Recapitalization to Shake Up Banking Sector – S&P
S&P Global Ratings said that the increase of banks’ minimum paid up capital to N 500 billion or approximately $380 million from N25 billion will likely shake up the banking sector landscape and support banks’ credit loss absorption capacity.
Recently, the Central Bank of Nigeria (CBN) announced that it will give banks 24 months to strengthen their capital base by either injecting fresh equity, consolidating, or downgrading their banking license to meet the new requirements.
S&P said this means that small banks could opt to lower their national license to a regional banking license, which calls for lower paid-up capital.
The last capital raising took place in 2005 and led to a significant consolidation of the sector, to a third of its size, the number of banks also reduced to 25 institutions.
Banks with a national banking license are required to raise their minimum to NGN200 billion (equivalent to about $150 million) and regional banks have a minimum of N50 billion. Naira Devaluation Deepens Economic Crisis in Nigeria
According to third quarter 2023 data, we estimate that our rated banks’ capital shortfall will be approximately NGN2.5 trillion.
S&P Global Ratings rates about 90% of the system assets. Despite the 21 licensed banks in Nigeria, the top five banks account for about 70% of the system assets and accumulate a paid-up capital shortfall of close to NGN1.5 trillion.
” In our view, the recapitalization can also help to strengthen Nigerian banks’ competitive position against international and pan-African banking groups”
The directive was not surprising, because in late 2023 the new CBN governor warned that banks were expected to shore up their capital in a context of macroeconomic headwinds, which would improve their resilience to economic shocks and better position them to finance the economy.
The CBN has simultaneously been working toward clearing the foreign currency backlog to attract foreign currency flows and stabilize the naira exchange rate.
“We understand that the recapitalization should be in the form of new equity injection and not a recapitalization of retained earnings and reserves, which benefited from the sharp naira depreciation in 2023.
“The top tier banks operate with a large buffer of reserves and retained profit compared with paid-up capital”, the global rating firm said.
