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:
- Raise fresh capital through follow–on offers, rights issues, or private placements,
- Mergers/Acquisitions,
- 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.
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.
