Recapitalisation may force tier-3 banks to merge – Fitch

Fitch Ratings has said tier-3 banks in Nigeria are more likely to resort to mergers and acquisitions or downgrade their licences as they struggle to meet the Central Bank of Nigeria’s new paid-in capital requirements.

In a report released on Wednesday, the global credit rating agency stated that while first- and tier-2 banks had made notable progress in raising fresh capital, tier-3 lenders had been slow in their recapitalisation efforts, making consolidation or licence downgrades a more likely path to compliance.

It noted, “M&A activity and licence downgrades remain more likely among third-tier banks.”

In March 2024, the CBN introduced a significant increase in paid-in capital requirements for all commercial, merchant, and non-interest banks in the country.

The new rule, which mandates a higher capital threshold, aims to improve financial stability and ensure that banks have sufficient buffers to withstand economic shocks.

To comply, banks have three options: raising fresh equity, merging with other institutions, or downgrading their licences.

While major banks have leveraged shareholder backing and capital markets to generate funds, third-tier banks have struggled to attract the necessary investments.

Unlike larger banks, which have successfully raised capital to maintain their current licences, third-tier banks have lagged in their efforts.

The Fitch report indicated that many banks had yet to obtain shareholder approvals or finalise their capital-raising strategies.

Among banks still navigating the recapitalisation process is Union Bank of Nigeria, which remains in breach of the CBN’s 10 per cent Capital Adequacy Ratio requirement.

Similarly, Wema Bank has received shareholder approval to raise capital to retain its national banking licence and is expected to commence fundraising by April 2025.

Coronation Merchant Bank has also received board approval for capital raising, but its next steps remain unclear.

The credit rating agency warned that unless these banks take immediate steps to secure fresh capital, they might be left with no option but to merge with stronger institutions or downgrade their banking licences to comply with the CBN’s regulatory expectations.

While smaller banks face difficulties, major financial institutions have made notable progress towards meeting the new capital requirements.

Access Bank and Zenith Bank have already raised sufficient capital to meet the N500bn benchmark for international banking licences.

First HoldCo, United Bank for Africa, and Guaranty Trust Holding Company have adopted a phased approach, raising capital in tranches, with some awaiting final regulatory approvals for their recent rights issues.

Fidelity Bank and FCMB Group, both classified as second-tier lenders, have completed their initial rounds of capital raising but will need to secure additional funds to maintain their international banking licences.

Fitch also noted that Ecobank Nigeria and Jaiz Bank required only minor capital injections and had already met the regulatory threshold.

However, Ecobank Nigeria remains in breach of the 10 per cent Capital Adequacy Ratio requirement and has further plans to restore compliance.

Despite the economic challenges, investor sentiment towards capital raising has remained positive, enabling most top and mid-tier banks to secure funds successfully.

The strong appetite for equity issuance has lowered the likelihood of widespread consolidation in the upper segments of the banking industry.

The recapitalisation exercise is expected to strengthen capital buffers across the sector, reversing some of the losses caused by the naira devaluation and external economic pressures.

Fitch noted that a stronger capital base would help cushion banks against foreign exchange volatility and regulatory risks while creating more room for business expansion.

However, the agency warned that recapitalisation alone would be unlikely to trigger an upgrade in ratings for Nigerian banks, given broader macroeconomic constraints.

While it could lead to some banks having their outlooks revised to positive, it is unlikely to push any financial institution beyond Nigeria’s sovereign rating of ‘B-’.