Caution there for Nigeria’s central bank: “A new report from Ernst and Young has sent shockwaves through the Nigerian banking sector, revealing that 17 out of 24 banks could potentially fall short of meeting the capital requirement set by the Central Bank of Nigeria (CBN) if it is increased by 15-fold from its current N25 billion.”

Good People, the central bank must watch carefully before bringing another vector into the Nigerian economy. Yes, we do not want a further reduction in competition. While Zenith Bank can meet any new minimum paid-up share capital for a national commercial banking license at 15x on the old N25 billion, banks like Unity Bank may not.

Zenith Bank had rains last year, and possibly hit more than N1 trillion on PBT, even as Unity Bank was recording losses, and is expected to record losses in some quarters this year. Yes, it was all about choices made!

Simply, Nigerian banking is emerging into two classes: big or dying. I think those guys in CBN are smart enough to avoid anything that would engineer more chaos in the system.  We ask them to pause any recapitalization exercise until we can stabilize the economy!

“While the CBN governor gave no indication as to the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds.

“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital,” the report states.

About 17 out of 24 Banks Would not Meet the New CBN’s Minimum Capital – Ernst & Young

A new report from Ernst and Young has sent shockwaves through the Nigerian banking sector, revealing that 17 out of 24 banks could potentially fall short of meeting the capital requirement set by the Central Bank of Nigeria (CBN) if it is increased by 15-fold from its current N25 billion.

The report delves into the potential consequences of this shortfall, offering insights into various options available to banks that might find themselves outside the capital requirements mandated by the CBN. It suggests that such banks may need to consider mergers and acquisitions (M&A) to shore up their capital base, a strategy reminiscent of the consolidation witnessed during the last recapitalization exercise in 2004/2005, which saw the number of banks reduced from 89 to 25.

“While the CBN governor gave no indication as to the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds.

“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital,” the report states.

The report underscores the urgent need for Nigerian banks to reassess their capital positions and formulate strategic plans to meet the requirements of the proposed capital revaluation by the CBN.

One of the key factors driving the need for this proposed capital revaluation is the recent devaluation of the naira in 2023. The report notes that while the exchange rate stood at N132.9/$ during the last exercise in 2005, the naira now exchanges for over N1400/$. Additionally, it notes that the N25 billion capital base in 2005 amounted to $188.2 million, which has significantly dwindled to a mere $18.4 million using the recent exchange rate.

This analysis presents a stark contrast to the stance of the CBN Governor, who previously indicated that the planned recapitalization aims to support Nigeria’s target of achieving a $1 trillion economy.

In November 2023, the Governor of the CBN hinted at the possibility of raising the minimum capital requirement for banks, citing the need for banks to have adequate capital to support an economy striving for a GDP of $1 trillion, as targeted by the Nigerian Federal Government.

Since the banks’ recapitalization in 2005, bank liquidation in Nigeria has significantly diminished, with no incident of depositors losing money to a failed bank. However, the financial sector has significantly changed since then, with the emerging fintech market which has spurred non-traditional financial institutions to record-breaking market capitalization, underscoring the need for the banks to recapitalize.

Also, the volatility of the Nigerian forex market has exposed the weaknesses of the banks, highlighting the vulnerability of their financial strength when measured in dollars. Given the current situation, experts say many banks will merge if the CBN makes its recapitalization move. Therefore, stakeholders are urged to collaborate closely with regulators and explore innovative strategies to ensure the continued resilience and stability of the banking sector.