- Experts foresee mergers, acquisitions, job losses
In March 2024, the Central Bank of Nigeria restated the need to increase the capital base of Deposit Money Banks for improved productivity.
The deadline for the recapitalisation exercise that requires banks to hold minimum capital of N500 billion, N200 billion and N50 billion for commercial banks with international, national, and regional licences respectively would elapse March 31, 2026.
Justifying the rationale behind the initiative, the CBN Governor, Oluyemi Cardoso, argued that given the critical role of the banking sector in spurring economic activity and growth through financial intermediation, the sector is expected to be pivotal to propelling the President Bola Tinubu’s administration’s economic growth projection of $1 trillion by 2030.
The CBN governor emphasized the need to build stronger and better capitalised banks which are better equipped to service the needs of a fast-growing economy, thus necessitating the call for recapitalisation.
Experts foresee mergers, acquisitions, job losses
However, as more financial institutions take steps to beat the CBN recapitalisation directive, financial market analysts have predicted a wave of mergers among the tier-2 banks.
“After recapitalisation, the banking landscape will shift. For instance, non-interest banks with lower recapitalisation thresholds are likely to promote mergers not due to an inability to meet requirements but to enhance efficiency”
This, they argued, would be less about meeting regulatory capital thresholds and more about positioning to compete effectively with the tier-1 banks, which dominate the industry.
Presently, only Access Bank has finalised its recapitalisation process.
Already, among the tier-2 banks, Providus Bank and Unity Bank have entered into a business combination deal.
However, financial analysts emphasised that while some tier-2 banks appear poised to meet the recapitalisation requirements, many would likely undertake significant structural adjustments to enhance their competitiveness.
Head of Financial Institutions Ratings at Agusto & Co., Ayokunle Olubunmi, noted that the recapitalisation process was set to reshape the Nigerian banking landscape, potentially altering the hierarchy of banks.
“Overall, most of the tier-2 banks are on track. For the majority of banks, raising capital isn’t the issue; the real question is, for those with weaker financial positions, what are they willing to give up?” Olubunmi said.
He added, “After recapitalisation, the banking landscape will shift. For instance, non-interest banks with lower recapitalisation thresholds are likely to promote mergers not due to an inability to meet requirements but to enhance efficiency. Smaller banks may also merge to become more profitable and efficient rather than being unable to meet the recapitalisation target.”
“Those that have raise funds include GTCO Holdings Plc (N400.5 billion), Access Holdings Plc (N350.1 billion), Zenith Bank Plc (N289.1 billion), Fidelity Bank Plc (N127.1 billion), and FCMB Group (N11.9 billion)”
Olubunmi also stressed the unpredictability of the situation, pointing to the last recapitalisation exercise, which saw significant changes late in the process.
“It’s still too early to predict the full outcome. If you recall the last recapitalisation exercise, uncertainty persisted until the final moments. By December 2025, with the March 2026 deadline approaching, we should have a clearer picture,” he explained.
“There’s still the possibility of larger banks acquiring smaller ones, even those that meet recapitalisation requirements. After the exercise, the tier-1 banking hierarchy could change, with one or two tier-2 banks potentially joining the top tier. It’s also plausible for a tier-2 bank to overtake a current tier-1 institution,” he concluded.
Similarly, the Managing Director and CEO of Anchoria Advisory Services, Sam Chidoka, whose firm has been involved in capital raising for a tier-2 bank, underscored the importance of balance sheet size in the evolving banking sector.
“For tier-2 banks, I think it will be a combination of capital raises, acquisitions, and potentially some mergers,” Chidoka said.
“To effectively compete with the tier-1 banks, there might need to be horizontal mergers among tier-2 banks. This is also an opportunity for some tier-2 banks to acquire smaller tier-3 banks to bolster their balance sheets and strengthen their market position,” he added.
Chidoka noted that larger balance sheets enable banks to underwrite and issue substantial loans, which would be a key competitive factor in the future.
“Tier-2 banks will need to consider mergers among themselves and the acquisition of tier-3 banks to remain competitive against tier-1 institutions,” he said.
When asked about the possibility of tier-2 banks being acquired by tier-1 banks, Chidoka expressed doubt.
“I don’t think so. I don’t believe any tier-2 banks would want to be acquired by a tier-1 bank. Most of the tier-1 banks will be fine in terms of capital raising. However, mergers and acquisitions can be quite disruptive. Anyone who has experienced one knows it’s not always the first option.
