Low Assets-to-GDP in Banks Explains Recapitalisation
The low asset base of Nigerian banks relative to peers makes a compelling case for a recapitalisation exercise, according to Ike Chioke, group managing director, Afrinvest West Africa Limited.
Banks’ total assets is only 16.4 percent of the country’s $0.5 trillion Gross Domestic Product (GDP) according to Afrinvest data, well below the level for banks operating in countries with similar GDP.
Banks’ asset to GDP ratio in Egypt is 100 percent, while it is 74 percent in South African and 47 percent in Kenya.
The figure is also significantly higher than countries around the $1 trillion-mark that Nigeria is targeting to achieve in eight years.
In Brazil, whose economy is worth $1.9 trillion, bank assets as a percentage of GDP is 125 percent. The figure is 45 percent in Mexico which has a GDP of $1.5 trillion and 104.6 percent in Netherlands which has a GDP of $1 trillion.
Chioke looked at the top 10 banks in Nigeria in terms of total assets, total deposits and loans based on their 2023 audited accounts as he attempted to further buttress his point of the relatively low asset base of Nigerian banks.
The ten largest banks in Nigeria had a combined $180 billion in total assets compared to Brazil’s top ten banks which have $1.6 trillion in assets. Indonesia’s top ten banks have $523 billion in assets while banks in Mexico hold $266 billion.
“We looked at all the commercial banks in Nigeria today and all the non-interest banks. We see that based on the CBN capital requirement, there’s a need for the Nigerian commercial banks to get to N3.7 trillion to bolster the N1.9 trillion they currently have,” Chioke, who was the keynote speaker at the BusinessDay’s roundtable on bank capitalisation, said.
“Clearly we have quite a lot of work,” Chioke said.
The CBN in March 2024 raised the minimum capital base for banks with international authorisation by ten-fold to N500 billion.
The apex bank also increased the minimum capital base for commercial banks holding national authorisation to N200 billion, and for those with regional authorisation to N50 billion. Merchant banks now have a minimum capital requirement of N50 billion, while non-interest banks holding national and regional authorisations must adhere to new minimum requirements of N20 billion and N10 billion, respectively.
Chioke said it is necessary to increase Nigerian banks’ minimum paid-in common equity capital to strengthen the banks against external and domestic shocks as well as macroeconomic headwinds.
“By increasing the minimum capital requirements, the CBN aims to ensure banks have a robust capital base to absorb unexpected losses. It will help enhance banks’ capital buffers, ensuring their continued stability and sustainability,” he said.
According to him, recapitalisation will result in the emergence of stronger, healthier and more resilient banks, thereby supporting the achievement of a US$1 trillion economy by the year 2030.
Bigger banks with larger capital base and capacity can underwrite larger levels of credit. This will provide a pathway to revitalise the economy.
“If you look at it in real terms, what we did here was to look at the effect of inflation from 2010, particularly when we had the repeal of the universal bank into 2024.
When inflation is factored, there has only been a 135.2 percent increase for commercial banks that have an international licence, 88.8 percent increase for banks with a national licence and 17.6 percent for banks with a regional licence.
For merchant banks, the new recapitalisation actually marks a contraction of 21.6 percent, and for non-interest bank licences, both national and regional, the new capital represents a decrease of 53 percent from the old minimum capital.
Chioke said the recapitalisation exercise has the potential to generate capital importation.
“If banks aim to recapitalise by sourcing half of their required funds from the market, with an equal division between domestic and international markets, approximately N984 billion or $820 million would be generated from the global market,” Chioke said.
There must be deliberate efforts to steer liquidity into the real sector so as to avoid banks creating financial asset bubbles or gains delinked from productivity of the real sector, he recommended.
The recapitalisation exercise could give the economy a renewed gusto towards the $1.0 trillion target, although there would be need for significant reforms across key sectors to realise this goal.
Ayokunle Olubunmi, head of banking at Agusto and Co, said that one of the consequences of getting the capital through the Right issue is that it might signal that you are finding it hard to get new investors.
He said that, for some banks, scaling down of the banking licence is the simpler method to get the capital, adding that the easiest might be just to step down for a while. During that, banks can now raise more capital to get the required capital,” he said.
He said that the disadvantage of this route can come from picking the branches to scale down from.
Another disadvantage is the number of years in which you must operate before you can change your licence. According to the CBN, it is five years.
Olubunmi said that the recapitalisation process will stimulate economic growth and stimulate activities in the capital market.
“I think this time around there’ll be a lot of foreign investors. It’s a good strategy to bring in FDI,” he said.
According to him, there’ll also be mergers and acquisitions but not as high as the last exercise in 2004/2005.
