ONLY SEVEN NIGERIAN BANKS MAY MEET CBN RECAPITALIZATION REQUIREMENTS, ACCORDING TO EY
Ernst and Young, a global professional services firm, has disclosed that approximately 17 out of the existing 24 Deposit Money Banks (DMBs) in Nigeria may struggle to meet the Central Bank of Nigeria’s proposed recapitalization requirement if it is raised from the current N25 billion.
In a recent report titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalization”, Ernst and Young highlighted that only seven banks might survive if the apex bank increases the capital base of commercial banks in the country by 15-fold from the current N25 billion.
The CBN Governor, Mr. Olayemi Cardoso, has previously indicated the possibility of raising the minimum capital base of banks in Nigeria to bolster their capacity to support the nation’s goal of becoming a $1 trillion economy by 2026.
Currently, the capital base is tiered according to banking license types, with regional, national, and international licenses requiring minimum capital bases of N10 billion, N25 billion, and N50 billion, respectively.
The proposed increase in the capital base comes nearly two decades after the CBN’s 2004 banking reform, which saw the capital base raised from N2 billion to N25 billion and resulted in significant mergers and acquisitions, reducing the number of banks from 89 to 25.
CEOs and executives of DMBs have begun exploring strategies to raise fresh capital through mergers, acquisitions, and other means, with some banks already announcing plans for Rights Issues and public offerings.
Ernst and Young noted that despite the overall soundness of Nigerian banks as of 2023, some may need to pursue various recapitalization options, including mergers and acquisitions, to meet the new requirements.
The report suggests that the proposed capital base hike could lead to a new wave of mergers and acquisitions, although not as extensive as seen in 2004/2005, given the relatively strong financial positions of banks today and the recent M&A activities in the sector.
The firm assumed various scenarios for the capital increase based on current economic conditions, estimating that in a worst-case scenario with a 15x capital multiplier, about 17 out of 24 banks may not meet the new minimum capital requirement.
This proposed recapitalization plan is prompted by the devaluation of the naira in 2023, with the current exchange rate exceeding N1400/$ compared to N132.9/$ in 2005 during the last recapitalization exercise.
Source: Techeconomy
