Date: May 3
Venue: Raddison Blue, Victoria Island, Lagos.
Introduction
The host, welcomed distinguished guests and introduced the round table discussion on bank recapitalisation directed by the Central Bank of Nigeria to foster economic growth.
Welcome Address
The publisher of BusinessDay delivered the welcome address, emphasising the importance of the Policy Intervention Series. This initiative aims to bring together industry experts, government representatives, and stakeholders to address challenges and formulate policies that drive economic growth.
Objectives of the Policy Intervention Series:
1. Analyse Pain Points: Identify critical issues facing the economy and society.
2. Facilitate Dialogue: Convene policymakers and stakeholders for frank discussions.
3. Foster Collaboration: Leverage collective expertise for policy formulation and execution.
4. Disseminate Insights: Share recommendations with a broader audience to catalyse tangible policy changes.
The series promotes collaboration and knowledge sharing to address complex societal challenges through evidence-based policy interventions.
Key Points from the Welcome Address
● Bank Recapitalisation: Discussing the Central Bank of Nigeria’s directive for banks to recapitalise, addressing challenges, and maximising benefits.
● Support for the Series: Emphasising the need for sponsorships to sustain the initiative, citing the costs involved in organising these events, including logistical requirements for high-profile guests.
Upcoming Discussions and Initiatives
● Bank Recapitalisation: The day was on discussing the challenges and benefits of bank recapitalisation.
● Future Events: Plans to bring in key figures such as the Director General of the Debt Management Office to discuss Nigeria’s Bond issuance programme for 2024 and the Director General of NAFDAC to address issues impacting businesses, particularly SMEs.
New Developments at BusinessDay
● Research and Data Analytics Company: Business Day has established a research and data analytics company to help clients understand trends and craft growth strategies.
Event Highlights
● Speakers and Panelists: The event featured prominent figures in the banking and legal sectors, including Ike Chioke Group Managing Director, Afrinvest (West Africa) Limited; Abiodun Ogunoiki Associate Partner, Ernst & Young / Head of Financial Services Risk Management, West Africa, Ayokunle Olubunmi Head of Banking Agusto & Co; Mustafa Chike-Obi Chairman, Bank Directors’ Association of Nigeria (BDAN); Osaro Eghobamien, SAN Managing Partner, Perchstone & Graeys.
Keynote address by Ike Chioke Group Managing Director, Afrinvest (West Africa) Limited.
Insights on banking recapitalisation, covering five sections
1. CBN’s Announcement and Implications: The CBN’s directive aims to bolster banks against economic shocks and support growth towards a trillion-dollar economy by 2020.
2. The 2004-2005 Recapitalisation Experience: Previous recapitalisation efforts saw only a few banks meeting the mandate independently, with many merging or being acquired.
3. Potential Approaches for Recapitalisation: Various strategies for banks to raise capital, emphasising the need for substantial capital mobilisation.
4. Implications of the Recapitalisation: Significant capital increases for different bank categories, adjusted for inflation and exchange rates, reveal a considerable gap to be bridged.
5. Summary of the Gap: Highlighting the challenges banks face in meeting recapitalisation requirements, particularly tier one banks.
Remarks by Mustafa Chike-Obi Chairman, Bank Directors’ Association of Nigeria
Mustafa addressed the complexities of recapitalisation:
● Agreement with Reservations: While agreeing on the need for more capital, he emphasised the importance of better engagement and explanation from the CBN.
● Key Questions: He raised questions about international licences requiring more capital and the rationale behind capital requirements for banks with varying international presences.
● Call for Engagement: Mustafa encouraged more transparent discussions between regulators and banks to better understand and implement policies.
Historical Context and Current Challenges
Reflecting on the 2004 recapitalisation:
● Independent Banks: Only six banks, including Zenith, GT Bank, and EcoBank, met the capital requirements independently.
● Mergers and Acquisitions: Numerous banks merged, resulting in 19 new entities, of which only 11 are still operational.
● Capital Growth: The total capital base pre-consolidation was $2.4 billion, with raised capital amounting to N445 billion. By 2015, the industry’s capital reached N932 billion.