“While it’s easy to suggest being acquired or merging, in practice, it can come with short-term challenges. I think tier-2 banks will try to survive independently rather than get acquired, at least in the immediate term,” Chidoka added.
Also speaking, the Partner & Head Financial Services KPMG Nigeria, Ayo Othihiwa, said the recapitalisation exercise has the pivotal objectives of strengthening banks and mitigating systemic risks.
“With nearly two decades since the last recapitalisation effort, the sector is once again poised to play a crucial role in accelerating economic growth and achieving the government’s 2030 vision of a trillion-dollar economy,” he said.
Othihiwa, however, noted that the current macroeconomic environment, characterised by high inflation following the significant devaluation of the naira, presents a more difficult hurdle for banks this time around.
“Banks face the twin challenge of raising capital within the prescribed timeline and developing new business models for the post-recapitalisation environment. This will come with the pressures of delivering attractive returns to shareholders amidst a post-recapitalisation macroeconomic environment that may yet be in recovery mode,” he stated.
On his part, the Managing Director/Chief Executive Officer, Coronation Securities Limited, Jibola Odedina, said the exercise is a timely catalyst for economic growth, stressing that capitalisation requires banks to hold sufficient funds as a buffer against financial downturns.
“Adequately capitalised banks can facilitate larger transactions and complex business ventures, bolstering the banking sector’s resilience and overall economic strength,” he stated.
He noted that there is a huge deficit gap in banks capacity to mobilise huge investment funds currently, stressing that, “Bridging this deficit is essential for the banking sector to maintain its role as an economic growth engine, benefiting all stakeholders. A capital infusion will enable Nigerian banks to compete more effectively with their African counterparts. Recapitalisation will empower Nigerian banks to compete in a global state. Currently, no Nigerian bank ranks among the top tier in terms of capital,” he noted.
GTCO, Access, four others approach capital market to raise funds
Following the regulator induced recapitalisation initiative, a total of six banks have announced and approached the capital market to raise funds while others are on the verge of doing so.
Those that have raise funds include GTCO Holdings Plc (N400.5 billion), Access Holdings Plc (N350.1 billion), Zenith Bank Plc (N289.1 billion), Fidelity Bank Plc (N127.1 billion), and FCMB Group (N11.9 billion).
In mid-December, FBN Holding concluded a Right Issue of N350 billion while United Bank for Africa Plc is currently in the market offering a Right Issue aimed at raising N239.4 billion.
Similarly, Sterling Financial Holdings Company Plc is in the market for N153 billion after finalising a $50 million capital raise through private placement.
Wema Bank walks a tightrope
In 2001, Wema Bank received a universal banking license from the CBN; however, it had to revert to regional banking license in 2009.
During the 2008-2009 banking crisis, Wema Bank had to take a strategic step of revising its licence to a regional banking license, which restricted its operation to a maximum of 12 states.
By 2015, the bank raised sufficient funds to elevate its license to one of national authorisation.
Notwithstanding the elevation, the bank has not been able to achieve an effective national spread, and there are concerns that the recapitalisation exercise would place an additional hurdle towards achieving a true national visibility as it has most of its operation domiciled in the South West.
Currently, Wema Bank has 149 branches across 19 states and the FCT in Nigeria, with 17 states hosting no Wema Bank branch. The bank has no branches across the five states in the South East region, and in the North East it boasts branches only in Bauchi State.
Wema Bank has branches in Lagos, Oyo, Osun, Ekiti, Ondo, Ogun, FCT, Rivers, Delta, Edo, Akwa Ibom, Niger, Kogi, Kaduna, Cross River, Nasarawa, Kano, Bauchi, and Kwara States.
Concerning the capital base, Wema Bank presently has a paid-up share capital of about N15.1 billion, thus requiring about N184.1 billion to meet up with the N200 billion minimum capital requirement for a national banking licence.
Wema Bank raised about N40 billion in a rights issue in December 2023. When this sum is reflected in its share capital, the bank’s required capital raise is expected to drop to N144.9 billion.
The bank however looks to raise N200 billion through rights issue and other means as it mulls new 37.14 billion shares via rights issuance.
The Managing Director/CEO of Wema Bank Plc, Moruf Oseni, had declared that the bank will retain its national banking license when the recapitalization deadline expires in 2026.
