In an effort to deepen the country’s financial system, the Central Bank of Nigeria has ordered a second recapitalization of its banking sector in a reform that is believed to be able to afford the industry the capacity to fully handle major funding needs in the economy. Mandy Amadi of our Economic Intelligence Unit reports that this development has opened a new vista of huge investments in the economy through equities, mergers and acquisitions as the Nigeria banks remain major profit cows in the economy.Even if drums and tambourines may not be deployed, against the case in 2006, the current recapitalization demand has already gained a very high pitch. It may not demand the usual road-shows, door-to-door marketing, because the efficacy of the banking sector to dig up the funds from the hidden investors is already known.
Fund raisers through recapitalization is no more new to investors who are conversant with the country’s economy, and more especially the banking sub-sector. What they now need to do is to do what they know how to do best; play up their figures and show what should be expected at the end of the year, reference the ‘magic’ they have been doing since 2006, and every fund will be falling into good places.With over 200 million people, made up about 65% medium income population, the future of Nigeria’s banking sector is as sure as the Northern Star and that shows the usually upward-looking financials of Nigerian banks, even when the GDP growth rate and the level of disposable income have been low over time.
The attraction into the Nigerian economy is based on the elasticity of its market which is enriched by a very large population and untapped and semi-tapped natural resources that have become major growth advantages. With about 36 banks in the country, there is still the belief that a very large segment of space and people are not really covered even as banks have continued to deploy more electronic processes which are heavily hampered by poor electricity drive. Apart from the high funding demands from critical areas like infrastructure there are other areas of very high financial needs that can gulp the entire deposit liabilities of a single Nigerian bank.
It is not difficult to raise some N500 billion equity as capital base for a Nigerian bank, if in the same industry five of such banks can at the same time return profits as much as N500 billion each, in a financial year from a business whose asset base is not up to N1 trillion.As a matter of fact, the current average return on investment (ROI) among Nigerian banks as calculated from the deployment of a paltry N100 billion capital indicates that the banking system is an ocean of many gains.
What one sees in the Nigerian banking industry today in terms of their levels of profit is a matter of the quantum of capital deployment to the system. Huge profits abound within the very high risk areas like mining, undersea, hi-technology, highway construction, research, inventions and mass productions in biotechnology and agriculture. The funds currently in Nigerian banks are simply funds for SME support, not even for growth, services, medium loans, short loans and short-hold equity investments. Where they are into some small scale long-term loans it also becomes a part of the huge cost for funds for banks; not enough funds for electricity development empowerment or a top-notch specialist hospital.With the expansion in global investment opportunities, huge capital can empower Nigerian banks to stream into whole-sale investments across the continent or run a huge syndication that can make them competitive and highly profitable.
The current level of profitability being recorded by banks has a lot to do with the 2006 expansion of the capital base which ushered many banks into novel investments like medium scale energy expansion, tertiary institutions ownership, high-scale commercial services and the availability of take-off funds for large industries. The biggest funding made by Nigerian banks after the 2006 capitalisation was the part funding for Dangote Cement at Ibeshe in the South West of Nigeria even at a very high interest rate which was eventually bought over by US- Exim Bank. Suffice it to say that Dangote Cement is today one of the top five most profitable equities on the Nigerian Exchange, meaning that investors in it are now home and fine.
This same level of fortune also awaits investors in Nigerian banks that are now up for capitalization. Looking at the profiles of banks like Access, Ecobank, GTBank, First Bank, UBA , Zenith , Fidelity, FCMB there are indications that their seeming drive for high performance would always leave them with very ambitious results which would satisfy the demands of any investment prodigy over a very short time. With their share prices ranging between N5 to N30 at their current level of capitalization, investors can expect more as capitalization enlarges, and more opportunities beckon.
On the average, the first ten biggest Nigerian banks have recorded as much as 100% growth on dividend payout and this could be more as more opportunities for bonus shares follow the new enlargement. What this means is that investors in Nigerian banks face a new deal of income growth, even as new funding areas open. What will happen in the Nigerian capital market in the next few months is capital investment rush, where many who have the capability to invest in these shares would be left out due to early closure or over subscription and subsequently rejection.Currently, the goose within the banking sub-sector of the finance equities include the Tier-One banks while a good number of them in the Tier-2 category, such as Fidelity, FCMB, Polaris and IBTC hold the ace in terms of stability in pricing for the last few months.
The big five Nigerian banks better known as FUGAZ ( First Bank, UBA, GTBank, Access and Zenith) could be any investor’s delight as far as returns are concerned because of their established levels of efficiency and confidence garnered over the last many years and their usually very stable customer loyalty. But more importantly, these banks are buoyed by competitiveness as they see themselves as very serious peers and the yardstick to measure the stability of the Nigerian banking industry. They hold the high revenue yields and hold the highest number of depositors as well as spread. Their asset holding makes them the most stable financial institutions even though they also hold the largest risk assets. Because their annual income has remained very large too, they bear the potency for better profit returns always.
