Less than a month after the banking sector emerged from the ashes of an ambitious recapitalisation with near 100 per cent success, benign, quiet but noticeable multi-level concerns about sustainability risks are gaining traction.

Outside the walls of banks, fresh scepticism is building around the medium to long-term value of the expansive capital injections. Concerns border on whether the operators could leverage their current ultra-high liquidity position to stimulate output growth as envisaged by the concept note of the recapitalisation exercise and how fast the economy can de-risk and scale up to sunk up the liquidity.

In the banking halls, there is, though currently silent, concern about what appears like excess liquidity, its cost, risks and the ultimate value it holds for diverse stakeholders.

Across the boards, there are still grumbles (not new anyway) over share dilution, most markdowns in dividend earnings, possible sluggish capital appreciation and their associated risks.

With the economy entering a low-yield era and the credit market shrinking around the public sector and big corporations, there are also fears that the entire banking sector could be heading into a low profit-to-capital ratio, a trend that could upset investors who were used to high returns.

Some radical views about the exercise that had caught the eye of both local and foreign investors, who had poured in multiple trillions of naira, are already pointing to excess capacity risk, arguing that the recapitalisation was an excess quantity for the sector and that the need for additional capital was overrated.

The argument is playing up a subdued worry across the boardrooms – what to do with what appears like excess liquidity? Though the largest quantum of the freshly raised capital, if not the entire N4.65 trillion, is equity, bank managers are aware that costs are attached.

The recapitalisation lifted the sector’s tier-one capital several-fold. With most lenders visiting the market to raise capital, the sector has witnessed a significant share dilution. Billions of additional shares were issued to fresh or existing shareholders who bought into the potpourri of rights issues and public offers.

The expanded share restructuring means many banks would need to double down on profitability to sustain the historically high earnings per share (EPS) and dividend payments.

But those knowledgeable about the changing market dynamics said the odds are against the banks, warning that the days of ultra-high dividend payouts are over, perhaps temporarily.

In addition, there are growing worries over a possible repeat of liquidity-induced moral challenge like the one the sector suffered after the 2005 reconsolidation. With a rich history of regulatory liquidity support, there are doubts that bank chiefs have learned enough to conduct their affairs with the level of integrity required to sustain stable banks.

In 2025, highly liquid vaults and the inherent perception that the regulator would activate extended lifelines to financially threatened operators, breeding moral hazards that threatened the entire sector.

With the Asset Management Corporation of Nigeria (AMCON) created to buy back the prevalent bad debt and clean up the books of the lenders yet to be dissolved, there are arguments that the authorities perpetuate expectations of future bailouts, encourage socialisations of individual mistakes and breed moral hazards.

In recent years, AMCON has not bought back new non-performing loans (NPLs). But existence, some experts have argued, sends a wrong signal on the commitment to the building sector, where reckless owners and management are left to bear the brunt of their malfeasances.

The Central Bank of Nigeria (CBN) has consistently told the operators that the new regulatory environment has no room for irresponsible banking practices. It followed up with different new policies to tighten the noose on integrity, corporate governance, and asset quality.

For instance, it directed operators to stress test their internal system effectively on April 1 with an overriding objective of safeguarding the assets of the institution and protecting depositors’ funds. As part of the stress test directive, operators are to treat all insider loans as bad and make 100 per cent provisions accordingly – a policy direction that is also expected to melt profitability in the near term.

Stakeholders said the sector is entering a decisive and uncertain post-recapitalisation phase, where stronger balance sheets may collide with tightening yield conditions, regulatory scrutiny and structural inefficiencies.

They noted that, on the surface, the recapitalisation marked a major regulatory success. But beneath the headline figures, they said, a more complex reality is unfolding – one defined by excess liquidity, constrained lending opportunities, moral hazard concerns and an evolving macroeconomic headwind.

The capital build-up coincided with a high-yield environment in 2024 and early 2025, when elevated interest rates boosted banks’ earnings via heavy investments in government securities. Treasury bills and bond yields climbed into double-digit territory, driving record profitability.

As inflationary pressures begin to ease and monetary conditions show signs of softening, yields in the fixed income market are moderating. This trend may, however, not be sustained if the Middle East crisis lingers.

A moderating fixed-income market is narrowing the high-margin window that previously underpinned bank profitability and exposing a structural contradiction – banks are now better capitalised but face lower yield and a high-risk lending market.

To make up for falling yields of low-risk securities, the banks need to expand their lending. But the real sector, which holds the prospect for expanded credit portfolios, is still highly risky. The government, ironically, is looking at speeding up the growth of the real sector to power aggressive economic growth.

Sadly, not much has been done to de-risk the real sector. Power efficiency, according to an economist, Dr Muda Yusuf, remains an albatross of a more efficient real sector. Other inefficient public infrastructures, such as poor road networks and limited transport options, have also encumbered the real sector, making it a high risk to banks.

Executive Director of Halo Capital Management Limited, Paul Uzum, said the immediate post-recapitalisation risk lies in excess liquidity, noting that conservative asset allocation strategies could dilute returns on newly raised capital.

Uzum argued that a sharp rise in EPS in 2026 appears unlikely, despite stronger capital positions, as the industry grapples with a lower-yield environment and cautious lending behaviour.

Vice President of Highcap Securities, David Adonri, takes a more critical stance, questioning the policy rationale behind the recapitalisation exercise itself.