He noted while answering questions from shareholders at the bank’s Annual General Meeting in May 2024 that the bank would not go back to its regional banking license. Oseni highlighted that capital raise was the next major hurdle for the bank hence he sought the support of the shareholders.
According to Oseni, “Capital raise is a major one in front of us, but please be rest assured that your bank will do all we can to get the funds in. And in two years’ time, come 2026, Wema Bank will remain a national bank. We have no plans of going back to regional banking.”
However, some industry experts express doubts over the ability of Wema Bank to achieve the N200 billion national operation authorization and cover the areas that it currently lacks presence.
“Much as banking is now effectively run on technology, for a bank that operates a national licence, Wema cannot operate like a regional bank – seen in limited areas, while its presence is lacking in others,” said George Edigin, an investor analyst.
“I cannot see Wema Bank come out of the recapitalization hurdle and maintain presence in virtually all the states,” observed Matthew Olalekan, a retired banker, adding that the tough operating environment calls for efficient management of resources, even if the bank operates a national licence “by mouth”.
Investor group leaders maintained that Wema Bank would not fail to meet the recapitalisation deadline.
“Wema Bank will definitely meet the target. The present GMD and the management team are doing marvelously in repositioning the bank.
“Going through the bank’s finances since he assumed office, nobody can be in doubt that the bank is gaining momentum with investor confidence going higher every day,” said Mukhtar Mukhtar, chairman, Trusted Shareholders Association of Nigeria.
Similarly, the National Coordinator, Independent Shareholders Association of Nigeria, Anthony Omojola, expressed strong optimism about Wema Bank’s capacity to meet the N200 billion requirements in 2026.
“Every bank sets its priorities towards certain objectives. Wema Bank is able to channel its efforts towards the N200 billion recapitalisation exercise and it will achieve it within the set period,” Omojola said.
Wema Bank Plc posted impressive results for the Q3 2024 operations incorporating its 9-month performance for the period ended September 30, 2024 in what is seen as a mark of efficient management of its assets.
As in the half year, the bank’s topline and bottom line profits were positively impacted by the efficiency in asset allocation during the Q3 period.
The bank hauled N289.1 billion in revenue, which is 90.6 percent more than the N151.6 billion achieved in Q3 of the preceding year; while it constitutes a 27.4 percent year-to-date growth against N226.9 billion as of December 31, 2023.
Profit before tax rose significantly to N60.6 billion from N22.1 billion constituting a 27.4 percent rise year-to-year and 174.1 percent jump year-to-date against N22.1 billion.
The bank posted a 33.49 percent growth in profit after tax which jumped to N52.7 billion against N19.2 billion in Q3 2023, or a 51 percent rise year-to-date from N34.9 billion.
The high interest regime decreed by the CBN’s Monetary Policy Committee impacted on Wema Bank’s interest income which surged to N229.9 billion during the review period from N127.4 billion in Q3 2023 representing a growth of 81.7 percent.
Forex revaluation which stood at a marginal N3.9 billion in Q3 2023 accelerated to N14.2 billion representing a 264.1 percent surge.
However total assets rose by a moderate 37.5 percent to N3.0 trillion compared to N2.2 trillion as of December 31, 2023.
Industry experts argue that the forex revaluation windfall harvested by the banks in 2024 would thin down to reality in 2025 when inflation and other macroeconomic challenges have taken their due course.
Meanwhile, Wema Bank Plc has announced plans to raise N150 billion through a hybrid offering to meet its national banking license obligations while Unity Bank Plc and Providus Bank are engaged in merger talks even as Nova Merchant Bank is said to be perfecting plans to scale up their businesses to deposit-taking commercial banks through raising N160 billion to ensure it meet the recapitalisation requirements.
FCMB stages a comeback, First Bank confident
Interestingly, the FCMB Group is staging a comeback as the bank announced plans to seek and got the board approval to raise another N340 billion at its Annual General Meeting held on December 19, 2024.
The Managing Director/Chief Executive Officer of First Bank of Nigeria Limited, Olusegun Alebiosu, is confident that the 130-year-old bank will scale the recapitalization hurdle.
“As the leading player in Nigeria’s banking industry, First Bank had maintained a strong capital base (relative to other players) before the announcement of the new CBN’s capital threshold requirements for banks.
