Recapitalisation Hurdle: Access Holdings Announces $1.5bn Capital Raising Programme

·         Targets N365bn rights issue

·         Analysts, bankers welcome capital raising for banks, fault exclusion of retained earnings

·         Say exercise will strengthen financial institutions, foresee mergers, acquisitions

·         CBN, law enforcement agencies to monitor exercise

Nume Ekeghe

Less 24-hours after the Central Bank of Nigeria (CBN) unfolded new policy requiring banks to increase their minimum capital, Access Holdings Plc, yesterday, took the first step among its peers by unveiling plans to establish a $1.5 billion (N1.963 trillion based on N1309/$ official rate as at Thursday), capital raising programme or its equivalent.

This was just as some financial market analysts, economists and bankers welcomed the recapitalisation exercise that requires banks to beef up their capital base to N500 billion and N200 billion for commercial banks with international and national authorisation respectively.

But some analysts faulted the exclusion of retained earnings from the regulatory capital composition.

However, the CBN has stressed that alongside law enforcement agencies, it would closely monitor the exercise to prevent the influx of illicit financing into the sector.

On Thursday, the central bank unveiled a fresh set of capital requirements for Nigerian banks, mandating international, national, and regional banks to uphold minimum share capital thresholds of N500 billion, N200 billion, and N50 billion, respectively.

Nevertheless, in delineating the concept of share capital, the Central Bank opted to exclude retained earnings from the computation. Instead, it stipulated that share capital encompasses solely banks’ ordinary share capital and share premium.

Access Holdings Plc, in a statement, announced plan to establish a capital raising programme of up to $1.5 billion or its equivalent.

According to the holding company, the programme aims to enhance the Group’s financial strength through the issuance of various financial instruments such as ordinary shares, preference shares, Alternative Tier 1 capital, convertible and/or non-convertible debt, bonds, or other capital and/or funding instruments.

It explained that the programme may be executed through a variety of methods including public offerings, private placements, rights issues, book building processes, or a combination thereof.

“The specifics regarding the tranches, series, proportions, dates, pricing, tenor, and other terms and conditions that may be associated, will be determined by the Board of Directors, contingent upon securing the necessary regulatory approvals.

“Drawing from the Programme, the Group expects to raise up to N365,000,000,000.00 (Three Hundred and Sixty-Five Billion Naira) specifically via a Rights Issue of ordinary shares. The proceeds of the proposed Rights Issue would be used to support ongoing working capital needs including organic growth funding for its banking and other non-banking subsidiaries.

“The plans for the Programme were disclosed in the Group’s Notice of the 2nd Annual General Meeting holding on April 19, 2024 which was published on the Nigerian Exchange portal on March 27, 2024,” it added.

However, speaking with THISDAY on the directive for banks to raise their capital base, the Special Adviser to the Senate Committee on Banking, Insurance, and Other Financial Institutions, Prof. Uche Uwaleke, contextualised the move by recalling the CBN’s previous capital base adjustment in 2005.

Uwaleke, highlighted the adverse impact of currency depreciation on banks’ capital base in dollar terms, necessitating the recalibration to enhance competitiveness on the global stage.

He emphasised the need for fresh capital injection, which he envisioned would proffer a safer and more resilient banking system in line with international standards.

The don explained: “For banks with international authorisation, that has had the effect of eroding capital base in dollar terms and these banks wouldn’t have the base to compete internationally so there is a need to ramp up the base of banks.

“In 2005 the CBN had allowed the entire shareholders’ funds to constitute the capital base. Shareholders’ funds comprise share capital, share premium and reserves of banks. All of that are to belong to shareholders and these reserves can either be revenue reserves or from retained earnings over the years.

“What the CBN is saying now is that for this recapitalisation, all we want to allow is paid-up share capital. The emphasis is on bringing in fresh capital and I think it would go a long way to strengthen the financial system and ensure that banks have enough capital to absorb losses because the whole idea of capital is to serve as a buffer.

“Going forward our banks are going to be safer, stable, and sound. I am sure the idea is to have a more resilient banking system again this is in line with international standards.”

Speaking further, he said: “If the CBN had allowed retained earnings, a number of our banks today already have shareholders’ funds in the excess of N500 billion. The CBN is focusing on the injection of fresh capital, core capital, and also after the quality of capital. If you include revenue reserves, some of the reserves may be associated with high-risk assets or speculative ventures which would have an effect of diluting the capital and that is why the focus on core capital.”

For his part, a former President of the Chartered Institute of Bankers of Nigeria (CIBN), Dr. Uche Olowu, lauded the initiative, describing it as a timely intervention to address capital erosion amid currency devaluation.

Olowu, anticipated a high compliance rate among banks within the 24-month window, with some likely opting for mergers or regional focus to navigate the evolving landscape.

He said: “There was a devaluation in the naira and that devaluation means Nigerian banks’ capital has been eroded and most banks, also do corresponding banking with external parties domiciled all over the world. So, you need to confer that assurance and that confidence.

“It has been expected because when capital has been eroded by devaluation, you need to shore-up your capital. It is designed to help banks do better. I think it is a welcome development. “

He predicted that having a 24-month window at least five or six banks would meet it easily.

