Why Nigeria Needs Another Banking Sector Recapitalisation

Reforms in the banking sector have become perennial actions in developing and emerging economies of the world, in which Nigeria as a country is not left out.
In fact, Matthew Gidigbi, in a research paper titled: “An Assessment of the Impact of Banking Reforms on Economic Growth and Bank Performance in Nigeria,” pointed out that banking reform takes place in an economy to ensure stability and viability of the economy.

Mainly, banking reforms usually set to achieve macroeconomic goals of price stability, full employment, high economic growth and internal and external balances.
Over the years, reforms in Nigeria have been directed towards financial intermediation, financial stability and confidence in the system.

In Nigeria, the Central Bank has oversight role of managing financial institutions and dynamic role of manipulating financial related factors in boosting the economy.
Banking sector recapitalisation helps in strengthening the banks to assume risk and absorb losses.

A study by the International Monetary Fund (IMF) showed that the significant and prolonged drop in oil prices since mid-2014 changed the fortunes of Nigeria and many other energy-exporting nations around the world. The report showed that budgets in oil exporting nations generally turned from surpluses to large deficits, slowdown in growth as well as increased threats to financial stability.

The report stressed that in such a challenging environment, a policy of “business as usual” will not suffice–policymakers will need to adopt significant measures to put public budgets on a sounder footing, address risks to liquidity and the quality of assets in the financial sector, and improve growth prospects.

These clearly, might have spill over effects on the banking system in Nigeria and other oil producing countries, and could be one of the reasons why the Senior Resident Representative and Mission Chief for Nigeria, African Department, IMF, Mr. Amine Mati, had about two years ago, suggested that the Central Bank of Nigeria (CBN) should recapitalise the banks.

Following the intense weakening of the country’s macroeconomic environment, resulting in the deterioration of asset quality and rise in non-performing loans (NPLs) in the banking industry, the IMF boss had advised the CBN to consider asking the country’s lenders to recapitalise.
These clearly are some of the reasons the CBN Governor, Mr. Godwin Emefiele, recently disclosed his intention to recapitalise banks in the country before the end of his new five-year tenure.

Emefiele, said the CBN would embark on a programme that would lead to the recapitalisation of the banking industry within the next five years.
He said the objective was to position Nigerian banks among the top 500 in the world.
As a result, he stressed that banks would be required to maintain higher level of capital and liquid assets in order to reduce the impact of an economic crisis on the financial system.

Speaking at the unveiling of a five-year policy thrust of the CBN, effectively signalling his agenda for a second term as the apex bank helmsman, Emefiele also said it would work with the fiscal authorities to pursue a double digit growth rate within the next five years.
He said the CBN would work assiduously to bring down the rate of inflation to single digit and accelerate the rate of employment.

Providing insights into reasons for the planned recapitalisation, the CBN boss said the 2004 banking industry recapitalisation which increased banks’ capital base from N2 billion to the current N25 billion had weakened.

He said: “You will all agree with me that it was Governor Soludo in 2004 that did the last recapitalisation we had, moving the capitalisation from N2 billion to N25 billion.

“And I must commend those efforts because it resulted in positioning Nigerian banks not only in Africa, but also being among the banks in the world in terms of capitalisation and it also increases or helps to strengthen the banking industry capacity to take on large ticket transactions- and those are some of the things we badly need today.

“And if you relate N25 billion in 2004 exchange rate which was about N100- N25 billion it is certainly only about $200 million . Today, if we relate N25 billion at N360, you can see that it is substantially even lower than $75 million.”

According to the CBN governor: “What we are trying to say is that recapitalisation has weakened quite substantially and there is a need for us to say it is time to recapitalise Nigerian banks again.

“It is a policy thrust which will be discussed at the Committee of Governors’ meeting and of course, the framework for the recapitalisation of Nigerian banks will be unfolded for the whole world to know.”

State of Banks’ Assets
The total assets of 11 commercial banks listed on the Nigerian Stock Exchange (NSE) stood at N39.065 trillion as at the end of December 2018, compared with the N34.898 trillion in the comparable period of 2017.
In comparison, South Africa’s banking sector had total assets of R5.14 trillion (N129 trillion) as of December 2017.