“Recall that before the announcement of the new capital requirement by CBN, FBNHoldings, the parent company of First Bank, had obtained its shareholder approval for a capital raise action of N150 billion at its 2023 Annual General Meeting with First Bank billed to be a major beneficiary of the proceeds. This capital raise action was executed via the FBNHoldings N150 billion Rights Issue programme that closed on 30th December 2024. I am particularly delighted with the rate at which existing shareholders have taken up their rights under this programme.
“In addition, at the 12th AGM of FBNHoldings held on 14th November 2024, shareholders approved another N350 billion capital raise action which will be executed in a combination of ways in the days ahead.
“In view of the visible progress made, I am very confident that First Bank will meet and exceed the new N500 billion minimum capital requirements well ahead of the deadline of 31st March 2026 set by the Regulator,” Alebiosu said.
Over N1.7trn raised already – SEC
According to the Director General of the Securities and Exchange Commission, Emomotimi Agama, approximately N1.7 trillion has been raised from the Nigerian capital market as at the end of November 2024 by banks seeking recapitalisation.
Agama disclosed this at the SEC 2024 Journalists Academy in Abuja.
While emphasising the importance of the exercise, he said, “As you are aware, we came on board with an important banking recapitalisation exercise which we can declare has been successful. About N1.7trn has been raised so far from the market. This exercise will enhance financial stability and bolster investor confidence and improve the Nigerian economy.
Beyond mere recapitalisation
According to a KPMG Nigeria report titled “Nigeria’s Banking Recapitalisation: What Lies Ahead,” the global advisory services firm emphasises the need for broader action beyond the financial industry to enjoy the desired benefit of the initiative.
“Achieving the full benefits of the recapitalisation programme will require deliberate and coordinated efforts across the financial services spectrum, including non-bank financial service providers, regulators, and the government alike,” the report stated.
While reviewing the expected impact of the recapitalisation project on the economy, the KPMG report highlighted some critical issues.
Analysing the situation, the report stated that, “Engine of Growth Nigeria’s banking industry has remained relatively resilient in the face of domestic and global economic headwinds over the last decade, achieving growth in capital and assets at 11% and 17% CAGR respectively in the period. However, the performance has been against a background of sluggish economic growth, with GDP growth decelerating steadily from the 3.4% rebound in 2021 following the COVID-19 pandemic, to 2.74% in 2023.
“The qualifying capital position of banks prior to the announcement indicates a significant capital shortfall of N4trn across all licence categories, with capital deficits of between 35% – 90% of the new minimum capital across the different banks.
“This significant level of capital injection should spur growth in lending activities required for production, investment and consumption activities.
“However, the effectiveness of the recapitalisation exercise for driving growth requires efficient allocation of funds to productive sectors of the economy such as Manufacturing, Retail, Agriculture as witnessed in China, Brazil, India, etc. Nigeria’s banking industry loan to deposit ratio averaged 68% over the last decade, lower than high growth emerging markets, attributable to several factors including the perceived high risk of SMEs (which constitute over 90% of formal enterprises), economic volatility and impact on lending rates, regulatory policies.”
According to the report, a review of the sectoral distribution of loans indicates a narrower spread for the banking industry.
“Between 2014 and 2022, commercial banks disbursed c.N165tn as loans and advances, with 50% channeled to only three sectors – Oil and Gas (26.1%), Manufacturing (15.5%) and Government (8.4%), while a critical sector such as agriculture, attracted significantly less funding, with 5% of total loans.
“Consequently, addressing structural issues like poor market information, weak framework for loan recovery, poor database on credit quality, etc., which currently limit lending activities to key sectors of the economy, should be undertaken in tandem with the recapitalisation programme for the effectiveness of the growth pillar of the reform agenda.
“Accordingly, initiatives aimed at enhancing credit information systems, strengthening risk-sharing mechanisms such as credit guarantee schemes and deepening securitisation should improve access to credit for SMEs and underfunded sectors and allow the banking industry better support the broader economy and contribute to sustainable economic growth.
“The recapitalisation process is also expected to be a major attraction for much needed foreign direct investment. Nigeria’s banking sector is one of its most sophisticated economic sectors and amongst the most developed banking markets in Africa.
“The availability of investment opportunities in the sector arising from the exercise is expected to be a major draw for long term foreign investments in the country.”