By Jibola Odedina
In a recently held webinar by Coronation Securities Limited, financial experts delved into the imperative topic of bank recapitalisation, discussing the potential of rights issues and opportunities for investors.
The panel, comprising Okey Umeano (Chief Economist, Securities and Exchange Commission, Nigeria), Bolanle Adekoya (Partner, PwC and Head, Capital Market Accounting Advisory Services Partner for West Africa Markets), and Ayokunle Olubunmi (Financial Institutions Ratings, Agusto & Co.), highlighted how capitalisation mandates can transform the banking sector and drive Nigeria towards a $1 trillion economy.
Capitalisation requires banks to hold sufficient funds as a buffer against financial downturns. Historically, these regulations have led to substantial increases in bank capital. For instance, a 2005 directive triggered a surge in capital from $2 billion to $50 billion. Such regulations safeguard the financial system and maintain public confidence, ensuring sufficient capital to service a $1 trillion economy soon.
Nigerian banks across all licence categories face a substantial capital shortfall, ranging from 35% to 90% of the new minimum requirement. This industry-wide gap totals approximately N4.2 trillion (KPMG, 2024). Bridging this deficit is essential for the banking sector to maintain its role as an economic growth engine, benefiting all stakeholders. A capital infusion will enable Nigerian banks to compete more effectively with their African counterparts.
Building a Global Competitive Edge
Recapitalisation will empower Nigerian banks to compete on a global stage. Currently, no Nigerian bank ranks among the top tier in terms of capital. To bolster this effort, the Central Bank of Nigeria has mandated banks to procure capital externally rather than relying on foreign currency assets, which are now bloated due to currency devaluation.
Pathways to Capitalisation
Banks are typically prohibited from retaining dividends as a means of capital augmentation. This restriction prevents them from artificially inflating their capital base without corresponding increases in shareholder value. However, several options are approved by the Central Bank of Nigeria:
- Public Offering: Issuing new shares to the public through a Public Offering (PO) or a Follow-on Public Offering (FPO) is a common method to raise capital. While this approach can generate funds, it dilutes existing shareholders’ ownership and incurs publicity costs, including heightened disclosure requirements.
- Private Placement: Selling shares to a select group of investors offers a faster capital-raising option compared to public offerings. However, it often requires substantial effort to attract new investors and can lead to ownership dilution. Introducing new, potentially unfamiliar shareholders could disrupt the bank’s corporate culture.
- Rights Issue: A rights issue allows existing shareholders to purchase additional shares at a discounted price. This method respects the rights of current shareholders but relies on their willingness to invest further.
- Mergers and Acquisitions: Combining with or acquiring other banks can boost capital and create operational synergies. However, this strategic move demands careful planning and execution to integrate diverse systems and cultures. The 2005 capitalisation exercise, which raised the minimum capital requirement to N25 billion from N2 billion, resulted in a dramatic reduction in the number of commercial banks from 89 to 25 and 24 later (CBN, “Banks Reforms and Its Impact on the Nigerian Economy,” 2012).
- Capitalising Dividends (Audio Dividends): Converting dividends into additional shares is often referred to as “audio dividends.” While this method can retain capital, it is not an approved capital-raising mechanism under the Central Bank of Nigeria’s regulations.
- Convertibles: Securities like convertible bonds or preferred shares offer a flexible capital-raising option as they can be converted into common shares. However, this method is not typically favoured as a primary capital-raising strategy. If a large number of convertibles are issued, the potential for significant dilution of existing shareholders’ equity is high. This can negatively impact the stock price and erode shareholder value.
Each capital-raising method presents distinct advantages and drawbacks. Selecting the most suitable approach depends on a bank’s specific circumstances, market conditions, and regulatory requirements.
The Popular Choice for Raising Equity Capital
Rights issues have been a popular capital-raising method due to their relatively low costs and ease of execution. Targeting existing shareholders simplifies marketing and administrative processes. As illustrated in the graphs, the number and value of rights issues have steadily increased over the past five years.
Investors benefit from potential capital gains if the bank’s share price appreciates post-rights issue. Importantly, rights issues preserve existing shareholders’ ownership stakes, preventing dilution from new investors. Additionally, they often offer shares at a discount, especially if the bank’s stock is undervalued. A thorough examination of a bank’s financials can help determine its value.
Successful rights issues bolster a bank’s financial resilience, enabling it to weather economic storms and provide a more secure investment for shareholders.
Understanding the Risks of Rights Issues
Shareholders who cannot exercise their rights during a rights issue risk dilution of their holding when new shares are issued. This is similar to the dilution that occurs in public offerings. Rights issues often coincide with market uncertainty, potentially leading to volatile share prices and investment losses. Insufficient investor demand can result in undersubscription, negatively impacting the bank’s share price. The successful deployment of raised capital for growth and profitability is crucial to the overall success of a rights issue.
Role of the Securities and Exchange Commission in Regulatory Oversight and Investor Protection
The Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) are jointly overseeing the bank recapitalisation process to safeguard investor interests. The SEC has established a regulatory framework for this exercise, is actively monitoring compliance, and will enforce rules to ensure fairness and protect investors.
