Pressure is mounting on banks in the country to bolster their capital base as a result of developments in the economy, OYETUNJI ABIOYE writes
Commercial banks, especially mid-sized and small lenders in the country, are considering new options to raise additional capital as pressure continues to mount on them from various fronts.
The deadline given by the Central Bank of Nigeria to the banks to raise additional capital has elapsed.
Adding to the pressure, the International Monetary Fund last week advised the Central Bank of Nigeria to compel the banks to recapitalise in order to become stronger to support the economy.
Beside the recent recession, which was occasioned by low oil prices, dwindling oil revenue and foreign exchange scarcity, among others, there has been significant deterioration in the country’s macroeconomic indicators, which exposed the banks to risks in the last 24 months.
This subsequently led to the deterioration of the banks’ asset quality with non-performing loans rising to 15 per cent, far above the five per cent regulatory threshold.
Banks, especially tier-2 lenders, were beginning to weigh options to raise additional capital ahead of a possible directive from the CBN, top banking officials told our correspondent on the condition of anonymity on Sunday.
“There are certain banks struggling with capital adequacy ratio; they need to recapitalise,” a chief executive officer of one of the banks said on condition of anonymity because of the sensitive nature of the matter.
“One or two tier-1 banks and then some banks in the tier-2 category need recapitalisation. But then, banks will always need recapitalisation,” the CEO added.
It was learnt that a number of banks were considering raising Eurobonds, while some others were planning to embark on an aggressive search for foreign partners to take up equity stake. Rights issue through the capital market was also said to be on the list.
Economic and financial analysts said recapitalisation by way of raising additional funding should be done as soon as possible to enable them to withstand any possible shock, adding that the CBN might need to compel banks to act fast.
“After a crisis like the recession we just had, banks should recapitalise so that they can have enough buffers to withstand any shocks,” the Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said.
He, however, noted that a few banks were already embarking on capital raising exercise.
The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said he believed the IMF’s advice to Nigeria was meant for banks that were currently undercapitalised.
Chukwu stated, “The CBN should compel banks that are currently undercapitalised to recapitalise. Most of them have had their capital eroded through high non-performing loans.
“These banks should recapitalise or find partners so that they don’t create systemic crisis.”
Two members of the CBN’s Monetary Policy Committee said in September that four commercial banks in the country were operating with too many non-performing loans on their books and with liquidity ratios below the minimum requirement.
In statements on the CBN’s website, the two MPC members, Dr. Doyin Salami and Prof. Balami Hassan, did not name the lenders, but said the four banks together were equivalent to at least one Systemically Important Bank.
Their statements were part of those of eight members of the MPC put on the website.
According to Hassan, financial sector stress tests showed that the Capital Adequacy Ratios for the nation’s banking industry worsened to 11.51 per cent in June, from 12.81 per cent in April, as against a regulatory minimum of 15 per cent for banks with international licences.
He said, “The financial performance indicators showed that when the four outlier banks were removed, the CAR, NPLs ratio and the liquidity ratio are all above the prudential requirement.
“The banking sector liquidity ratio showed that all the DMBs registered above the minimum of 30 per cent Liquidity Ratio with the exception of four outlier banks. The stress test, therefore, shows that the Deposit Money Banks are less resilient to shocks.”
Hassan stated that the NPLs stood at 15.07 per cent in June compared with the five per cent regulatory limit.
Salami, on his part, said the ratio stood at 8.17 per cent when excluding the four lenders in question.
He stated, “The Financial System Stability Report by the CBN staff highlights one of the biggest challenges with which the central bank must grapple.
“At slightly over 15.0 per cent, the portfolio of the NPLs as a proportion of the total loan book of the banks remains above the regulatory maximum and continues to rise. Whilst the CBN staff continue to note that once the figure is discounted for the impact of the four outlier banks, the NPL ratio drops to 8.17 per cent.”
In its latest report titled, ‘Nigerian banks: Survival of the fittest’, Renaissance Capital, an investment bank, said, “We believe that the focus for the banks that have struggled in this environment is to clean up their loan books and strengthen their capital positions.
“In our view, the biggest risk to both the NPL clean-up process and capital is the currency, as most of the banks continue to use the official rate (N305/$) to market their foreign currency exposures.”
A number of mid-sized banks are seeking to raise fresh capital but the economic challenges facing the country may have delayed their plans.
The Managing Director, Afrinvest Securities, Mr. Ayodeji Ebo, said the CBN should address the risk assessment of the banks, adding that additional capital could be invested in areas that would erode the capital.
“If you ask the banks to get additional N50bn, you need to monitor where they will invest it; that is the key thing. There is a need for continuous monitoring of the books of the banks by the CBN examiners.”
It appears that some banks in Nigeria, especially small and mid-size banks are finding difficult to raise capital.
United Bank for Africa Plc, Zenith Bank Plc and Fidelity Bank have issued Eurobond in recent months.
Wema Bank Plc dropped plans recently to raise dollar loans but will rather sell naira debt locally in smaller tranches.
Unity Bank Plc, which missed a February 28 deadline to recapitalise, has been in talks with investors since October, while Diamond Bank Plc started negotiations to issue debt over a year ago, Bloomberg reports. Spokesperson for the CBN, Mr. Isaac Okorafor, did not respond to text messages and telephone calls when our correspondent sought to know the regulator’s position on the IMF’s advice on the need for Nigerian banks to recapitalise.