Why 17 out of 24 banks may not meet new capital requirement–report

A new report from Ernst and Young estimates that 17 out of 24 banks might not meet the capital requirement from the CBN if it is increased 15-fold from its current N25 billion.

The report discusses the options available to banks who might fall outside the capital requirements from the CBN.

Although the report acknowledged that financial soundness indicators show that Nigerian banks are largely safe and resilient as of 2023.

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 Acquisition (M&A) as witnessed during the last recapitalisation exercise in 2004/2005.  The last recapitalisation exercise of the apex bank reduced the number of banks from 89 to 25.

It stated, “While the CBN governor gave no indication as to 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 on 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.

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“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 noted that plan to recapitalise banks is premised upon the recent devaluation of the naira in 2023. It explained that the exchange rate as of 2005 during the last exercise in 2005 stood at N132.9/$ but the naira currently exchange for over N1400/$.

Furthermore, the N25 billion capital base in 2005 amounted to $188.2 million, this has dropped significantly to a mere $18.4 million using recent exchange rate.

This differs from the position of the CBN Governor who stated that the planned recapitalisation is aimed at supporting the targetted $1 trillion economy.

In November 2023, the Governor of the Central Bank of Nigeria (CBN) suggested the possibility of raising the minimum capital requirement for banks, despite the sector’s relative stability in recent years.

He noted that the proposed increase is based on the observation that many banks lack sufficient capital to back an economy aiming for a GDP of $1 trillion, as targeted by the Nigerian Federal Government.