Key Details
● The 2004-2005 Recapitalisation:
● Independent banks: Zenith, GT Bank, Ecobank, Standard Chartered, Stanbic Bank, and City (formerly Nigerian International Bank).
● Mergers: Sky Bank (now Polaris), Spring Bank (Enterprise Bank, now Heritage Bank), Sterling Bank (Union Bank), UBA, Access Bank, PHB Bank (Skystone Bank), Afribank (Main Street Bank, now FCMB).
● Total capital pre-consolidation: $2.4 billion.
● Raised capital: N445 billion.
● Capital in 2015: N932 billion.
● Current Recapitalisation Challenges:
● Significant increases in minimum capital requirements.
● Questions about international versus national capital requirements.
● Need for transparent engagement between regulators and banks.
Recapitalisation Strategies
To recapitalise, banks can use various methods:
● Rights Issues
● Private Placements
● Initial Public Offerings (IPOs)
● Mergers and Acquisitions
However, past forced mergers in Nigeria have had negative outcomes. Valuations based on price-to-book value indicate that Nigerian banks are undervalued compared to peers in emerging markets like Brazil, Indonesia, and Mexico.
Historical Context and Valuation Concerns
Reflecting on the 2004 recapitalisation, it’s crucial to avoid overvaluation by carefully considering valuations at each capital raise stage. Despite regulatory improvements, investors remain cautious.
Capital and Retained Earnings
The CBN’s announcement that retained earnings won’t count as qualifying capital suggests that distributing these earnings may be a wise move. If dividends can’t be distributed, new investors might buy at a deep discount, which would be unfavourable for existing shareholders.
Risk Management and Capital Importation
Effective risk management is essential, even at the Central Bank, as supervising banks with additional capital will be challenging. Past experiences show that most capital raised in the 2004-2005 recapitalisation came from Nigerians, with foreign investors joining later and exiting before the 2008 market crash.
Government’s Role and Economic Impact
The federal government and states should prepare bankable real sector projects to ensure that capital goes into growth-driving sectors. Investing in real estate in certain areas can create asset bubbles, leading to economic crashes.
Fiscal Discipline and Monetary Policy
The government’s large borrowing and money printing injects cash into the system. Fiscal discipline is necessary to allow the CBN to manage the economy effectively.
Fireside Chat with Mustafa Chike-Obi
Mustafa Chobi emphasised that banks are under-capitalised, agreeing with the policy but questioning the feasibility of achieving a trillion-dollar economy in eight years, which requires a 15% annual GDP growth. He highlighted the need for a realistic approach to recapitalisation, stressing that the goal should not be the sole reason for raising capital.
Risk Management Concerns: Given his experience with AMCON, he noted that increased capital is necessary due to the decline in real exchange-adjusted capital. This adjustment aims to restore capital levels to their proper state, rather than significantly increasing them beyond normal levels.
Key Points
● Recapitalisation Methods: Rights issues, private placements, IPOs, mergers, and acquisitions.
● Valuation: Nigerian banks are undervalued compared to peers; careful valuation is crucial.
● Retained Earnings: Distribution may be necessary as they don’t count as qualifying capital.
● Risk Management: Enhanced risk management is needed at the Central Bank.
● Government Projects: Should focus on real sector projects to drive growth and avoid asset bubbles.
● Fiscal Discipline: Essential for effective monetary policy and economic stability.
● Feasibility of Economic Goals: Achieving a trillion-dollar economy requires realistic targets and strategies.
AMCON’s Purpose and Future
● Creation and Necessity: AMCON was established to prevent a banking system collapse during an emergency.
● Current Status: While necessary in the past, it is now considered redundant and should be phased out.
● Duration: AMCON is the longest-running Asset Management Corporation globally. Debts not recovered in 13 years are unlikely to be recovered.
Financial Implications
● Costs to Banks: Statutory fees for AMCON and NDIC are significant, with AMCON and NDIC expenses potentially matching salaries and other expenses within a few years.
