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Bank recapitalisation: M&As could lead to a concentrated banking sector with higher barriers of entry- Fitch Ratings

Global ratings agency, Fitch Ratings has stated that the Mergers and Acquisitions (M&As) that would accompany the bank recapitalisation exercise could lead to a more concentrated banking sector with greater barriers of entry and stronger long-term profitability.

It explained that the anticipated concentration of the banking sector would be propelled by small and medium-sized banks finding it difficult to raise the new capital requirement leading to M&As.

However, it noted that such scenario would be of no effect to the long-term rating of banks as most Nigerian banks already have a B- Long-Term IDR.

It stated, “Some small and medium-sized banks may struggle to raise the necessary capital, leading to increased M&A. This would result in a more concentrated banking sector, with higher barriers to entry, greater economies of scale and stronger long-term profitability.”

Furthermore, the agency stated that it has low expectation of banks paying large dividend to shareholders in the hope that it will be reinvested as capital into the banks as it doubts the CBN would approve of such and even if approved, they are usually subject to taxes.

It stated, We do not expect banks to pay out large dividends for shareholders to reinject as paid-in capital, as we doubt the CBN would grant approval, and, in any case, the dividends would be subject to tax.”

Also, the agency opined that downgrading of license would not play a major role in meeting the new CBN requirement as it would mean banks divesting their international subsidiaries.

Last month, the CBN announced new capital requirements for commercial banks, merchant banks and non-interest banks to be met in the next 24months. Specifically, the apex bank asked banks across the country to submit a plan on how to meet the new capital requirement on or before the end of April 2024.

 

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