Financial expert and head of investment and research at Meristem Securities Limited, Praise Ihensekhien, has hinted that the recent recapitalization policy by the Central Bank of Nigeria (CBN) could result in a shift of preference among shareholders and investors towards bank stocks, due to an increased flow of liquidity into the banking sector.
Ihensekhien made this disclosure in a statement on Saturday during a webinar hosted by Nairametrics.
The webinar which focused on Nigeria’s Economic Recovery is themed “CBN Policies and its Impact on Wider Economy.”
Addressing the CBN’s recent bank recapitalization mandates, Ihensekhien stated that this move will necessitate banks to augment their capital, enhancing their appeal to investors and shareholders in the stock market.
She observed that the recapitalization policy would intensify the attractiveness of the banking sector for investment, especially for those banks already benefiting from excess liquidity and high return on investment.
- “In the long run, we should see that increase in the base that the banks are able to utilize. Remember when the capital is raised, the money is not just going to sit down in the Bank’s balance sheet.
- “They also going to spend those assets to be able to get more returns on them and produce more investments for shareholders.
- “The fact that the share capital is increasing should lead to a reduction in EPS, but banks are going to avoid that by giving out more loans and being able to get more returns in increasing their earnings to shareholders. .
- “Shareholders might start to favour bank stocks over other companies. I mean this is something that is already playing out. For example, we have more liquidity in the banking stock than any other stocks,” Ihensekhien stated.
Recapitalization Could Lead to Long-term Inflationary Risks
Furthermore, Ihensekhien said while bank recapitalization can curb inflation in the short-term, it might also cause inflationary pressure in the long term as money supply increases in the country.
According to the financial expert, expanding the capital base of banks will result in a considerable increase in credit to the private and public sectors.
She said that the more the capacity of the banks increase the more likely the government can rely on domestic lending environments to fund the deficit of its budget.
- “One thing a lot of people are not thinking about is that this has a long-term impact on inflation. In the long-run, you’re increasing the capital base of banks. This money is not going to sit down in the banks.
- “You can’t grow your economy from a $242 million economy to a $1 trillion without significantly increase your spending base.
- “Of course, there will be likelihood of decline in inflation in the short run, but going forward, as we start to see that money supply, inflation again might go up because increase in the share capital base of banks will likely lead to the higher credit to the private sector. That should lead to higher money supply.
- “The government cannot run on equity alone. So there be some credits to the government from the banks. The budget deficits cannot be sponsored by external borrowing.
- “And if the domestic environment is capable for funding the budget deficits, that will reduce the need for external funding,” she added.
Backstory
Nairemetrics earlier reported that the Central Bank of Nigeria (CBN) increased the capital base for commercial banks with international authorization to N500 billion and national banks to N200 billion.
- It was also stipulated by the CBN that the minimum capital requirement for banks must be met between April 1, 2024, and March 31, 2026, a timeframe of 24 months.
- Meanwhile, Credit ratings agency, Agusto and Co. projected that affected banks may need to raise up to N4 trillion of inflow to meet the new CBN’s capital requirements.
- The report therefore observed Mergers and Acquisition (M&A) could be required for some banks that don’t it difficult to meet the apex bank’s capital requirement.
- Reacting to the new requirements, some bankers who spoke to Nairemetrics expressed their opposition to the Central Bank’s decision to omit retained earnings from the share capital calculation in its recent recapitalization guidelines.
- 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