They also stand the highest chances of not experiencing any remote level of technical insolvency. Their corporate governance level is high and this adds to their claim to avoidance of high degree of insolvency. Most stockbrokers and investment consultants would definitely recommend the FUGAZ due mainly to conservatism, but critical and robust investors would also look deep into banks like Fidelity, Polaris, FCMB and IBTC. As a give-away option, many investors in this new dispensation may strictly be glued to this order while advising their brokers to deal with Access, Zenith, GTBank, Ecobank, UBA, First Bank, FCMB, IBTC, Fidelity.
This has become where investors looking for lucrative options must focus and direct their new income demands now that the Central Bank of Nigeria’s (CBN) circular dated March 28,2024 has ordered all banks, commercial, International, national, regional) merchant , non-interest banks to beef up their respective capital base or ship out of the shores of the financial sector. Banks operating Commercial and international operations or service are required to operate with N500 billion new capital base, national commercial banks N200 billion, while regional commercial banks are expected to have N50 billion new capital base. The Merchant bank is expected to lift its capital base to N50 billion, while the non-interest banks, national and regional, are to have N20 billion and N10 billion new capital requirements, respectively.
The banks are required to meet up with the new capital requirements within a period of 12 months, commencing April 01, 2025.Taking into account that the clock has started ticking for the banks on the agreed time frame for recapitalize, they now have barely nine months before the deadline. The capital market provided a melting pot for the funds to be raised, and banking on past performance could once again outperforms global indexes on gains. The focus here starts from the top of the pyramid which is the eight International licensed banks, followed by the seven national, six merchant banks and the three non interest banks.
There is no doubt, with the contest for consolidation of ownership or control of majority shares in banks, investors or shareholders would use the prevailing opportunity for recapitalization to re-ignite the ownership contest on who takes shares not taken by their shareholders, only time will tell how this plays out.Chairman, UBA , Tony Elumelu, at the bank’s recent Annual General Meeting (AGM) urged shareholders to invest in the capital raising by taking their rights, the same way he will take all his rights, “Elumelu stated, “I’m advising shareholders, as you get your dividends, reinvest a significant part of it. My group and I would be investing 100% of the dividends we get.
If we don’t do so, we would be leaving food on the table for others who did not labour for it.” Remarkably, the Nigerian capital market has consistently offered peak earning opportunities for investors, even when the global markets give negative returns, investors in Nigeria make great harvest. It is not surprising that foreign investors who have the FX exchange rate advantage, would put all their arsenals in place to ensure that they have a greater chunk of the investment opportunities made available by the recapitalization bid of all the banks in the country. Even as the foreign portfolio investors are warming up to make a giant inroad into ownership of Nigerian institutions through acquisition of major stake in the unfolding recapitalization, Nigerian custodian or mutual funds portfolio investors would be seen to be positioning to also have a greater bite of the cakes in refinancing the capital base of financial institutions. Idle funds are expected to be put into work to generate much returns in line with the tradition of most Nigerian banks with international licenses. However, for the banks that have opted for rights issues, there is the probability that their new shares to be accommodated through the capital raising, will rightly bloat their already over bloated share outstanding, which ostensibly will in no small measure retard the price movement , as there would always be surplus supply of the shares to the market.Kudos are at the same time being given to the Central Bank of Nigeria (CBN) governor, Olayemi Cardoso, for the policy geared towards further consolidating the country’s financial services sector. Halima Ishaq, Head of Corporate Affairs, Jaiz Bank, said that investors are now faced with multiple investment opportunities at the same time, as they now have the opportunity to make choices. She noted that, “Investors aren’t supposed to have issues because as an investor you have confidence in your institution.
If you look at the recapitalization breakdown, the Tier two and tier three banks are not as Tier one, which everybody know, are strong, they are also reliable” She added that the Tier two banks which she described as “The middle ones” probably, could find it a little bit difficult to stand, and this makes it imperative that they invest more. But For Jaiz Bank she said “looking at where we are and what we’re supposed to add up to, I can say to you that we are fine. That’s all I can say, that investors would have more confidence and CBN for it to say this, of course knows that, we are going to be stronger. You can remember when banks used to be over 100, it became 89 and pruned down to about 20 at the some point, and were brought down to 20 something.
The industry continues to be stronger, the industry continues to do better. And we are confident that this is also an initiative that is also going to give us more advantage”Senior stockbroker, David Adonri, Chief Executive Officer, Highcap Securities Limited, in an interview said that the ongoing recapitulation will surely make more financial instruments available to investors and this, to investors, translates to more opportunities to make more money. For him, there is no doubt that the recapitalization effort of banks will certainly make more quality financial instruments available to investors in the Capital Market. Because Banks have strong fundamentals and pay out high dividends,” these will make them attractive to prospective investors”.
