How naira devaluation sparks calls for banks recapitalization in Nigeria
The recent devaluation of the naira against the United States dollar has raised concerns about the capital base of commercial banks in Nigeria, according to a report by Daily Trust.
Analysts argue that the 2004 banking industry recapitalization, which raised banks’ capital base from N2 billion to the current N25 billion, has been weakened.
A closer analysis reveals that the banks’ capital base, which averaged $250 million in dollar terms at the 2004 exchange rate of N100/$, now stands at just $33.3 million when related to the current N750 exchange rate.
Capital adequacy ratio, an important banking concept that measures a bank’s capital in relation to its risk-weighted credit exposures, comes into play.
The latest monetary policy committee meeting of the Central Bank of Nigeria (CBN) noted the stability in the banking system, with the banking system’s Capital Adequacy Ratio (CAR) at 12.8%, Non-Performing Loans (NPLs) ratio at 4.4%, and Liquidity Ratio (LR) at 45.3% as of April 2023.
Efforts to obtain a reaction from the CBN were unsuccessful, as the spokesperson, Dr. Abdulmumin Isa, was unavailable. The purpose was to inquire whether the CBN has plans for recapitalization in the near future and their perspective on concerns regarding the banks’ capital base after the significant depreciation of the naira from N100/$ in 2004 to N770/$ today.
The Necessity of Recapitalization
Musa Wapahyal Balla, a Compliance Officer at a Tier 2 bank, stated that Nigerian banks and firms will experience a decline in valuation due to the perception of weakened organizations caused by FX rates. He predicts that if the current FX rate remains, recapitalization of banks, insurance companies, and other financial organizations will be expected. Balla suggests that the minimum capital requirement for commercial banks should be N100 billion due to the five-fold depreciation of the naira since the previous requirement was set. This could result in mergers, acquisitions, and potential job losses.
Abiola Rasaq, former Economist and Head of Investor Relations at UBA Plc, believes that recapitalization should be viewed as necessary. He points out that the recent liberalization of the FX market, which led to nearly 50% depreciation of the naira in the official market, affects the banking sector’s risk-weighted assets and capital adequacy ratio.
He expects the capital adequacy ratio to fall below 11%, but overall stability should be maintained. He emphasizes the importance of strong capital ratios for banks to support credit expansion and economic growth, suggesting that recapitalization will likely be addressed by the incoming CBN governor.
Ayokunle Olubunmi, Head of Banking at Augusto & Co, highlights that banks have been preparing for devaluation scenarios and engaging in capital raising exercises through various means such as tier 1, tier 2, and AT1 bonds. He expects several banks to complete their capital raise before the end of the year.
The Approach to Recapitalization and Future Outlook
Professor Uche Uwaleke, an economist and professor of capital market, opposes recapitalization forced by the apex bank. He suggests that Deposit Money Banks be encouraged to recapitalize through mergers, acquisitions, or via the stock market, with incentives provided by the CBN. A stronger capital base in dollar terms would help attract foreign capital, improve IT infrastructure, and enhance global competitiveness.
The conversation surrounding recapitalization is not new, as former CBN governor, Godwin Emefiele, expressed the intention to recapitalize the banking industry in order to shore up its liquidity and enhance industry confidence in the banking sector.