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The CBN new minimum capital requirement for Nigerian Banks: The good, the bad, and the downright ugly

Since taking office in late 2023, the new CBN Governor, Mr. Yemi Cardoso has, in not too many words, sprung but a few startling.

However, some might argue, that economically necessary and fiscally expedient moves on the Nigerian economic chessboard in a bid to stabilise a floundering economy and steer the country back on a path of economic prosperity.

Some of these moves have included the near forceful merging of our multiple FX markets and sharp increases in monetary rates. Many will say, perhaps rightly, that despite initial hiccups, these moves have begun to bear some fruit.

The one move, however, many had anticipated with bated breath had, until recently, not been announced. Many a–speculation had consequently made the mill about the new minimum requirements, particularly after a similar exercise only 20 years prior.

After many weeks of conjecture, the much-awaited announcement was sprung on Good Friday’s eve, to nothing short of a stupefied people and an addled banking sector.

The announcement of N500bn capital requirement for banks with international authorization, N200bn for National banks, and N50bn each for regional and merchant banks, no–less left a rather dry patch on many banker’s throats, requiring a rather tall glass of water to quench whilst digesting the information.

Even more disconcerting, the CBN circular further stated, categorically (much to the chagrin of many a–banker I am sure) that the new requirements excluded existing Shareholder’s Funds and other Additional Tier 1 Capital, i.e., capital reserves, preferred stocks, etc. This therefore leaves banks with one, or all three bitter pills to swallow:

  1. Raise fresh capital through follow–on offers, rights issues, or private placements,
  2. Mergers/Acquisitions,
  3. License upgrades or downgrades…

Despite many being in sound financial health no thanks to robust 2023 audited declarations, the newly announced policy unfortunately implies that every single bank still falls significantly short of the CBN’s latest demands and will see each gird their loins in a combined attempt at raising nothing short of N4.3 trillion of fresh capital.

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This is undoubtedly a daunting challenge set by the CBN, enough to deny but a few senior banking executives and major stakeholders a few good nights’ sleep.

In this article, we shall consider the three faces of this new policy to understand their inherent benefits, the possible drawbacks, and the likely disasters that could occur due to the CBN’s latest stance on Nigerian banks.

The good…

  • A $1tn economy at all costs: There is no gainsaying, the CBN is mirroring President Bola Ahmed Tinubu’s desire to double Nigeria’s economic size in the shortest possible timeframe. This new policy will certainly kickstart this process.
  • Cheaper Business Loans: After the exercise, and burdened with so much capital, even the most reluctant loan-issuing institutions may become more indulgent in loan requests.
  • The eventual beneficiaries will ‘hopefully’ be the Private, Manufacturing & Informal Sectors of the economy.
  • This should in–turn spur greater job recruitment and hopefully fuel greater economic growth, in the long term.
  • Stronger banks: It’ll no –doubt be impossible to double the nation’s economy without a sturdy banking fulcrum. This new policy will ensure Nigerian banks, 24 months hence, are amongst the most capitalized in Western Africa if not Africa.
  • Enhanced Capital Market Activity: The NGX has no doubt enjoyed strong activity in the preceding months to the latest CBN announcement. Things are however about to get even friskier as the race for the ‘most capitalized bank’ is set to commence.
  • Increased FDI/FPI/Forex activity: With International Investment & Private Equity firms keenly looking to emerging frontiers like Africa for double–digit investment/portfolio gains, the new recapitalization exercise could come at no better time to infuse much-needed forex into our economy, further strengthening the Naira.

The bad…

  • A severe liquidity crunch: The new announcement is no doubt an ancillary extension of the CBN’s monetary policy targeted at inflation control. A +N4 trillion cash extraction from the economy will unequivocally slow spending in the short–term as investors, existing & potential, are wooed by the banks. This will further constrain disposable income. Certainly, controlling inflation in the short–-term, however, conceivably affects GDP output in the medium.
  • Fewer New Corporate Listings: With almost every Nigerian bank about to beset the market for no less than N4 trillion, other corporate entities that have had a keen eye on approaching the capital market for raises of their own may procrastinate further, possibly leading to…
  • All activity, no depth: An active capital market but still just as shallow, with the same existing companies, as it was before the CBN announcement.

