Exclusion of Retain Earnings to Complicate Banks Recapitalisation –Moody’s
Retain earnings of Nigeria’s deposit money banks (DMBs) excluded from capital base calculation will complicate recapitalisation plans for lenders, Moody’s Rating gave the hint in a new report.
However, the firm stated that Nigerian banks’ minimum capital requirements could drive positive credit ratings for these financial institutions under its coverage universe.
The Central Bank of Nigeria (CBN) has mandated that banks submit implementation plans by April 30, 2024, after it announced a significant increase in new capital requirements for banks, effective March 31, 2026.
The minimum capital requirements for international commercial banks will increase tenfold starting in 2026 to N500 billion; for national commercial banks, the requirement will increase eightfold to N200 billion, and for regional commercial banks, the requirement will increase five times to N50 billion.
The banking industry will benefit from the higher capital requirements since they will have a stronger balance sheet and be able to expand their loan books while absorbing any unforeseen credit losses before Basel III is eventually implemented.
In order to comply with the new requirements, analysts explained that banks have three broad options. They can raise ordinary equity by selling subscription shares to new shareholders or conducting a rights issue to existing shareholders; consolidating through mergers and acquisitions; or downgrading their banking license.
For example, upon the sale of its UK subsidiary in September 2023, Union Bank of Nigeria reverted to a national license after having an international one, which decreased its capital requirement to NGN25 billion from NGN50 billion.
“We estimate that the nine banks we rate currently have an aggregate shortfall (versus the pending capital requirement) of approximately N2.6 trillion ($2.1 billion) should they maintain their current license categories, and this amount represents 26% of their existing aggregate shareholders’ funds”, Moody’s said.
There are currently seven banks with international commercial banking licenses: Access Bank, FCMB, Fidelity Bank, First Bank, GT Bank, UBA, and Zenith. Others are Union Bank and Sterling Bank with national licenses. The new required minimum capital must comprise solely paid-up capital and share premium.
Although they both apply to the capital adequacy ratio (CAR), which remains at 15% for commercial banks with international operations that have been designated as domestic systemically important banks (D-SIBs) and 10% for national banks, retained earnings and additional Tier 1 capital cannot be applied to the required minimum capital.
Moody’s said the exclusion of retained earnings from qualifying capital may complicate recapitalisation plans for banks as they are unable to apply accumulated earnings that have thus far not been distributed as dividends.
Given the possibility that banks will have to issue fresh common stock, it stated that investors might express apprehensions about the dilution of share value.
“We expect that the new regulations will drive significant consolidation within the sector, particularly where it is not feasible for banks to raise the required capital”, Moody’s said in a commentary note. #Exclusion of Retain Earnings to Complicate Banks Recapitalisation –Moody’sNaira Suffers Big, CBN Goes Ballistic Against FX Whales
