No fewer than 17 out of the existing 24 Deposit Money Banks may be unable to meet the Central Bank of Nigeria’s capital requirement if it is increased from its current N25 billion, a new report shared by Punch, says.
According to the report by Ernst and Young titled: “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation.”, if the apex bank raised the capital base of commercial banks in the country by 15-fold from the current N25 billion, only seven banks will survive.
It partly reads; “The recent plan by the CBN to increase the capital base of banks could again lead to M&A activities but not as widespread as was the case in 2004/2005 given the relatively solid financial positions of the banks today as well as the occurrence of several M&A activities in the banking sector over the past 10 years.
“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three licence types) that may fall below the new minimum capital thresholds.
“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.”
The report comes after the CBN Governor, Olayemi Cardoso, stated that the apex bank would consider an increase in the minimum capital base of banks in the country as part of its efforts to strengthen their capacity to support Nigeria’s drive to become a $1 trillion economy by 2026.
The proposed increase in the capital base is coming nearly two decades after the CBN’s 2004 banking reform, which led to an increase of the then prevailing capital base from N2 billion to N25 billion.
The 2004 banking reform was characterised by massive mergers and acquisition activities, which ultimately resulted in the reduction of the number of banks in the country from 89 to 25 banks.
In Nigeria, the current capital base is stratified based on the type of banking licence.
Banks with regional, national and international licenses are currently expected to maintain a minimum capital base of N10 billion, N25 billion and N50 billion respectively.
According to the report, the recent plan by the CBN to increase the capital base of banks will lead to a series of mergers and acquisitions as witnessed during the last recapitalisation exercise in 2004/2005.
Ernst and Young, a global financial services company, said that some banks may depend on different recapitalisation options, which include mergers and acquisitions, initial public offerings, placements and/or right issues and undistributed profit (retained earnings) despite financial soundness indicators show that Nigerian banks were largely safe and resilient as of 2023.
