Finance

Road to N500b recapitalisation: Bank owners lobby, seek adjustment in share capital composition

Less than a week into the effective date of the exercise, the recapitalisation programme of banks may face its first acid test in the coming days as influential bank owners and top bankers have started throwing spanners into the implementation…

· Cardoso secured Tinubu’s support before announcing new policy
· Economy risks crowding-out effect, says Owoh
· Banks in N2.5 trillion capital shortfall, says S&P
· Small banks contend with increasing anxiety, vendors fine-tune new credit policies

Less than a week into the effective date of the exercise, the recapitalisation programme of banks may face its first acid test in the coming days as influential bank owners and top bankers have started throwing spanners into the implementation, The Guardian was informed at the weekend.

But the Central Bank of Nigeria (CBN), which sources said had secured the full support of the President, Bola Tinubu, to go on with the exercise, is resolute in prosecuting the programme as contained in the blueprint.

Still, there are indications the CBN Governor, Olayemi Cardoso, could be summoned at some point to provide more explanation on the cost and benefit of the exercise. Already, some lawmakers are seeking support for a possible invitation for a proper interrogation on the issue, it was learnt.

Whereas there is a consensus that the banking sector needs a recapitalisation, some owners of the banks who are wary of losing control of the institutions are said to have called for relaxation and reconsideration of the new share capital or include the consideration of shareholders’ funds (including retained earnings) as in the case of the 2005 recapitalisation.

Until last month, when the new regulatory capital was announced, tier-one banks were essentially considered adequate capitalisation. But to the chagrin of the banking community, the apex bank disqualified retained earnings, which is about 60 per cent of the total equity of some of the banks.

Hence, the banks are currently battling to bridge shortfalls, which S&P Global Ratings pegs at N2.5 trillion. Ironically, the industry sits on N3.85 trillion in retained earnings, a buffer that could sufficiently bridge the capital adequacy gap.

The five systemically important banks (SIBs) alone – Access Bank, First Bank, GTBank, United Bank for Africa and Zenith Bank – according to the research institution will now have to source for N1.5 trillion to bridge the capital shortfall. The amount is dwarfed by the retained earnings provisions.

Cardoso faces the pressure of admitting the huge component of shareholders’ funds as part of the total regulatory capital (TRC) of banks, but reliable sources said the governor would not bow to the pressure.

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“In any case, they have until 2026 to beef up their capital base. So, there is no pressure; perhaps, the CBN understands that it is a tough environment and that it would not be convenient for all the banks to succeed in capital raising at this critical moment,” a source explained.

The CBN recognises the industry could explore merger and acquisition (M&A), public offers (POs), rights issues and other blends of capital raising options to meet the regulatory requirements by March 31, 2026, when the window will close.

The prospect of fresh capital depends largely on the market’s receptiveness. The Nigerian capital market, for one, has seen a draught of public offers even as rights issues struggle for subscriptions. There are also the questions of public confidence, which is at its ebb unlike during the 2005 consolidation, which considered with the return of confidence flowing the successful civilian transition in 1999 had consolidated.

The sheer mention of M&A is stoking enormous tension in the industry. Players with less bargaining power are worried a round of acquisition would translate to annihilation while the dominant players think a merger could substantially dilute their controls. Merger, in practical terms, is radically different from a mere business combination as a brand could be submerged as somebody losing an executive position.

For small companies, the tension of recapitalisation and fear of acquisition is real and taking a toll on operational efficiency already. At the weekend, The Guardian was informed that the small banks are already getting untoward responses from vendors and consultants, who are increasingly uncertain the institutions will survive the next programme unscathed.

A source in one of the banks said service providers, especially foreign affiliates, have started sending new conditions of service. Much of the conditions, it was learnt, border on payment cycle and terms.

The overall intention of the service providers, it was gathered, is to reduce their credit exposure to the institution, by hedging against those who will likely not be able to raise the fresh capital to scale through the hurdle.

The timeline is two years, and that means 24 months. But talks about M&A are expected to start in earnest before the end of the year with new brands expected to be completed next year. Sources privy to the foreboding around the new regulation said most executives do not think they have as much as 18 months to close deals.

