Governor of the Central Bank of Nigeria, Olayemi Cardoso has restated the commitment of the apex bank to focus on its core mandate of delivering price stability to provide an enabling environment for economic development.
To achieve that, the CBN governor said the bank is committed to harnessing the power of digital technologies to enhance financial inclusion, boost productivity, and create an enabling environment for innovation and entrepreneurship to thrive for job and wealth creation. “The Bank has also deployed robust digital technologies in driving most of its processes towards achieving optimal performance,” Cardoso said yesterday when he hosted the participants of the Senior Executive Course (SEC) 46, 2024, from the National Institute for Policy and Strategic Studies (NIPSS), Kuru who were on a study visit to the CBN headquarters yesterday.
Nigeria’s digital landscape is evolving, presenting immense opportunities and complex challenges. The study tour themed “Digital Economy, Youth Empowerment and Sustainable Job Creation in Nigeria: Issues, Challenges, and Opportunities,” was organised to provide insights into the Bank’s initiatives and strategies aimed at fostering a robust digital ecosystem.
Cardoso who was represented by his deputy governor, corporate services, Dr Bello Mohammed said the study of this nature is imperative in unveiling the huge potential of digitalization towards contributing to sustainable job creation and youth empowerment in Nigeria. He highlighted the intricate linkages between digital economy, youth empowerment, and sustainable job creation.
“This study tour presents a unique opportunity for us to engage in fruitful discourse and explore collaborative strategies to address the multifaceted benefits and challenges of digital economy, youth empowerment, and sustainable job creation in Nigeria,” he stated, adding: “We welcome your critical insights, thought-provoking questions, and valuable recommendations.
These will undoubtedly enrich our policy formulation processes.” In reaction, the director-general of NIPSS Ayo Omotayo said the central bank can grow the nation’s economy by 12 percent. He however said the ability of the CBN is dependent on the policy selection priorities of the apex bank.
Professor Omotayo digital economy can be used to empower the Nigerian youths, adding that the nation has made progress in the use of digital instruments for the economy. “The more we empower the people, the more we provide access to inclusive growth for more Nigerians.
He said the institute is looking forward to information to build a better society that is digitally inclined, benefiting from the many gains a digital economy offers.
The Director General of the National Institute for Policy and Strategic Studies (NIPPS), Prof. Ayo Omotayo, said the Nigerian economic growth rate can average 12…
Professor Ayo Omotayo
The Director General of the National Institute for Policy and Strategic Studies (NIPPS), Prof. Ayo Omotayo, said the Nigerian economic growth rate can average 12 per cent annually for 5 years with a push from the Central Bank of Nigeria (CBN).
Prof. Omotayo who stated this in Abuja when he led members of Group Six, Senior Executive Course 46, 2024, on a study tour of the apex bank, Tuesday, explained that with CBN deploying digital tools as drivers, the economy can outperform its current Gross Domestic Product, GDP, growth rate.
The Federal Government in the 2024 budget projected GDP growth at 3.76 percent.
He noted that with growth in the use of digital services to run economies across the globe, the institute believes that the CBN “because of its own regulatory role, has a lot of importance in the matter of the digital economy.
He said: “We are asking ourselves how many things can be moved digitally. The more our activities that can be put in digital format, the more of the opportunity to provide more access to a whole lot of 120 million active Nigerians.
“We at NIPPS believe that we can have 12 percent growth in our economy, year in year out for the next five years if we are serious about it and if it is going to work, the CBN is critical in ensuring that it works. A whole lot of what is going to happen in Nigeria in the next five years depend on how successful CBN drives everything.”
Speaking earlier, the CBN Governor, Olayemi Cardoso observed that with over 100 million people economically active in Nigeria, the digital landscape in the country was evolving rapidly presenting immense opportunities and challenges.
Cardoso, who was represented by the Deputy Governor, Corporate Services, Dr. Bala Bello noted that as a “forward-thinking central bank, we are committed to harnessing the power of digital technologies to enhance financial inclusion, boost productivity, and create an enabling environment for innovation and entrepreneurship to thrive. The bank has also deployed robust digital technologies in driving most of its processes towards achieving optimal performance”.
The CEO of Rainoil Limited, Gabriel Ogbechie, has claimed that the federal government resumed the payment of the controversial fuel subsidy following the devaluation of…
Subsidy regime
The CEO of Rainoil Limited, Gabriel Ogbechie, has claimed that the federal government resumed the payment of the controversial fuel subsidy following the devaluation of the Naira in the foreign exchange market.
