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Banks may soon embark on capital shore-up over Basel II

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Group Managing Director/Chief Executive Officer, UBA Plc, Philips Oduoza (left); and Chairman, UBA Plc, Tony Elumelu, at the annual UBA Chief Executive Officer Awards organised by the Bank in Lgaos at the weekend.

Group Managing Director/Chief Executive Officer, UBA Plc, Philips Oduoza (left); and Chairman, UBA Plc, Tony Elumelu, at the annual UBA Chief Executive Officer Awards organised by the Bank in Lgaos at the weekend.

The race to shore up operating capital among the nation’s Deposit Money Banks (DMBs) may soon take off at the instance of Basel II implementation.

The dire need to raise the capital level extended to all classifications of banks- regional/national and international, including those designated as Systemically important Banks (SIB).

Indications emerged that the Central Bank of Nigeria (CBN), had on March 13, issued a letter to the banks, extending the implementation deadline for higher capital requirements for SIBs.

It also set a deadline for banks that have already breached the minimum Capital Adequacy Ratios (CAR) under Basel 2 to submit their recapitalisation plans and execute same.

However, the same letter affirmed CBN’s willingness to support any under-capitalised bank, adding that it may require rapid remedial actions if adequate capitalisation is not restored.

Under the Basel II framework, which the financial institutions are due to switch, a minimum of 10 per cent CAR is required for regional/national banks, while 15 per cent is required of those with international presence.

But Renaissance Capital, in a report titled: “Nigerian Banks: CBN Gives a Breather on Capital,” said that it was obvious that few banks do not meet the minimum CAR of 10 per cent and 15 per cent for regional/national and international banks, respectively, under Basel 2.

In its analysis of the way forward, the report described the apex bank’s recapitalization window as “breather”, a 15-month period which comprises three months till June 13, 2015, to submit recapitalisation plans and June 30, 2016, to implement same.

“In our view, this extension is a positive development for Nigerian banks as we have previously noted that the pace of implementation of Basel 2 (nine months) and other tighter capital requirements were rather speedy.

“Feedback from our recent international investor roadshow suggests that given the deteriorating Nigerian macro environment, significant capital-raising events could struggle to attract meaningful international investor participation.

“We also find international investors increasingly questioning the Nigerian banks’ ability to create value, given constraining regulations and weakening macro fundamentals.

“We, however, think that the domestic investor pool or private equity capital could be supportive in some dire instances, drawn by depressed valuations and/or the long-term investment case for the sector,” the report said.

The Vice President, su-Saharan African Banks Lead Analyst, Renaissance Capital, Adesoji Solanke, said: “Tightening capital regulations has been an ongoing theme for the Nigerian banks since early 2014, including the introduction of Basel II and higher capital requirements for SIBs. Partly in light of the short implementation deadlines given to the banks, three banks (Diamond, Access & UBA) all raised tier 1 capital within the last six months.

“With more banks seemingly in need of tier 1 capital to meet minimum regulatory requirements plus a buffer, the macro environment deteriorating rapidly and significant pools of foreign capital remaining underweight Nigeria presently, we view the CBN’s deadline extensions as a step in the right direction.

“We believe this should give the banks some room to make optimal capital decisions around earnings retention and asset growth in the near term, with the consideration of a tier 1 raise in more favourable market conditions. That said, we still expect Skye, Stanbic and Ecobank Nigeria to source tier 1 capital near term. FBNH’s capital position (15-16 per cent) gives us the most significant concern, not in the least because of its systemic importance. Nevertheless, we expect the bank to focus on earnings retention and slower growth over the next 12-18 months, with the possibility of a tier 1 raise when market valuations improve.

“We expect capital levels and the sufficiency of this to remain an ongoing discourse for the Nigerian banks given the probable risks to earnings and book from material asset quality surprises, as well as continued naira depreciation. We maintain our view that dividend payouts and asset growth are likely to be cut near term to build the necessary capital buffers.”



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