Union Bank, others face potential mergers, licence downgrades – Fitch

Fitch Ratings has issued a warning that Union Bank of Nigeria (UBN) and other tier-3 banks in Nigeria may face mergers, acquisitions, or a downgrade of their licenclies due to difficulties in meeting the Central Bank of Nigeria’s (CBN) new paid-in capital requirements.

The global credit rating agency in a report last week noted that while first- and tier-2 banks have made substantial progress in raising fresh capital, tier-3 banks have been slow to recapitalize. As a result, mergers or license downgrades are increasingly likely for these smaller banks to meet the CBN’s capital thresholds.

In March 2024, the CBN raised the paid-in capital requirements for commercial, merchant, and non-interest banks in a bid to strengthen financial stability and ensure banks have enough buffers to absorb economic shocks. To comply with the new rules, banks have three options: raising fresh equity, merging with other banks, or downgrading their licenses.

While large banks have turned to shareholder backing and capital markets to raise funds, third-tier banks have struggled to attract the necessary investment. The report highlighted that, unlike the bigger banks, tier-3 banks have fallen behind in their recapitalization efforts, with many still awaiting shareholder approval or finalizing their capital-raising plans.

Union Bank of Nigeria, for example, is still in breach of the CBN’s 10 percent Capital Adequacy Ratio requirement. Similarly, Wema Bank has received shareholder approval to raise capital in order to retain its national banking license and plans to begin fundraising by April 2025. Coronation Merchant Bank has also received board approval for capital raising, but its next steps remain uncertain.

Fitch cautioned that unless these banks act quickly to secure fresh capital, they may have no choice but to merge with stronger institutions or downgrade their licenses to meet the CBN’s regulatory requirements.

While smaller banks face challenges, major financial institutions have made significant strides in meeting the new capital thresholds. Access Bank and Zenith Bank, for instance, have already raised enough capital to meet the N500bn benchmark for international banking licenses. First HoldCo, United Bank for Africa, and Guaranty Trust Holding Company are adopting a phased approach, raising capital in tranches, with some awaiting final regulatory approval for their recent rights issues.

Fidelity Bank and FCMB Group, both categorized as second-tier lenders, have completed their initial rounds of capital raising but will need additional funds to maintain their international banking licenses. Fitch also noted that Ecobank Nigeria and Jaiz Bank had already met the regulatory threshold with only minor capital injections needed. However, Ecobank Nigeria is still in breach of the 10 percent Capital Adequacy Ratio requirement and has plans to restore compliance.

Despite the economic challenges, investor sentiment towards capital raising has remained positive, allowing most top and mid-tier banks to secure funding. The strong appetite for equity issuance has reduced the likelihood of widespread consolidation in the upper tiers of the banking sector.

Fitch expects the recapitalization efforts to bolster capital buffers across the banking sector, helping to mitigate some of the losses caused by the naira devaluation and external economic pressures. A stronger capital base will also help protect banks from foreign exchange volatility and regulatory risks, while providing more opportunities for business expansion.

However, the agency warned that while recapitalization will strengthen banks, it is unlikely to result in an upgrade of their ratings due to broader macroeconomic challenges. While recapitalization could lead to a more positive outlook for some banks, it is unlikely to lift any Nigerian financial institution above the country’s sovereign rating of ‘B-’.