Recapitalisation: Analysts Project Shrink in Merchant Banks Space
Analysts have predicted that the imminent recapitalisation exercise in the banking sector could see a lot of mergers and acquisitions in the commercial banking space which could boost the sub-sector but may see a reduction in the number of merchant banks in the country.
Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, had last month, revealed that the apex bank would recapitalise the banks. Presently, the capitalisation of commercial banking at the national level is N25 billion, regional banking licences is N10 billion and international commercial licences - N50 billion.
But analysts who spoke with THISDAY, noted that the recapitalisation exercise, when it commences would see more merchant banks merge or change their licences. This appears to have started as last week, Nova Merchant Bank switched its licence to that of commercial banking and there are talks about some others following suit in the coming months.
Speaking to THISDAY, the Chief Executive Officer Cowry Management, Johnson Chukwu, said asking the banks to recapitalise to $1 trillion would be unrealistic.
He added: “Merchant Banks may be the worst of the categories of banks if the regulatory capital is increased beyond a certain threshold.
“The economic environment is not providing as many opportunities for merchant banking business as applicable to commercial banks, which can explain why merchant banks in previous periods have converted to commercial banks and we are also seen that happening again.
“So, if you increase the capital base and threshold and they don’t have opportunities to invest that capital they may be compelled to look at other banking services which may make it attractive for them to consider the option of converting to commercial banks.”
Furthermore, he noted that most tier 1 and tier 2 banks were adequately capitalised.
He said: “Whatever figure I quote would be speculative but I know that the intention is to increase by as much as 100 per cent of what it is today.
“For each category of bank, like I said, it's still in this speculative realm, but the intention may be to increase it by 100 per cent of each category.
“The tier 1 and tier 2 banks already have adequate capital. But the key thing like I've always said is that we don't have a $1 trillion economy. To now compel the bank to have the capital requirement for a $1 trillion economy when we are not going to have a $1 trillion economy in the next 20 years at our current growth rate will simply mean that the banks would be over-capitalised.
“And if the banks are well capitalised, that means the return on investment will decline and holding banking equity as an investment will be less attractive.
“So, the regulatory authorities must be must think through the recapitalisation proposal,” Chukwu said.
Also speaking to THISDAY, the Head, of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, predicted that the exercise would not be drastic considering the challenge of forex.
He said: “It is a dilemma for the CBN because if you increase it, for the banks to effectively implement it, they would need foreign investors.
“But with the way forex is, there is no foreign investor that would want to bring in money into the country. However, even if it is increased by 400 per cent, a lot of banks would still make it.
“For national bank is doing N25 billion and if they raise it to N100 billion you will realise that except the new banks and the banks with negative capital like Unity Bank and Keystone, most of the banks have surpassed N100 billion.
“So, unless it is something extremely high, the banks that would be challenged would just be the new banks and the banks that have negative capital.
“What banks are focusing on now is their capital Adequacy Ratio (CAR) and those that are low or close to the regulatory threshold are already looking for means to raise capital.”
He added: “The merchant banks are converting to commercial banks. The would be a redefinition, realignment, acquisition and mergers in the merchant banking space.
“Some would recalibrate their business model unless the CBN comes out and gives them some things that would make the segment more profitable and attractive.
“But the way it is, I envisage more of them converting to commercial banks. Merchant banks with affiliation to commercial banks may close their merchant bank subsidiaries.”
Former President of the Chartered Institute of Bankers of Nigeria (CIBN), Prof. Segun Ajibola, in a recent interview on ARISE News had said: “The CBN governor must engage with stakeholders to avert any possible consequences of the recapitalisation exercise.
“Let all stakeholders sit down, look at the facts and ask ourselves, not only about the desirable figures but the obtainable figures, given the state of the economy. The Central Bank is right in saying this exercise is now due.”