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Nigerian banks race to raise capital after order to bolster balance sheets

Nigerian banks are racing to find new sources of capital after the country’s central bank ordered them to strengthen their balance sheets to protect themselves from the country’s worsening economic situation.

The Central Bank of Nigeria, which supervises the country’s 25 commercial banks, has given them until March 2026 to meet new capital requirements.

Those with international operations are expected to have at least N500bn ($314mn) in capital. For banks with operations around the country the figure is N200bn and for smaller regional operators it is N50bn.

“Bigger banks with [a] larger capital base and capacity can underwrite larger levels of credit which is critical to lubricate and catalyse the growth of the economy,” the bank said.

The CBN is looking to promote stability in the industry while Nigeria struggles with a deteriorating economy.

Since June last year, there have been two devaluations of the naira as part of market friendly reforms to encourage overseas investment. As a result, the currency has lost almost 70 per cent of its value and inflation has risen past 30 per cent to levels not seen since 1996.

Africa’s largest economy as recently as two years ago, Nigeria has dropped to fourth place this year, driven by the volatile currency and declining productivity. According to a Deloitte report, the total capital base of its banks had shrunk to $1.8bn by earlier this year from $5bn in 2022. For comparison, South Africa’s Standard Bank, Africa’s largest lender, has tier one capital of $11.9bn alone.

Nigerian banks are being encouraged to meet the new rules in three ways: rights issues and offers for subscription, mergers and acquisitions, or downgrading their licences. They cannot use retained capital, debt or other assets already on their balance sheets to meet the new targets. Only paid-up capital and share premiums will count.

No bank currently has enough capital to meet the requirements and there have been blanket television, radio, online and billboard advertisements urging people to buy shares. The total shortfall for the industry is estimated at N4.8tn.

However, industry watchers do not expect the bigger ones to struggle with the new requirements. Some mid-tier lenders could find it harder and opt for mergers, or to downgrade their licences.

Oyinkansola Aregbesola, an investment research analyst at asset manager ARM, believes the new capital requirements will prompt at least three mergers among the smallest banks. Ngozi Odum, a financial services analyst at investment management company CardinalStone, agrees that some mergers are inevitable, but that this would be a “last resort”.

Aregbesola also said there had been “positive sentiment” about share offers that had already been completed or announced. “There are subscriptions from different investors and it’s not far-fetched given the performance of these banks . . . they have good fundamentals that will attract investors.”

“Most of the investment will come from international investors,” said Bolatito Bickersteth, a senior financial services analyst at research firm Stears.

Central bank boss Olayemi Cardoso previewed the higher capital requirements at the industry’s big annual dinner last year. He said that while the banks were stable, they lacked the financial muscle to build the $1tn economy envisioned by President Bola Tinubu by 2030.

Banks were given a month to submit their recapitalisation plans to the central bank — a deadline that passed in April. The plans are now being reviewed.

Bickersteth said that the changes could be viewed as an attempt to increase competition in an industry dominated by the largest participants.

The country’s ten biggest banks hold nearly 90 per cent of the assets in the industry, she said. “It looks to me they [the central bank] want to force the smaller banks to compete,” she said.

She added that the central bank appeared keen for the smaller ones to consolidate, noting actions it had taken that pointed in this direction.

These include its revoking of the licence of the distressed Heritage Bank and its approval of a merger between Unity, whose books had been in bad shape for almost a decade, and Providus, a regional bank known for its digital innovation.

The last time banks were asked to boost their balance sheets was 20 years ago. In 2004, the central bank announced an 18-month scheme for all commercial banks to shore up their capital base to N25bn ($195mn at the time).

Central bank research at the time found that many banks had become dependent on deposits related to public sector activity, such as tax and fine collection, and transfers between central and local government. Some banks relied on the government for up to 70 per cent of their deposits, the research said, making them “weak and volatile”.

By January 2006, at the end of the last recapitalisation process, 89 commercial banks had become 25. Most of these are now listed on the Nigerian Stock Exchange, which is credited with improving regulation.

“It makes sense to recapitalise now,” said Aregbesola. “Relying on the old requirements would be overstating the financial health of these banks.”

CardinalStone’s Odum said banks would emerge stronger from the recapitalisation, likening it to the 2004-06 process that achieved similar results.

“We are going to see a strengthened financial system that is more resilient to economic shocks. The system back then was able to withstand even the 2008 economic shock and the banks that have [remained] post that recapitalisation have done extremely well.”