The compilation of the Nigerian banks’ results for the year ended December 31, 2018, by THISDAY, showed that the combined total assets grew by N4.167 trillion or 11 per cent in the year under review. The banks are Zenith Bank Plc, Access Bank Plc, Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA), FBN Holdings Plc, Fidelity Bank Plc, FCMB Group, Ecobank Transnational Incorporated, Sterling Bank, Union Bank of Nigeria Plc, and Wema Bank Plc. But the computation did not capture total assets of Suntrust Bank, Keystone Bank, Heritage Bank, Polaris Bank, Providus Bank, Citibank and Standard Chartered Bank as they are not listed on the NSE.

According to the results, while ETI posted total assets of N8.224 trillion as at December 2018, compared with the N6.865 trillion it reported in the comparable period of 2017; Zenith Bank recorded total assets of N5.956 trillion as of December 2018, higher than the N5.595 trillion it was the previous year; GTBank recorded N3.287 trillion total assets as of December 2018, up from N3.551 trillion the previous year and Access Bank’s total assets stood at N4.954 trillion at the end of 2018, higher than N4.102 trillion reported the previous year.

It is worthy to note that following its business combination with the Defunct Diamond Bank, Access Bank’s total assets jumped to N6.427 trillion at the end of the first quarter of 2019, its recently released results showed.

Furthermore, while Fidelity Bank’s total assets climbed to N1.719 trillion at the end of 2018, from N1.379 trillion the previous year; Union Bank posted total assets of N1.455 trillion as at December 2018; Sterling Bank recorded N1.103 trillion and Wema Bank’s total assets stood at N488 billion at the end of 2018.

Some of Nigeria’s tier 2 banks are operating with weak capital which makes them vulnerable to shocks, a report had indicated.
Analysts at Lagos-based CSL Stockbrokers Limited, which gave the warning, noted that capital adequacy is a persistent issue for a number of Nigerian banks.

The CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent while banks without international subsidiaries maintain a CAR of 10 per cent. The minimum requirement for systemically important banks is 16 per cent.

Therefore, the firm in the report, pointed out that given the tough regulatory environment, some banks would require more capital in order to create sufficient buffers for their growth plans as well as unforeseen problems.
It also stated that any naira devaluation would affect the capital adequacy ratio of some banks negatively.

Furthermore, it noted that the implementation of Basel III, a new global regulation on CAR, which is expected to commence this year, was also expected to put some pressure on capital.
“A naira devaluation, in theory, challenges CAR because the naira-equivalent value of risk-weighted assets (RWAs) rise given that these include foreign currency loans.

“The impact of foreign currency loans on RWAs is however expected to be offset by windfall gains banks make from net long FX positions, which should in turn boost capital.
“Our expectation of a 5-7 per cent devaluation in the naira to N385-N390/US$ however is minimal and should have very marginal impact on the capital position of our covered banks.
“Asset quality also poses a challenge to capital adequacy. If a bank suffers an unexpected rise in cost of risk (COR) that exceeds the capacity of one year’s profits to absorb it, then that bank will be looking at writing down capital.”

Experts’ Opinion
Economists and financial market experts have expressed divergent views about whether Nigerian banks should be asked to hold a new minimum capital base.
The Chief Executive Officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, said the plan to raise the capital base of commercial banks above the N25 billion minimum level would be beneficial to the stock market. However, he said said the NSE was studying the pronouncement by the CBN so as to know what the banking sector regulator intends to achieve.
Onyema said: “We are still studying the pronouncement; so we are not quite sure what it means.

But what I can say is that historically if you look at the last big recapitalisation efforts for the banking sector, the capital market was greatly used for raising the financing and indeed it was very beneficial to the capital market to the extent that the market became more sophisticated and a lot more players came into the market from the investors perspective.”
According to the NSE boss, tthe financial sub-sector on the NSE remains one of the most liquid sectors listed on the stock exchange.