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But a top retired banker dismissed the anxiety from the banking community, saying compromises would eventually be reached in the coming months. Besides, he said, investors have sufficient time to harmonise their plans and make the most favourable choices, with some of the banks likely going to come out stronger.

Last week, S&P said it was confident the minimum capital requirement would strengthen the lenders’ competitive position against international and pan-African banking groups.

“According to third quarter 2023 data, we estimate that our rated banks’ capital shortfall will be approximately NGN2.5 trillion. Despite the 21 licensed banks in Nigeria, the top five banks account for about 70 per cent of the system assets and accumulate a paid-up capital shortfall of close to N1.5 trillion,” it said.

The recapitalisation comes at the same time the United States is debating a possible share capital of the 37 top biggest banks with a minimum of $100 billion assets in alignment with Basel III, the latest global banking regulation requirement.

This coincides with an ultra-restrictive monetary system that has taken interest rates to a multi-decade high, a situation turbocharged by Nigeria’s near junk status in the international investment market.

Locally, high interest rates have also sent bond yields to a level not seen in decades, worsening the attraction of the capital market. This has also increased the uncertainty on how fast the banks could secure fresh capital to raise their buffer.

As some bankers sweat over the possibility of getting the CBN to relax its rule and allow the money to be recycled as part of the share capital, a professor and applied economist, Godwin Owoh, who had consulted widely on the issues, said it is self-defeating to classify retained earnings as share capital for a sector that requires fresh liquidity.

He told The Guardian, yesterday, that the inclusion in the previous exercise was a major error, which cannot be repeated in a regime that gives operators a choice from an array of categories with a ranking set of requirements.

“Retained earnings are not liquid components of income. Income and revenue are different just as liquidity and profitability are also different. A company can be very profitable but not liquid. In banking, the most important component of capital is the liquid capital,” Owoh noted.

He noted that “retained earnings could be from non-liquid income that accrues to an organisation; that has little or no impact in banking, which is essentially a liquidity-based institution”. Hence, he noted, retained earnings cannot and should not qualify as part of recapitalisation that should inject new funds into an industry. The focus is on liquidity and stability.”

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The economist said the beauty of recapitalisation forecloses near-liquid assets, where retained earnings could. He insisted that retained earnings relate to several accounting entries that could be used for direct injection in a material time and boost liquidity.

Nigerian banks, indeed, have been contending with liquidity challenges. The Guardian had reported a week before the new capital requirement rule that the deposit money banks (DMBs) were battling low liquidity challenges, despite the ‘doing-well’ façade most of them have worn.

Towards the end of last year, activities in the window, which allows both CBN and DMBs to access funds to meet short-term obligations, increased significantly. From January till March 18, for instance, banks drew a total of N24.13 trillion or 94.4 per cent of the total transaction on the discount window, to bridge the liquidity gap. Within the period, a paltry N1.44 trillion was deposited with the Central Bank as excess reserve in the form standing lending facility (SLF).

Analysis of data obtained from the apex bank’s financial updates shows the SLF and standard deposit facility (SDF) trends had pivoted a few years with the relationship becoming increasingly one-sided. There might have been an uptick in the SLF in recent months, but data suggests that the build started a few years away, a sign the banks have been in precarious liquidity condition.

Whereas the CBN has scored a positive point in its effort to recapitalise the sector, there is a question on whether higher capital, which many people have described as a political option, would necessarily lead to more stable banks as opposed to creating an increase in the immoral latitude of operators.

But beyond rhetoric, a major social consequence of the exercise is the potential to crowd out other sectors. In the capital market, banking stocks are the toast of every investor. This raises questions on whether prospective shareholders would lift stocks of other sectors if two, three or four banks are offering their shares for subscription.

Owoh also argued that the economy may have capital flowing from other sectors to bank equities. If this happens, the policy could be counter-intuitive to one of the goals of the new move, to build banks that are strong enough to support the aspiration of Tinubu to build a $1 trillion economy by 2030.

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