SEC’s framework on banking sector recapitalisation in Nigeria

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The Securities and Exchange Commission (SEC) has a significant role in facilitating the recapitalisation programme as banks are expected to leverage the capital market to raise needed funds, writes JOSEPH INOKOTONG.

The release of a framework on the banking sector capitalisation programme, 2024 by the Securities and Exchange Commission (SEC) has signalled, in earnest, the commencement of the exercise.

Justifying its steps, the SEC pointed out that they are in a bid to support the Central Bank of Nigeria’s (CBN) recapitalisation programme toward achieving the targeted objectives.

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The framework, which was released on the commission’s website on Friday, serves as a comprehensive guide for banks/holding companies and market participants to navigate the recapitalisation programme effectively and the move is driven by the recent directive by the CBN for banks to raise additional capital that will be able to serve $1 trillion economy.

Also, the commission’s framework would help to ensure the capital-raising process by banks is conducted efficiently, transparently and in a manner that protects the interests of all stakeholders.

It is expected to guide the banks/holding companies issuers and capital market operators in filing applications for capital raise and/or mergers and acquisitions. Other objectives of the framework are to ensure full disclosure of material facts in compliance with the Investments and Securities Act 2007, rules and regulations of the commission and other relevant laws to enable proper and timely review of the transactions.

The capital market has a significant role in facilitating the recapitalisation programme as banks are expected to leverage the market to raise the needed funds and/or engage in various forms of business combinations.

As the regulatory institution mandated to regulate and develop the Nigerian capital market, SEC has the responsibility to ensure a smooth, transparent and efficient capital raise process by the banks.

To underscore this, the framework outlines the guidelines and procedures banks are required to follow to raise capital through rights issuance, private placements, or other approved methods during the 2024-2026 recapitalisation period.

According to the SEC, applications/documents should be filed electronically via [email protected] email, adding that documents forwarded will be reviewed and where there are observed deficiencies, those will be communicated to the applicants electronically. The commission also stated that where deficiencies are communicated, the timeline resets and in the absence of any deficiency, approval will be granted and communicated.

“Where an application is returned for being incomplete, a penalty of N1 million and a re-filing fee of N100,000 shall apply. This fee is payable by the Issuing House without recourse to the Issuer or the Issue proceeds. For further inquiries or clarification, banks and stakeholders are encouraged to contact the SEC’s dedicated offer application email: [email protected],” the commission stated.

In pursuance of its regulatory functions, the commission may require other documents or information as may be necessary. Where an issuer had already filed necessary documents with SEC (e.g. Memorandum and Articles of Association (Memart) or certificate of incorporation or certificate of increase in share capital, etc.), the issuer need not file the documents in subsequent transactions, provided the issuer enters into an undertaking that since the previous filing, there has been no change in the documents already filed with the commission. Affected banks/holding companies are required to regularise/update their corporate information with the CAC prior to filing an application with the commission.

When the CBN in March gave the directive to banks to recapitalise, it said the prevailing macroeconomic challenges and headwinds occasioned by external and domestic shocks have underscored the need for banks to raise and maintain adequate capital to enhance their resilience, solvency and capacity to continue to support the growth of the Nigerian economy.

Consequently, in furtherance of its statutory responsibility to promote a safe, sound and stable banking system and in line with Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 2020, the apex bank announced an upward review of the minimum capital requirements for commercial, merchant and non-interest banks in Nigeria.

It pegged the minimum capital for commercial banks that desire to ply their trade internationally at N500 billion, while those in the national scene should have N200 billion and regional banks are required to have N50 billion. Merchant banks that are interested in having a national spread are required to have N50 billion, non-interest banks with national spread to have N20 billion, while those with regional outlook should have N10 billion.

To meet the minimum capital requirements, the CBN added that banks may consider any of the option of injecting fresh equity capital through private placements, rights issue and/or offer for subscription, mergers and acquisitions (M&As) and/or upgrade or downgrade of license authorisation.