 “Within this window, we should expect at least 75 per cent of the banks would meet the target while the others may merge,” Olowu said.

In his contribution, the Group Chief Executive Officer, Cowry Asset Management, Johnson Chukwu, faulted exclusion of retained earnings from the capital base calculation, advocating for its inclusion to incentivise banks to recapitalise without incurring additional costs.

Chukwu, urged the CBN to align the new capital requirements with industry dynamics to facilitate a seamless transition.

He said: “For international banks to have a capital base of N500 billion is an average of $500 million and for local banks to have a capital base of N200 billion is about $200 million. And if you look at the calculation as at the last time and now is about the same.

“Given the devaluation of the currency overtime and given the size of transaction tickets of banks today, the new capital requirement is not out of place.  On increasing it, many of the international banks may have a capital base that handles the new capital requirement. Many of them may go to the capital market to raise additional capital.

“The only adjustment the Central bank needs to do is that the new capital requirement should include the retained earnings of banks. Because if you exclude retained earnings, you will incentivize banks to incur costs to recapitalise.”

“The retained earnings of banks should be recognised by the CBN as share capital so they don’t pay dividend and bring back the money for rights issues. The only adjustment I would recommend is to allow retained earning count.”

Also, the Head of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, noted the CBN’s decision to solely rely on paid-up capital for regulatory capital qualification flagged concerns over the exclusion of retained earnings, underscoring the potential challenges in raising additional capital for banks.

 He said: “Everyone was expecting the CBN to increase the minimum capital requirements However, nobody thought the CBN would go this route by only allowing their paid-up capital to be used for qualification as base regulatory capital.

 “Based on the circular of yesterday, almost all the banks need to raise additional capital. Although some of, their shareholders’ funds are in excess however CBN is excluding retained earnings which is a major controversial issue.

“One of the major concerns is CBN excluding retained earnings for composition of regulatory capital, the only thing that can make sense is that CBN wants them to bring in fresh funds. And if you look at the top banks some of them would need to bring in as much as N200 to N300 billion which is a huge ask.

 “Some think that CBN wants the banks to bring in foreign investors because getting such an amount in the Nigerian market might be challenging.

“We think there may be some discussion within the CBN and we anticipate that the CBN may allow retained earnings. However, if CBN maintains they are only allowing paid-up capital, there would be a lot of realignment in the industry.”

He added: “Banks need to raise capital. They need to do rights issues and they’ll need to start talking to their shareholders on how much additional share capital existing shareholders would be willing to bring forward and if existing shareholders can’t take them to the finish line, they should start courting the institutional investors or new investors that have the capacity to support the banks.”

 Chief Executive Officer, Eczellon Capital, Diekola Onaolapo echoed support for the new capital base, citing the rationale behind safeguarding banks against currency devaluation.

Onaolapo predicted strategic shifts in banking operations, including mergers, acquisitions, and regional expansions, as banks strive to meet the regulatory standards within the allotted timeline.

He said: “I think only makes sense given what has happened to the currency. If you look at the size of banks now versus when the last recapitalisation was done, you would probably wonder if banks aren’t in smaller sizes in dollar terms. So it is a good idea.

“Some would easily cross it, some big banks, the other ones would probably look at having some sensible mergers and acquisitions and I think some can also probably choose to maybe change their coverages, so instead of being national or international may probably do regional banking. Also, the timeline is a good enough timeline.”

CBN, Law Enforcement Agencies to Monitor Compliance

 Meanwhile, the CBN has indicated that it would closely monitor the recapitalisation efforts alongside law enforcement agencies to prevent the inflow of llicit financing into the sector.

This was disclosed in a circular signed by the the Director of the Financial Policy and Regulation Department at the CBN, Mr Haruna Mustafa. The circular was addressed to commercial, merchant, and non-interest banks, including promoters of proposed banks, on the new minimum capital requirements for banks.

It stated:  ”The CBN has robust anti-money laundering regulations which will  be strictly enforced, with the active collaboration of relevant law enforcement agencies. In addition, the CBN will require all banks to ensure that appropriate and effective anti-money laundering screening/checks (Know Your Customer, Customer Due Diligence and Suspicious Transactions Monitoring, etc) are conducted. 

“There shall be strict enforcement of fit and proper checks for all prospective and significant shareholders as well as directors and senior management staff of banks.

“The CBN will actively monitor and supervise the recapitalisation process to ensure compliance with set guidelines. This will involve the conduct of on- and off-site reviews, verification of capital, periodic interventions when necessary and broader stakeholder engagements.

“The CBN, in collaboration with the Nigeria Deposit Insurance Corporation (NDIC), will ensure that depositors’ interests are protected during the Programme.  The CBN will enhance its monitoring and supervisory oversight over the banks and will apply appropriate sanctions for violations of extant laws and regulations as well as ensure the protection of depositors’ interests.

“In a merger or acquisition scenario, depositors’ accounts and funds will remain secure. The acquiring institution will assume responsibility for all liabilities and obligations, including the protection of depositors.”