Although he acknowledged that it succeeded in injecting fresh capital into the banking system, he described the recapitalisation as a “misplaced priority,” arguing that Nigerian banks were already over-capitalised following the gains from naira floatation.

According to him, the sector now faces a surplus capital problem, with banks holding funds far beyond the absorptive capacity of the real sector they are meant to serve.

“This is a threat to price stability in certain asset classes like equities and real estate, as excessive credits may be directed to the sectors,” he said.

Adonri warned that surplus liquidity could also fuel increased lending to the public sector, potentially pushing government borrowing beyond sustainable levels.

While conservatively managed banks may benefit, he argued that the broader policy outcome risks starving the real productive sector of much-needed funding.

From his perspective, recapitalisation may have inadvertently deepened structural imbalances – strengthening banks on paper while leaving the real economy constrained.

Even as profitability pressures mount, the sector is witnessing a surge in investor interest.

Strong dividend histories and relatively attractive valuations have triggered a rotation of capital into banking stocks, positioning the sector at the centre of a broader equity market re-pricing.

Managing Director of Crane Securities Limited, Mike Ezeh, said the robust dividend payouts recorded in 2025 provide a solid foundation for enhanced shareholder returns post-recapitalisation, even in the face of moderating profits.

He maintained that Nigerian banks’ stocks remain significantly undervalued relative to their fundamentals, creating compelling entry points for both domestic and offshore investors.

According to him, the growing influx of foreign and institutional capital into equities is already reshaping market dynamics, with funds gradually shifting out of money market instruments in search of higher returns in banking stocks.

While recapitalisation has been completed, analysts said the real test of the sector’s strength is only just beginning.

From April 1, the CBN commenced industry-wide stress tests, with results expected by the end of the month.

The exercise is designed to determine whether banks are genuinely resilient or have merely met regulatory thresholds.

The Executive Chairman of the Society for Analytical Economics, Nigeria, Prof. Godwin Owoh, described the stress tests as a “reconfirmation of the tenacity and texture of capital” aimed at ensuring that newly-injected funds are real, stable and not artificially structured.

Owoh, however, warned against practices such as temporary fund injections where capital is briefly parked in banks to meet requirements and withdrawn shortly after.

He hoped the tests would expose such manipulations.

The stress scenarios would assess banks’ ability to withstand shocks, including liquidity pressures, credit losses and market volatility, the CBN had said.

A key component is the requirement for full provisioning of insider-related loans, a long-standing source of systemic risk in Nigeria’s banking system.

By forcing banks to account for loans granted to directors and related parties regardless of performance, regulators aim to reveal hidden vulnerabilities that could undermine stability.

An emeritus professor of economics and public policy, Akpan Ekpo, endorsed the exercise, but cautioned that its credibility would depend on execution.

The advance notice, he warned, could allow banks to temporarily adjust their books, masking underlying weaknesses.

He also raised concerns about the CBN’s institutional capacity to conduct rigorous and continuous assessments across the sector.

Beyond capital adequacy, the post-recapitalisation landscape is also reviving longstanding concerns about moral hazard, particularly the role of AMCON, established in 2010 to absorb NPLs following the global financial crisis. AMCON was intended as a temporary intervention. More than a decade later, it remains active, prompting criticism from economists and allied professionals.

Owoh argued that the agency has outlived its usefulness and now undermines financial discipline by creating expectations of regulatory bailouts.

He described AMCON as having evolved beyond a moral hazard issue into “an axis of corruption”, citing weak recovery performance and alleged collusion between debtors and officials.

Ekpo shared similar concerns, warning that the continued existence of AMCON could encourage reckless lending and borrowing behaviour.

Both professors called for stricter loan recovery mechanisms and greater accountability for borrowers and bank executives.

Despite stronger balance sheets, banks continue to face structural barriers in lending to the real sector. High interest rates remain a major constraint. With the CBN’s monetary policy rate elevated, effective borrowing costs in Nigeria can approach 40 per cent when bank margins are added, levels that make long-term investment unviable.

Ekpo noted that under such conditions, even well-capitalised banks are unlikely to finance productive ventures at scale.

For one, the small and medium-scale enterprises (SME) sector, widely regarded as the backbone of economic growth, remain largely excluded from formal credit, he said.

This disconnect highlights a central paradox of the recapitalisation exercise. While banks are stronger, their ability to translate capital into productive economic activity remains constrained by broader macroeconomic challenges, including fiscal headwinds, infrastructure crisis and policy deficiencies.

Concerns about regulatory consistency are also shaping the post-recapitalisation outlook. Owoh pointed to unresolved issues surrounding certain banks, particularly the handling of Union Bank, which he described as procedurally faulty.

He pointed out that the CBN’s intervention, which dissolved the board without a formal declaration of insolvency, violated provisions of the Banks and Other Financial Institutions Act (BOFIA).

Owoh said that shareholders should have been allowed to recapitalise before regulatory intervention, warning that deviations from established legal frameworks could undermine investor confidence.

Still, uncertainty continues to trail institutions that failed to meet recapitalisation thresholds. Analysts expect regulatory intervention through restructuring, mergers or asset transfers, with the CBN and the Nigeria Deposit Insurance Corporation (NDIC) expected to prioritise depositor protection and systemic stability.