Ogbechie made this statement on Tuesday during the Stanbic IBTC Energy and Infrastructure Breakfast Session held in Lagos.
He pointed out that with Nigeria’s daily fuel usage at 40 million liters and the foreign exchange rate at N1,300, the government’s subsidy per liter of fuel falls between N400 and N500, culminating in a monthly total of approximately N600 billion.
He said; “When Mr. President came in May last year, one of the things he said was that Subsidy is gone. And truly, the subsidy was gone, because immediately the price of fuel moved from 200 to 500 per liter. At that point truly, subsidy was gone.
“During that period, Dollar was exchanging for N460, but a few weeks later, the government devalued the exchange rate. And Dollar moved to about N750. At that point, subsidy was beginning to come back.
“The moment the two markets officially closed, officially the market went to about N1,300. At that point, that conversation was out of the window. Subsidy was fully back on petrol. If you want to know where petrol should be, just look at where diesel is. Diesel is about N1,300 and petrol is still selling for N600.
Furthermore, he said that NNPC being the only petrol importer in the country implies that there is an ongoing subsidy, as prices had to be fixed.
Earlier yesterday, the former governor of Kaduna State, Nasir El Rufai, said the federal government is spending more on petrol subsidy than before.
In addition, the Special Adviser to the President on Energy, Mrs. Olu Veŕheijen, said that the Federal Government reserves the right to pay fuel subsidy intermittently to cushion hardship in the country.
“The subsidy was removed on May 29. However, the government has the prerogative to maintain price stability to address social unrest. They reserve the right to intervene.
“If the government feels that it cannot continue to allow prices to fluctuate due to high inflation and exchange rates, the government reserves the right to intervene intermittently and that does not negate the fact that subsidy has been removed,” she said.
Private jet operators have been given 72 hours to submit relevant documents for re-evaluation by the Nigeria Civil Aviation Authority (NCAA). This followed the high…
This followed the high prevalence of illegal operations by private jet owners holding a permit for non-commercial flights (PNCF).
The permit forbids the owners from using their aircraft for hire and reward.
Our correspondent reports that there are over 100 private jets in Nigeria with a few of them holding PNCF.
But over time, some operators have been operating commercial flights without the necessary approval and against the spirit and letter of their permit.
The implication, according to the authorities, is the loss of revenue in addition to exposing the passengers to risk since the aircraft does not possess comprehensive insurance in the event of an accident or incident.
Yesterday, the NCAA suspended the permits of three private jet owners for violating the terms of their permits and using their jets for commercial purposes.
The suspension came after about a month of surveillance at major airports in the country by the regulatory authority acting on the marching order of the Minister of Aviation and Aerospace Development, Mr. Festus Keyamo.
Though the affected operators were not disclosed, it was learnt that the operators were caught red-handed using their aircraft for hire and reward.
Acting director general, Capt. Chris Najomo, said: “In line with our zero tolerance for violation of regulations, the authority has suspended the PNCF of these operators. To further sanitise the general aviation sector, I have directed a re-evaluation of all holders of PNCF to be carried out on or before the 19th of April, 2024 to ascertain compliance with regulatory requirements.
“All PNCF holders will be required to submit relevant documents to the authority within the next 72 hours.
“This riot act is also directed at existing Air Operator Certificate (AOC) holders, who utilise aircraft listed on their PNCF for commercial charter operations.
The Port Harcourt Refining Company Limited (PHRC) is yet to commence operation despite assurances by authorities that it will come on stream about two weeks…
The Port Harcourt Refining Company Limited (PHRC) is yet to commence operation despite assurances by authorities that it will come on stream about two weeks ago.
Citizens have been made to believe that the coming on board of the Port Harcourt refinery, which had been moribund for decades, and subsequently others in Warri and Kaduna, will ease energy crisis in the country and ultimately halt importation.
Stakeholders believe that with pumping oil for domestic consumption from the government-owned refineries, and additional support from the Dangote refinery, Nigeria and its people stand to gain more in terms of forex inflow, which had been grossly depleted by importation.
Recall that the Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPCL), Mele Kyari had on March 28, told the Senate that the Port Harcourt refinery will begin to deliver refined petroleum products in two weeks, just as he assured Nigerians that the rehabilitation of the refineries would be completed on schedule.
It is now over two weeks since the deadline elapsed.
Kyari also disclosed that the Warri refinery was almost ready too, while the refinery in Kaduna would be completed and ready to go into production in December this year.
He said that the rehabilitation of the Port Harcourt refinery had been completed, having passed its “completion mechanical procedure.”
He had said: “The Mechanical Completion means that you are done with your rehabilitation work, now you are to test if this completion is okay.”
