$1tn economy: Mergers, acquisitions loom as CBN plans banks’ recapitalization

Mergers and acquisitions loom as Nigeria’s Deposit Money Banks brace for another round of recapitalization in line with the country’s $1 trillion economy target.

Last week, the Central Bank of Nigeria Governor, Olayemi Cardoso, in his speech at the 50th-anniversary dinner of the Chartered Institute of Bankers of Nigeria, CIBN, in Lagos, announced plans to recapitalize DMBs.

Cardoso said the move is crucial to test the adequacy of Nigeria’s banking industry and to achieve the objective of President Bola Ahmed Tinubu’s projected $1 trillion economy.

The development comes nearly six months after the country’s currency, the Naira, was floated against other currencies at the foreign exchange market, losing over 40 per cent of its value from N463 per USD in the official market to over 750/$1.

Invariably, this singular act of unifying the country’s exchange rate on June 14 signalled a call for banks’ capital base revaluation.

Recall that eighteen years ago, when Nigeria’s banks were recapitalized from N2 billion to 25 billion, the country’s exchange rate stood at N100/$1. Certainly, the depreciation of the Naira over N780/$1 gives credence to the recapitalization move by the apex bank.

However, the fear remains: how many of the twenty-four commercial banks in the country’s financial services sector can survive?

Meanwhile, an analysis of the 2022 financial year showed that Tier 1 commercial banks in Nigeria included Access Bank, Guaranty Trust Company, Zenith Bank, the United Bank of Africa, UBA, and some Tier II banks- Fidelity Bank and FCMB.

These leading banks in the Nigerian banking sector pooled a combined N9.6 trillion as the capital base as of the end of the 2022 financial year, indicating readiness to key into CBN’s recapitalization plan.

However, the fate of the remaining banks, especially the newly established banks under the reign of Godwin Emefiele as CBN governor, is bleak.

Also, the persistence of the foreign exchange market, which closed on Monday at N814.60/$1 and soaring inflation, which stood at 27.33 per cent in October, may portend a bigger challenge to Nigeria’s economy.

The President of CIBN, Ken Opara, assured that Nigeria’s banks are ready and capable to shoulder the planned recapitalization objective.

In his recent speech at the 22nd National Seminar on Banking and Allied Matters for Judges in Abuja, Opara said: “One trillion dollars is very important, it’s achievable because already there has been different capital raising process, you will also see that banks have raised bonds as much as possible and have repaid those bonds when they mature.

“It’s not a difficult thing to be bothered about funding $1 trillion, I think the major thing is that the industry is deep, they have deep pockets, they have the financial strength”.

Speaking to FLYINGEZE BLOG on Monday, the CEO of SD & D Capital Management, Mr Idakolo Gbolade, said the present capital is equivalent to $2.5 billion, which is inadequate for the targeted $1 trillion economy.

He estimated a capitalization of $10 to $15 for commercial banks.

He, however, advised that banks should be given at least two or three years to achieve the capital target.

“The present capital base is an equivalent of $ 2.5 billion, which is grossly inadequate for an economy that the CBN envisages to be a trillion $ economy in 2 years.

“We should be looking at capitalization of between $10 to $15 billion, and an adequate time frame of between 2 to 3 years should be given to the different tiers of the banks to achieve it.

“The banking sector is expected to be the engine room of economic growth and a major enabler of economic development in the country, and it must possess adequate capacity to do so. The kind of economic level the country needs to attain in expected growth cannot be achieved with the present capitalization of the banks.

“Inflation and the continuous depreciation of the Naira have already weakened the present capital adequacy of the banks and may limit them to propel the economy positively, hence the need for recapitalization.

“The CBN should, however, capitalize the banks on a regional, national and international basis to guarantee the existence of small holding banks.

“The new banks licensed by the last CBN team should also be given adequate time to recapitalize.

“Recapitalization of banks will further strengthen the economy by ensuring that banks have more capacity to lend to the productive sector and engender confidence in foreign investors. The strength of our economy is largely driven by activities of the real sector which, when improved, can reduce rising inflation and strengthen the Naira through foreign direct investment (FDI)”, he said.

Also, Aminu Gwadabe, president of the Association of Bureaux de Change Operators of Nigeria (ABCON), said the recapitalization move would impact the entire economic sector.

He called for adequate consultation between the CBN and the stakeholders in the financial service sector to drive the plan to a successful conclusion.

According to him, mergers between like-minded people in the banking sector are eminent as long as they bring about general good for most Nigerians.

“A target of a $1 trillion economy by the country will grow the entire economic sector. It is a target that would keep everyone on his toes. I commend the initiative.

“What key performance indicators by all other sectors would align with the above-targeted objective? There is a need for adequate consultation among stakeholders.

“Recapitalization is a continuous phenomenon. The fundamental goal is to achieve a $1trn economy. Looking at the depreciation of our domestic currency, the previous N25 billion capital will need to be re-evaluated. The economic reality in the country is necessary for recapitalization. Some of the bank’s current capital exceeds the N25bn benchmark.

“It is a huge concern that the country’s foreign market is unstable. The FX is dwindling. The speculative FX demand is affecting the market. The president is moving around galvanizing investors; it is good for the country. We need FX to boost investors’ confidence. We need forex stability; this will increase investor’s confidence.

“Governance is about public interest. You must sacrifice for the good of everybody. The decision to recapitalize will make the new banks stronger. If there is a need for banks that cannot match the required capital base demand, they can look for a like mind for a merger”, he told FLYINGEZE BLOG.

On his part, a don at the Lead City University in Ibadan, Prof Godwin Oyedokun, said banks’ recapitalisation aims to strengthen the financial sector.

He noted that the exercise would be challenging and time-consuming for individual banks.

Oyedokun told FLYINGEZE BLOG that: “Bank recapitalization in Nigeria refers to increasing the capital base of banks to meet the regulatory minimum requirement set by the Central Bank of Nigeria, CBN.

“The recapitalization exercise was first introduced in 2005 with a minimum capital requirement of N25 billion for commercial banks and N20 billion for merchant banks.

“Subsequently, the requirement was increased to N50 billion in 2010 and N25 billion in 2019 for commercial banks.

“The implication of bank recapitalization in Nigeria is that it helps strengthen the banking sector and increase the financial system’s stability.

“A higher capital base enables banks to take on larger transactions and manage risk better.

“It also helps to increase public confidence in the banking system and attracts foreign investors.

“The recapitalization exercise has also and will encourage mergers and acquisitions in the banking sector, leading to larger and stronger banks that can compete globally.

‘This has and will continue to increase efficiency and innovation in the banking sector.”

“However, the implication of bank recapitalization for individual banks can be challenging, as they may need to raise additional capital to meet the requirement, which can be costly and time-consuming.

“Non-compliance with the minimum capital requirement can also lead to penalties, including revocation of operating licenses.

“Let me just summarize simply by saying that bank recapitalization in Nigeria is a necessary exercise that promotes the growth and stability of the banking sector, but it can also be challenging for individual banks”, he said.