Importance of Bank Capitalisation
- Financial Strength: Capitalisation is a key indicator of a bank’s financial strength, acting as a buffer against potential losses. This instils confidence in depositors, investors, and regulators.
- Lending Capacity: Adequate capital allows banks to extend loans to businesses and individuals, promoting economic growth and development.
- Risk Mitigation: Capitalisation provides a cushion to absorb losses arising from loan defaults or market fluctuations, ensuring the bank’s stability and sustainability.
- Regulatory Compliance: Banks are required to maintain a certain level of capital by regulatory authorities to protect the financial system and ensure consumer confidence.
Composition of the New Bank Capital
- Share Capital & Share Premium: The new capital is limited to only share capital and share premium.
- Retained Earnings Excluded: Retained earnings and other reserve components of shareholders’ funds are excluded.
- Bonus Shares Excluded: Capital from the issuance of bonus shares is excluded. Banks are not allowed to capitalise retained earnings through the issuance of bonus shares to meet the new capital requirement.
- Capital Adequacy Ratio: Retained earnings, additional tier-1 capital, and other reserves will continue to be recognised in the computation and determination of a bank’s capital adequacy ratio (CAR).
According to KPMG, the capital shortfall for banks ranges between 35% to 90% of the new minimum capital requirement, with an estimated total capital shortfall of about N4.2 trillion across the entire industry.
Coronation Securities views the bank capitalisation initiative as a timely catalyst for economic growth. Adequately capitalised banks can facilitate larger transactions and complex business ventures, bolstering the banking sector’s resilience and overall economic strength. Through its digital platform, Coronation Wealth, the company empowers investors to capitalise on emerging market opportunities and generate substantial returns. Coronation Wealth offers a diverse range of investment options, including access to rights issues and public offerings. This platform serves as a gateway for retail investors, providing them with the tools and knowledge to make informed investment decisions.
Benefits of Investing in Recapitalised Banks through Coronation
1. Enhanced Financial Stability and Resilience
Recapitalised banks have undergone a significant infusion of capital, which fortifies their balance sheets and provides a buffer against economic downturns. These financial strengthening positions these banks to manage risks more effectively, maintain liquidity, and meet regulatory capital requirements. For investors, this translates into a safer investment with reduced exposure to financial instability.
Coronation Securities offers investors a pathway to these resilient institutions, ensuring that their portfolios are aligned with banks that are well-prepared to navigate economic uncertainties and continue their growth trajectory.
2. Potential for Strong Capital Appreciation
As banks recapitalise, they are better equipped to expand their lending activities, invest in new technologies, and enhance their operational efficiencies. These improvements can lead to increased profitability and higher stock valuations. Investors who position themselves in recapitalised banks stand to benefit from the potential for significant capital gains as these banks grow and enhance their market competitiveness.
Through Coronation, investors can access a curated selection of recapitalised banks that are primed for long-term growth, providing them with the opportunity to realise substantial returns on their investments.
3. Access to Dividend Income
Recapitalised banks, with their stronger financial foundations, are likely to generate consistent and robust profits. This financial health often translates into attractive dividend payouts, providing investors with a reliable source of income in addition to potential capital appreciation. For those seeking income-generating investments, recapitalised banks represent a promising opportunity.
Coronation Securities facilitates access to these dividend-paying banks, enabling investors to build a portfolio that balances growth with steady income.
4. Strategic Exposure to Emerging Markets
Nigeria, and Africa more broadly, are regions with high growth potential, driven by increasing financial inclusion, infrastructure development, and a young, dynamic population. Recapitalised banks are positioned to play a pivotal role in this growth, expanding their operations and capturing new market opportunities. By investing in these banks, investors gain exposure to the promising prospects of emerging markets.
Coronation’s deep expertise in the African financial landscape provides investors with valuable insights and access to these opportunities, ensuring they can capitalise on the growth potential of recapitalised banks in emerging markets.
5. Increased Investor Confidence and Security
The recapitalisation process is closely monitored by regulatory bodies like the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC). Banks that meet the new capital requirements demonstrate their commitment to transparency, good governance, and regulatory compliance. This reassures investors of the soundness and integrity of their investments.
Investing through Coronation ensures that investors are aligned with banks that adhere to the highest standards of regulatory compliance, providing them with the confidence that their investments are secure and well-managed.
In conclusion, the need for bank recapitalisation in Nigeria is not just a regulatory requirement but a strategic imperative for the country’s economic growth and stability. The various methods of raising capital, particularly rights issues, offer viable pathways for banks to strengthen their financial positions and compete on a global scale. Coronation Securities, through its platform, provides investors with the opportunity to participate in this transformative process, fostering a robust and dynamic financial sector in Nigeria.
By partnering with Coronation Securities, investors can leverage the insights and opportunities presented by bank recapitalisation to grow their wealth and contribute to the nation’s economic prosperity.
By Jibola Odedina – Managing Director/Chief Executive Officer, Coronation Securities Limited.