The downright ugly…

  • Watered Valuations: With banks being forced to create even more shares to meet their new capitalization requirements, valuations, i.e., EPS, PBV, etc., will certainly, and in many cases be cut by as much as half, perhaps even more. A sector–wide share price correction(s) after the exercise is therefore to be expected.
  • Greater Loan Oligopoly: More loans could go to much the same corporations/individuals as before the exercise, with little economic trickle–down.
  • The possibility of increased loan defaults: Akin to America’s subprime debacle of 2008, freshly flush with so much cash, Nigerian banks may discriminately choose to lower loan approval requirements in a frantic bid to turn so much cash liabilities into interest-bearing assets. This could possibly lead to greater non–non-performing–loans.
  • Some messy last-minute mergers/acquisitions: Just as with the 2004 ‘Soludo Recapitalization Era’, prepare yourself for some messy boardroom politics and in-house–intrigue that could see some banks only achieve their new capital requirements at the very last minute(s) of the exercise.

A ‘Hotter Money’ Flux: Nigeria has enjoyed a flux of FPI a.k.a. ‘Hot Money’ (short–term cash investments), in recent weeks due to mouth–watering offerings, particularly from the Nigerian treasuries market. Things are about to get even ‘hotter’, leading to sharp volatilities in the capital and forex markets in the short, and long terms respectively.  

CBN explains exclusion of retained earnings from bank recapitalization process

The Director of Financial Policy & Regulatory Department of the Central Bank of Nigeria (CBN), Haruna B. Mustafa, has provided reasons for the exclusion of retained earnings of banks in the proposed capitalization process.

In the latest edition of CBN podcast published on the bank’s website on Monday, the CBN Director stated that the apex bank’s exclusion of retained earnings is to ensure that deposit money banks across the country inject fresh funds into their capital base.

He stated, “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognised in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks.”

Mustafa further noted that the recapitalization program is geared towards boosting the capacity of banks to take on bigger projects for the country’s growth and development.

He also referenced the bank’s recapitalization exercise of 2004 and how it helped in insulating banks across Nigeria from the ripple effects of the global financial crisis of 2008, noting that efforts of the current recapitalisation would help to strengthen Nigerian banks against unforeseen global financial threats.

 

Last month, the CBN announced an increase in the capital requirements of different tiers of banks across the country– the first of its kind since 2004/2005 recapitalisation exercise. The apex bank hiked the capital requirement for Tier-1 banks to N500 billion while national banks’ capital’s expected capital was set at N200 billion.

However, the CBN noted that new capital would comprise of paid-up capital and share premium, excluding shareholders’ funds- a policy that has generated a lot of conversation.

Nigerian bankers have voiced out their opposition to the exclusion of retained earnings, noting that it is flawed and contravenes the conventional and legal treatment of company’s capital structure

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Bankers oppose exclusion of retained earnings in CBN recapitalization terms

Bankers are voicing opposition to the Central Bank’s decision to omit retained earnings from the share capital calculation in its recent recapitalization guidelines.

The Central Bank announced on Thursday a new set of capital thresholds for Nigerian banks, requiring international, national, and regional banks to maintain minimum share capital of N500 billion, N200 billion, and N50 billion, respectively.

However, in defining share capital, the Central Bank excluded retained earnings from the calculation. Instead, it specified that share capital comprises only the banks’ ordinary share capital and share premium.

  • “For existing banks, the capital requirements specified above shall be paid-in capital (Paid-up plus Share Premium) only. Bonus issues, other reserves and Additional Tier 1 (AT1 Capital shall not be allowed or recognized for the purpose of meeting the new minimum capital requirements.” CBN

In accounting terms, retained earnings are considered a component of a company’s equity because they represent profits that have not been distributed as dividends but are instead reinvested in the bank.

Many bankers, who requested anonymity when speaking to Nairametrics, expressed the view that the Central Bank’s decision to exclude retained earnings from share capital calculations is flawed.

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They argue that this approach fails to acknowledge the actual value that these earnings represent which goes against the conventional and legal treatment of company’s capital structure.

Some bankers also expressed the opinion that while the Central Bank prefers banks to retain most of their earnings to reinforce their capital base, it should not concurrently prevent them from counting these undistributed earnings as part of their capital.

According to estimates by Nairametrics, the ten largest banks in the country possess a cumulative total of N4.2 trillion in retained earnings.

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  • With the exception of Sterling Bank, none would require additional capital raising if retained earnings were recognized as part of share capital.
  • This may explain the widespread dissatisfaction among bankers with the Central Bank of Nigeria’s (CBN) directive.
  • It seems that the Central Bank is prioritizing direct capital injections into banks rather than relying on accounting entries to satisfy recapitalization requirements.
  • Although the Central Bank has permitted mergers and acquisitions, this suggests it anticipates that some banks might struggle to meet the new capital requirements.

The Central Bank has stated that the purpose of raising capital is to “engender the emergence of stronger, healthier and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030” in line with the Renewed Hope agenda of the Tinubu administration.

The Central Bank contends that larger banks with substantial capital bases are essential, as they can offer more significant levels of credit.

This capacity is deemed critical to facilitating and accelerating the growth of the national economy.

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