Despite the Central Bank of Nigeria’s (CBN) governor, Dr. Olayemi Cardoso, mentioning a plan to increase banks’ regulatory capital base, the industry is gearing up for an intensified recapitalization effort not solely dependent on the apex bank’s proposal.
The Head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, explained that this recapitalization surge is a response to escalating credit risk and single obligor limits triggered by the devaluation of the naira.
Speaking on the Implications of Reforms in the Banking Industry at the Finance Correspondents Association of Nigeria (FICAN) forum in Lagos, Olubunmi highlighted that the devaluation of the naira will impact the banks’ books, particularly inflating foreign exchange loans, posing credit risks, and diminishing their Capital Adequacy Ratios (CAR).
Additionally, he pointed out that certain banks might breach the 20% single obligor limit due to the inflated value of their dollar loans. Consequently, he predicted that banks would need to raise capital before the end of the year, irrespective of the CBN’s plans to boost the industry’s capital base.
While acknowledging that the CBN’s proposed capital base increase would not significantly harm the industry, Olubunmi emphasized that about 60% of the sector is currently dominated by the top five banks in the country. He mentioned that mergers and acquisitions resulting from recapitalization would not substantially impact the industry as a whole.
Despite the top five banks already having capital bases around N1 trillion, with some surpassing the trillion mark, Olubunmi anticipated new entrants into the industry, with approximately eight entities already in the process of obtaining banking licenses. Additionally, he highlighted the ongoing transformation of merchant banks into commercial banks.
Despite acknowledging that the Nigerian banking industry remains an attractive investment opportunity, Olubunmi pointed out that the only drawback is the country’s foreign exchange issue. The exchange rate crisis, which prompted various CBN directives to increase the supply of dollars and ease pressure on the Naira, has been a notable challenge in the financial landscape.
