Nigerian banks race to meet recapitalisation move

Nigerian banks are currently at the center of a massive recalibration exercise set forth by the Central Bank of Nigeria. The move requires both international and local banks to significantly increase their capital reserves to ensure financial stability and resilience in the face of economic shocks. Some of the key players in the Nigerian banking sector are racing to explore various options available to meet the new capital requirements. Egie Akpata, Chairman of Skymark Partners, recently shed light on the strategies and challenges faced by these banks in an interview on CNBC Africa. The recent directive from the Central Bank of Nigeria has raised the bar for banks, with the capital requirements for international banks surging from 50 billion to 500 billion, and for national banks from 25 billion to 200 billion. Akpata emphasized that this move was not unexpected, considering similar reforms in the past. The central bank aims to ensure that banks have adequate buffers to navigate economic uncertainties and support the overall economy. One of the key methods available to banks to raise fresh capital includes injecting funds through rights issue private placements or through the capital markets. While Tier 1 banks are expected to meet the new requirements comfortably, smaller privately-owned banks may explore options like mergers and acquisitions or downgrading current licenses to comply with the regulations. Several prominent banks have announced their plans to raise substantial capital to meet the new requirements. For instance, Jitico is looking to raise about $750 million, Axis Corp aims to raise $1.5 billion, and FBNH plans to raise $300 billion. However, Akpata noted that the focus should be on the number of shares being issued by these banks, as that is the primary concern for the central bank in assessing compliance. While addressing the timeline for meeting the capital requirements - set to expire by 2026, Akpata suggested an inverse relationship between bank size and compliance speed. Larger banks are likely to meet the requirements sooner, as waiting until 2025 could limit investor interest. The looming challenge, however, is the potential over-capitalization of banks, leading to lower return on equity, a concern for equity investors. Regarding the exclusion of reserves by the central bank in the capital calculations, Akpata explained that the decision was likely driven by the need for fresh capital infusion rather than relying on retained earnings. The focus remains on repositioning banks for solvency and resilience, aligning with the broader goal of financial stability. While the recapitalization move is a critical step for the Nigerian banking sector, Akpata highlighted that other macroeconomic challenges, such as inflation, remain at the forefront of the Central Bank's agenda. With inflation on the rise, the Central Bank may need to consider further rate hikes at the next Monetary Policy Committee meeting to curb inflationary pressures. In conclusion, as Nigerian banks navigate the terrain of recapitalization, investors are closely monitoring the developments. While some may view the current market reaction as a temporary downturn due to rights issues and ex-dividend adjustments, the long-term implications of the recalibration exercise will reshape the banking landscape in Nigeria. The road ahead requires strategic maneuvering and proactive decision-making to ensure sustainable growth and stability in the banking sector.