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Nigerian banks brace up for mega capital raise

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Nigerian banks are strategically gearing up for a major capital raise in response to various factors shaping the country’s economic landscape.

Industry insiders and market intelligence from Nairametrics indicate that several banks are actively planning to bolster their capital reserves, with some institutions already taking concrete steps to attract potential investors. 

Access Holding has taken the lead, having announced in April the successful completion of a $300 million (N240 billion assuming $800/$1) capital investment into its flagship subsidiary, Access Bank Plc.

The bank holding company notably employed a non-dilutive approach to raising the capital, signaling its innovative approach to meet capital requirements. 

Following Access Holding’s move, other banks in Nigeria have been prompted to assess their own capital needs and adopt proactive measures.

One of the major players in the Nigerian banking sector, Fidelity Bank announced plans to raise capital via a combination of a public offer and a rights issue. At the current share price of N7.3, the sales could fetch the bank fresh capital of about N96.3 billion. 

Other banks are expected to follow suit and explore similar capital-raising strategies. While not all banks have disclosed their plans officially, many are expected to include capital raise proposals as part of their upcoming Annual General Meetings (AGMs). 

FBN Holding is anticipated to announce its own capital raise soon, according to a reliable source who informed Nairametrics. 

Why the need for more capital?

In a bid to arouse the interest of institutional investors and pension funds, some banks have commenced road shows, seeking to secure substantial investments.

These engagements are seen as crucial steps in securing the necessary capital for their growth and expansion plans. 

Market experts believe that several key drivers underpin the surge in capital-raising activities among Nigerian banks.

Macro-Economic Headwinds – Firstly, the country’s economy has faced challenging headwinds, leading banks to fortify their capital base to absorb potential losses and maintain healthy balance sheets.

The increase in non-performing loans has further emphasized the importance of shoring up capital to remain compliant with regulatory capital adequacy ratios.

In discussions with Nairametrics, a pension fund manager expressed the belief that Tier 2 and regional banks should seek to raise new capital to safeguard against falling below the required 15% and 10% Capital Adequacy Requirements, respectively.  

  • Additionally, such capital would facilitate the enhancement of their technology infrastructure, enabling them to compete more effectively.
  • Conversely, the pension fund manager does not perceive an immediate need for Tier 1 banks to raise additional capital, as these banks possess well-established FinTech capabilities, enabling them to handle technology improvements internally. 

According to insights from an investment banker, the primary concern lies in placements and investments from an institutional perspective.

  • Banks falling below the threshold required for pension funds to conduct business with may face limitations in securing placements and investments in their capital market transactions.
  • This dynamic underscores the significance of maintaining adequate capital levels to attract and retain potential investors.  

The central bank recently released key financial indicators for the banking sector as of April 2023. According to the disclosure, the Capital Adequacy Ratio (CAR) stood at 12.8 per cent, the Non-Performing Loans (NPLs) ratio at 4.4 per cent, and the Liquidity Ratio (LR) at 45.3 per cent.

Changes at CBN – While these indicators may currently seem positive, there are skeptics who believe they could deteriorate under renewed scrutiny. 

  • As the appointment of a new CBN Governor is imminent, analysts predict that banks will face increased scrutiny of their financial books.
  • This heightened oversight may lead to loans that were previously classified as performing to be reevaluated and potentially disclosed as non-performing upon closer examination. 

Basel III – Additionally, the implementation of the latest Basel III requirements has prompted banks to seek additional capital to meet global capital adequacy benchmarks.

  • Complying with these international standards is paramount to ensuring stability and resilience in the face of economic uncertainties.
  • Nigeria’s central bank had set a November deadline for Nigerian banks to begin implementation of Basel II guidelines, however, no new directives or updates have been made since then. 

Competition– FinTechs, with their well-capitalized presence, have emerged as formidable competitors to traditional banks in Nigeria.

  • The scarcity of the Naira earlier this year served as an eye-opener for most banks, revealing vulnerabilities in their IT infrastructure when facing the pressure of online transactions.
  • During this challenging period, many banks experienced difficulties, and their IT systems crumbled under strain.
  • In stark contrast, FinTech companies showcased their resilience and efficiency, as their superior and modern IT infrastructure withstood the pressure effortlessly.
  • This advantageous position allowed FinTechs to gain market share, capitalizing on the opportunity presented by the shortcomings of traditional banks.

As technology continues to play a pivotal role in the industry, the ability to handle online transactions seamlessly has become a crucial factor for banks to retain their market standing and effectively serve their customers.  

Govt Policy – The Nigerian government’s signal towards a market-driven economy has opened doors for capital-intensive projects.

  • Banks are positioning themselves to take advantage of economic expansion opportunities and secure significant deals that may arise in this dynamic environment.
  • The government plans to spend around N30 trillion according to information contained in some of their policy documents.
  •  Another critical consideration is the recent unification of the naira, which has resulted in a smaller dollar-denominated balance sheet for banks.

Pan Africa – As Nigerian banks continue with their Pan-African expansion plans, raising additional capital becomes imperative to support cross-border operations effectively.

  •  The Nigerian banking sector has been strategically positioning itself for the full implementation of the African Continental Free Trade Area (AFCFTA).

Market confidence appears to have anticipated the sector’s growth, as the banking index has impressively surged 68% year-to-date, outpacing the 26.8% growth of the All-Share Index. 

As banks take proactive measures to secure capital and adapt to the changing market dynamics, investors and stakeholders are closely watching how these strategic moves will shape the future of the banking sector in Nigeria.