Other requirements spelt out by the CBN entail all banks and promoters of proposed banks noting certain details. For existing banks, it said, “The minimum capital specified above shall comprise paid-up capital and share premium only. For the avoidance of doubt, the new capital requirement shall NOT be based on shareholders’ fund.”

This is where the SEC comes in because the banks will have to approach the capital market, which the commission regulates.

“Additional Tier 1 (AT1) capital shall not be eligible for the purpose of meeting the new requirement. All banks are required to meet the minimum capital requirement within a period of 24 months commencing from April 1, 2024 and terminating on March 31, 2026. Notwithstanding the capital increase, banks are to ensure strict compliance with the minimum capital adequacy ratio (CAR) requirement applicable to their license authorisation.

In line with extant regulations, the CBN stressed that banks that breach the CAR requirement shall be required to inject fresh capital to regularize their position.

For proposed banks, it stated that the minimum capital requirement shall be paid-up capital and the new minimum capital requirement shall be applicable to all new applications for banking license submitted after April 1, 2024.

The CBN pledged to continue to process all pending applications for banking license for which capital deposit had been made and/or Approval-in-Principle (AIP) had been granted. However, the promoters of such proposed banks shall make up the difference between the capital deposited with the CBN and the new capital requirement not later than March 31, 2026.

All banks are required to submit an implementation plan (clearly indicating the chosen option(s) for meeting the new capital requirement and various activities involved with their timelines). The plan shall be submitted to the Director, Banking Supervision Department, Central Bank of Nigeria, not later than April 30, 2024. The CBN will monitor and ensure compliance with the new requirements within the specified timeline.

Interestingly, after the CBN’s announcement, many banks have embarked on a journey to raise their capital bases. A new report by the Lagos-based Afrinvest (West) Africa Limited has estimated that listed commercial banks, excluding Union Bank, would require a combined N2.8 trillion to meet the new baseline capital requirement set by the CBN.

It stated, “Assuming the re-engineering of retained earnings to bolster eligible capital levels (that is share capital and share premium as defined by the CBN for the recapitalisation exercise), our estimation indicates that approximately N901.8 billion combined would be needed by Wema, FCMB, Fidelity, Unity and Sterling banks to reach new benchmarks.”

This notwithstanding, skeptics have expressed the view that some banks may not be able to meet the new capital base. A report from Ernst and Young highlighted foreign exchange devaluation, fintech competition, among other challenges that will constrain and cause about 17 out of 24 banks to fall short in meeting the planned capital requirement to be set by the CBN if it is increased by 15-fold from its current N25 billion.

The report delved into the potential consequences of this shortfall, offering insights into various options available to banks that might find themselves outside the capital requirements mandated by the CBN. It suggests that such banks may need to consider mergers and acquisitions (M&A) to shore up their capital base, a strategy reminiscent of the consolidation witnessed during the last recapitalisation exercise in 2004/2005, which saw the number of banks reduced from 89 to 25.

“On the back of that, we were able to determine the number of banks (across the three license types) that may fall below the new minimum capital thresholds. In a worst-case scenario, given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital,” the report stated.

Despite this, six banks have been reported to be on the race to raise over N1. 047 trillion amidst pressure to shore up capital following directive from the CBN to Deposit Money Banks (DMBs) to increase their capital base within 24 months beginning from April 2024 to meet the new rule.

Amidst these, experts say the CBN’s new minimum capital requirements for banks will enhance the financial system and provide a potential boost to the stock market.

Professor Uchenna Uwaleke, Director, Institute of Capital Market Studies, Nasarawa State University, Keffi, described it a welcome development that will help strengthen the country’s financial system and a potential boost to the stock market, adding that in view of naira devaluation following the unification of exchange rates, the new calibrated minimum capital requirements seem “OK, unlike the uniform capital base of N25 billion stipulated in 2005.”