“So, we know that potentially, it could be very beneficial to the capital market. So, we are studying it and we intend to engage and see how we can serve as a trusted partner in implementing that recapitalisation whenever it comes,” he added.
Also, the Chief Executive Officer, Rand Merchant Bank Nigeria/Regional Head, RMB West Africa, Mr. Michael Larbie, who welcomed the move by the central bank, pointed out that a bank is just as strong as its balance sheet.

According to Larbie, the capacity of a financial institution to lend to industries and other sectors would be dependent on the capital they have.
“I think stronger and well capitalised banks would be good for the economy. And the important thing is clear, being big is one thing, but having the right assets and industries to lend to, sensibly, where you don’t have accumulated non-performing loans (NPLs), is really going to be the balancing that we need to have.

“Really, providers of capital expect to get a return on the capital. So, return on capital is going to be very important and I think it is something that our industry, collectively working with the Governor and the people at the CBN need to find what the optimal answer is.
“But I have no doubt that well-capitalised banks is certainly good for the economy and no doubt if those capital raised are deployed prudently, then it can go a long way in creating more industry giants to support the economy,” the RMB Nigeria boss added.

Also, the President, Chartered Institute of Bankers of Nigeria (CIBN), Mr. Uche Olowu, said it was a step in the right Olowu, who spoke in an interview with THISDAY, pointed out that for the central bank Governor to have said the banks should be ready for another round of recapitalisation, “it means that capital has been eroded and if the banks would have to take on more business and to be well positioned for the kind of opportunity that would come, then they have to be recapitalised.”

“This is because without capital, it would be difficult for you to do the kind of business you are expected to do. So, if a regulator has said that, he has all the data.

“All the banks need to do is to re-strategise and start working towards the direction of the CBN. Today, if they have to play in certain markets, they definitely need to beef up their capital,” the CIBN boss added.

But the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, argued that the first step ought to be for the regulator to evaluate whether the recapitalisation that was done in 2014 has had any impact on the industry and the economy.
According to Rewane, consolidation can either be regulatory induced or market-induced.
“Obviously, there is always the need for buffers, but you cannot make the minimum capital requirement a buffer requirement.

“Those who are well capitalised would be able to do things and would be able to differentiate themselves from others who are not well capitalised. I think that without knowing the objective for the consolidation and an evaluation of the current consolidation to see whether it has achieved the objective for which it started; or is it competitive pressure to say because Ghana and few other countries have done it?” he maintained.

Also, a former bank Chief Executive Officer, Mr. Okechukwu Unegbu, said the pronouncement by the CBN Governor could send panic into the system if not properly managed.
But, Unegbu, who is presently the CEO of Maxifund Investments and Securities Plc, argued that beyond recapitalisation, the issue of human capital in the banking industry should also be given serious attention.

“We must understand that everything is not about money coming into the system. We should be talking about capacity building and the type of personnel behind these institutions.
“These days, a lot of bankers don’t have career path. Most bankers don’t have job satisfaction. Today, the level of fraud in the system is on the rise and it is a result of deficiency in capacity building.”

But the Head of Research at FSDH Merchant Bank, Mr. Ayodele Akinwunmi, said with the double-digit growth the CBN Governor has said he would be targeting in the next five years, recapitalising the banks would be essential.

“As the economy grows, lending activities would increase and more viable lending opportunities would be thrown up. As that increases, the capital that bank would require to support the expected increase in lending would increase.

“So, it is going to be a win-win for everyone. For me, if we expecting double-digit growth in the Gross Domestic Product, then the financial system must then be well capitalised to ensure that they support that growth that we are expecting.

“Secondly, I think the capital market is deep enough to support any banking recapitalisation. So, until we see the modalities and the amount, for now, I think any bank in Nigeria can raise any money in the capital market to support their business,” Akinwumi explained.

Clearly, the foregoing shows that while the central bank continues to consider how best to approach the matter, it must ensure that the exercise is carried in such a way not to hurt confidence in the system. Also, the regulator must ensure that whenever this would take place, financial institutions are given enough time so as not be put under undue pressure.
This may also result to mergers and acquisitions within the banking sector.