up the recapitalisation exercise then, I think the number of banks in the economy was more than 50 then, before they were reduced to 20. So, this one, I can predict maybe they will come down to 15 or above that.”

The professor affirmed that for the FUGAZ, “they will remain because they have the strength to maintain it. A lot of people that kept their money, will bring the money out. And they will all come to the capital market.”

Noting that the recapitalisation will spike activities at the capital market, he said “they will be coming to the capital market to raise fresh capital and also right issues. I expect that the share prices will have gone up before they do that.”

 Based on this, under the commercial banks with international authorisation of N500 billion; Access Bank, Fidelity Bank, FCMB, First Bank, Guaranty Trust Bank, Union Bank, United Bank for Africa and Zenith have with a total amount of paid-up capital and share premium to be N251.81 billion, N129.71 billion, N125.29 billion, N251.34 billion, N138.19 billion, N148.09, N115.82 billion, and N270.75 billion, respectively. This shows that the institutions will be raising capital to meet up with the new capital base of N248.19 billion, N370.30 billion, N374.71 billion, N248.66 billion, N361.81 billion, N351.91 billion, N384.19 billion, and N229.25 billion, respectively.

Also, out of the Commercial Banks operating all over the country, EcoBank Nigeria met the new capital base as the Bank’s issued share capital and share premium stood at N353.51 billion exceeding the N200 billion new capital base. The paid-up capital and share premium of CitiBank Nigeria Limited (N14.44 billion), Polaris Bank (N50.43 billion), Stanbic IBTC Bank (N109.26 billion), Standard Chartered Bank Limited (N45.42 billion), Sterling Bank (N57.15 billion), Titan Trust Bank (N29.20 billion), Unity Bank (N16.33 billion), and Wema Bank (N15.13 billion) will be adding a new capital of N185.56 billion, N149.57 billion, N90.74 billion, N154.58 billion, N142.85 billion, N170.80 billion, N183.67 billion, and N184.87 billion respectively

Meanwhile, under the regional non-interest banking with a new capital base of N10 billion, TAJ Bank and Lotus Bank met the requirement by N14.06 billion and N13.03 billion respectively.

Based on the stipulation of the CBN, Access Corporation, the parent company of Access Bank has paid-up capital and share premium of N251.811 billion according to its 2023 full-year result released yesterday hence a shortfall of N248.189 billion.

FBN Holdings, the parent company of FirstBank has paid-up capital and share premium of N251.3 billion, hence a shortfall of N248.66 billion, according to its Q3’ 23 results. The paid-up capital and share premium of GTHoldco, the parent company of GTBank stands at N138.186 billion as of Q3’23, hence a shortfall of N361.814 billion

UBA has paid-up capital and share premium of N115.815 billion, hence a shortfall of N384.185 billion according to its Q3’23 Zenith Bank has a paid-up capital and share premium of N270.745 billion, hence a shortfall of N229.255 billion.

 

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