However, he expressed concern that the recapitalization could in some instances provoke or intensify effort for ownership control.David Adonri, commenting on the possibility of the new shares through rights issues, to boost outstanding shares of banks, thereby making payment of better dividend difficult, he maintained that the fresh capital would be put to work to generate more funds to service the now higher volume of shares. He said that “as long as the securities that will be issued are backed with exchange of consideration, it will increase the number of outstanding securities but that may not be considered as over-bloating, adding that mergers and acquisitions may not be feasible, hence the capital market has enough funds to take public offerings and Rights Issues. Through public offerings and placements, the banks can scale the huddle. Mergers & Acquisitions are unnecessary. The Capital Market has enough capacity to ensure success of the exercise” Secretary, Independent Shareholders Association of Nigeria (ISAN), Chibuzo Emma Ekeh, in an interview said that the ongoing recapitalization provides investment opportunities for both local and foreign investors. The local investors will have the opportunity to recapitalize the banks for future growth.
”It will make the banks stronger to do foreign businesses. When the banks become stronger, they can pay good Dividend in the nearest future”. According to him, “foreign investors now have more opportunity to access the Nigerian capital market to help grow the institutions and expect better dividends, adding greater value to the economy. The recapitalization exercise will provide opportunities to attract foreign investors which will strengthen the banks and the economy at large. Recall that Nigeria economy is the largest in Africa, most investors will like to invest in Nigeria because of its inherent opportunities. Over bloating of outstanding shares through new rights issues may result in a small Dividend payout, but it also depends on profits made and Dividend Policy of the company. All these are on the short run but on a long run, the Dividend payment will be better as the economy improves”. Eke however, argued that mergers and acquisitions may be an option for the banks that did not meet the threshold.
Another option could be foreign investors buying substantial shares in the particular bank, especially those that have good retained earnings, and other indexes. “Recapitalization of banks especially in this economy will make the banks stronger and in a better position to do business and the investors will enjoy better dividends.” He sounded.Former Registrar/ Executive, Chartered Institute of Bankers of Nigeria (CIBN) and President, Bank Customers Association of Nigeria (BCAN), Dr. Uju Ogubunka, in an interview, said that merger and acquisitions could provide the easy way out for banks in their recapitalization bid. He said that the issue of bank recapitalization is important, especially given what is happening in our country and in the global world. But given volume of money required, some banks may not have the capacity.
“If you look at the size of what is required, you will try to understand that some banks may have to merge to be able to raise that kind of money”, he noted. He indicated that, there may be injection of capital, either from within or outside. In other words, many more people may participate in ownership of banks, either through share ownership or by acquisition.He said that if the banks fail to consider mergers and acquisitions, it would be very difficult for some banks to single handedly, meet up with the new capital requirements.
“So, in my opinion, I will advise that banks that have the same trend of thinking, and like, should merge, or they can consolidate. You can have some group of banks come together and consolidate under a new name; otherwise, either you bring money from outside or you bring more people. ”If you go to the capital market today and advertise that you want to sell shares, I don’t know how many people that are going to buy because of the size of our pockets. So, I am thinking that the best way to go about it, is that banks that have common business interests can merge and become one. Two or three of them can come together and become one, it doesn’t hurt, you have a smaller number of banks in Nigeria, which will be better for the regulators and supervisors when they want to regulate and supervise”, he quipped.Yes, foreign invasion of the capital market is expected.
They can bring the money, if the law permits it. But if the law doesn’t permit it, then it becomes an issue. They can also use investors within. For local investors, it brings investment expansion. For instance, if you don’t have shares in a bank before, and this is an opportunity to have shares in the bank, you are expanding your scope. Also, if you have fewer shares in the bank before, or you have in one bank, now you want to have in two or three more banks, this is an opportunity to buy into those banks. So, it provides a lot of opportunities. When this recapitalization process ends, the scope of banking operations will increase, which means they will need more staff to be able to service the customer base.
Dr. Anthony Omojola, former Chairman, Independent Shareholders Association, in an interview said that the recapitalizations were expected to widen the depth of the Nigerian capital market and provide more opportunities for both local foreign investors. He said that control could not be the primary aim of recapitalization, it is not ruled out, as opportunities abound for investors to strategies into gaining control of some of these organizations by investing more in places of interest to them.
Omojola also expressed confidence that the boost in capital will lead to boost in profitability to service the now bloated shares outstanding. “It is hoped when the rights issues result in increased shares, more working capital will be available and used to generate increased revenue. Higher revenue will naturally lead to bumper dividends. Payment of higher dividends is a function of good earnings, otherwise bloated shares will result to lower dividends”, he explained. He further explained that the remaining nine months to conclude banks recapitalization programs no doubt offer both foreign, local, institutional, and retail investors opportunities to leverage on the enabling openings to boost earnings, at probable rates which the money markets could not guarantee, going by the rates of returns of most banks in the country.