● Duplication of Roles: The NDIC premium is questioned, as AMCON often bails out banks without NDIC intervention. It’s suggested that NDIC premiums be redirected to AMCON until it is dissolved or to cover bank failures more efficiently.
Valuation Issues
● Bank Valuations: Nigerian banks are undervalued because investors distrust their reported book values due to bad loans and lack of transparency.
● Impact on Shares: Misstatements by the Central Bank of Nigeria (CBN) about banks’ capital can depress share prices, causing rational investors to sell bank shares.
Exit Strategy and Asset Management
● Lack of Exit Strategy: Initially, AMCON had no formal exit strategy. It was created without a legal sunset date but aimed for a 10-year exit plan based on specific assumptions.
● Taxpayer Funds: AMCON’s operations were funded by taxpayer money, with banks later bearing the costs. Private sector involvement in asset management was limited.
Industry Structure and Capital Regulation
● Banking Industry: The Nigerian banking industry comprises 36 banks, including non-interest banks and merchant banks.
● Capital Requirements: International banks need a minimum capital of 50 billion Naira, national banks 25 billion, and regional banks 10 billion. Capital adequacy ratios vary between 15% for international banks and 10% for others.
Recapitalisation Plan
● New Regulation: CBN’s new regulation focuses on paid-up capital (share capital and share premium) instead of total shareholders’ funds. Banks have two years to comply.
● Capital Needs: Approximately 4 trillion Naira is needed for banks to meet the new capital requirements.
Challenges and Recommendations
● Duplication and Costs: Reduce duplication between AMCON and NDIC and redirect premiums to avoid excessive costs on banks.
● Improving Valuations: Enhance transparency and reporting to improve investor confidence and bank valuations.
● Phasing Out AMCON: Develop a clear exit strategy for AMCON, leveraging lessons from international practices and focusing on long-term sustainability.
Four Options for Banks to Meet New Capital Requirements
1. Rights Issues: Offering shares to existing shareholders to minimise dilution. However, these have historically faced low subscription rates in Nigeria.
2. Private Placement: Involves bringing in new investors, which may dilute existing shareholders but provides easier access to funds.
3. Mergers and Acquisitions: Used during the 2004-2005 recapitalisation, providing resource access but can present integration challenges and may not meet goals.
4. Scaling Down Banking Licenses: Quickly meets capital regulations but involves operational challenges and regulatory approval hurdles.
Recapitalisation Necessity and Risks
● Necessity: Essential to stimulate economic growth, strengthen capital bases, diversify ownership, and invigorate the capital market.
● Risks: Potentially attracting unsuitable investors, creating asset bubbles, and dealing with macroeconomic uncertainties. Enhanced risk management and governance are needed.
Regulatory and Economic Context
● Regulator Role: Needs to enhance supervisory capacity, scrutinise fund sources, and manage inflationary pressures from increased money supply.
● Banking Product Diversity: Increased capital availability will lead to product innovation and risk mitigation.
● Non-Performing Assets (NPAs): Addressing NPAs is crucial for banks’ economic growth contribution.
Strategic Focus and Panel Insights
● Niche Markets: Banks may develop niche markets, focusing on specific sectors or regions, especially viable for regional and non-interest banks.
● Regulatory Considerations: Assessing capital needs and strengthening underlying assets to attract investors. Importance of deploying raised capital effectively, especially in supporting SMEs.
● Audience Concerns: Focus on capital utilisation for SME support and real asset creation. Need for a conducive fiscal environment and structured investment opportunities.
Inflation and Central Bank Mandate
● Inflation Control: Central Bank focuses on price stability to bring down inflation, which is crucial for economic stability and growth.
● Policy Stability: Importance of stable policies to allow for effective planning and growth. Regulatory changes and reducing non-performing loans are key.
Capital Raising and Market Considerations
● Local vs. Foreign Capital: Likelihood of raising capital locally due to global economic volatility and risk aversion.
● Investor Attraction: The need for stable economic policies to attract foreign investment.
Conclusion
Banks must adopt strategic measures to meet new capital requirements, considering risks and the broader economic environment. Effective recapitalisation and robust risk management will support sustainable growth and financial inclusion.