Contacted Tuesday, the NNPL Chief Corporate Communications Officer, Olufemi Soneye said regulatory and compliance tests were the only reason keeping the Port Harcourt refinery from commencing full operations.
He said: “The Port Harcourt refinery has received crude oil, and it has been stocked in the facility. All crude lines are currently active. Regulatory and compliance tests are underway as we speak, and once they are completed, the refinery will commence operations. This adherence to best practices is recognised worldwide.”
Shell Petroleum Development Company of Nigeria Limited (SPDC) had on February 12, announced on its website that it had completed the supply of over 475,000 barrels of crude oil to the Port Harcourt refinery from the Bonny Oil and Gas Terminal, a joint venture asset operated by SPDC.
Country Chair, Shell Companies in Nigeria and Managing Director, SPDC Dr Osagie Okunbor, said, “With this supply restart, the refining capacity of in-country is expected to come back to life and make petroleum products readily available while reducing Nigeria’s dependence on imported refined products.”
Speaking on the resumed crude supply, the terminal’s Installation Manager, Odita Nnajiofor, said the success of the crude supply restart is indeed a significant step in the nation’s renewed efforts to utilise key infrastructure to assure the steady supply of products from the refining company to the Nigerian market.
According to Nnajiofor, “Before implementing the supplies of the product to the refining company, the project teams first assured the integrity of the supply pipelines and the terminal’s export pumps which had been shut down for an extended period.” These actions, he explained, resulted in the successful and safe completion of the refinery supply with no harm to people and environment.
Missed deadline characterize previous restart date
The Port Harcourt refinery shut down in March 2019 for the first phase of repair works after the government secured the service of Italy’s Maire Tecnimont to handle the scoping of the refinery complex, with oil major Eni appointed technical adviser.
In 2021, NNPC Limited said repairs had started after FEC approved $1.5 billion for the project.
The government said funding for the repairs will be from many components including NNPC, Internally Generated Revenue (IGR), budgetary provisions and Afreximbank.
The then Minister of State for petroleum, Timipre Sylva had said that the first phase was initially scheduled to be rounded up in 18 months (December 2022) from the point of the agreement, taking the refinery to 90 per cent production capacity with the second and third phases completed within 24 months and 44 months respectively.
However, that time line was reviewed by the previous administration, with the first phase of the refinery expected to start operation by March 2023, following 24 months of project execution in Area 5 of the complex.
The government also disclosed that Phase 2 of the rehabilitation project will restore the Port Harcourt refineries to a processing capacity of 135,000 bpd (90%), delivering a total processing capacity of 189,000 bpd by December 2023 following 33 months of project execution in Areas 1 & 2 of the complex.
In Phase 3 of the project, the entire refinery allied infrastructure will be restored and upgraded, most notably the fluid catalytic cracking unit and other ancillary operations.
Support infrastructure such as storage tanks and product assessment laboratories will be fully restored by December 2024.
In a major step towards resuming operations five years after the plant was shut, NNPC Ltd in December 2023 said it will complete test runs at the Port Harcourt refinery at the end of the year.
Also, Kyari said that the second phase of repair works of the Port-Harcourt refinery will be completed by the fourth quarter of 2024.
Why restart will excite Nigerians
Over the years, the refinery has performed below optimal levels despite the huge resources set apart for its rehabilitation.
This has resulted in importation of petroleum products for domestic use for many years to cover for the gap in the refinery’s output, costing the nation dear in terms of lost revenue.
The removal of subsidy by the government on May 29th 2023, saw prices soar through the roof, compounding the cost-of-living crisis for the average Nigeria as energy prices had a severe pass-through effect to other sectors, forcing inflation to touch 40 per cent in March 2024.
The dilemma for Nigeria is that neither an increase nor a decrease in international crude price portends any good news as the current dollar crises will translate to high landing cost or low revenue accretion for the country.
The news that the mechanical completion of the refinery will see the plant begin by processing 60,000 barrels per day, leading to operating at the full capacity of 210,000 barrels per day later this year is seen as a major achievement in the bid to cut energy cost.
An economist, Prof. Segun Ajibola said Turn Around Maintenance (TAM) takes time, with the cost competing at times with what it would take to build a new one entirely.
He said: “The gap is that the TAM has been left unattended for years now. But if the refineries could stick to the anticipated completion dates with refining activities commencing, it will lessen the pains of consumers.
“The challenge has been continued importation of refined products, which costs are annexed to the ruling foreign exchange rate. There is no short cut as solutions to the current disequilibrium in the local oil industry, which has compounded the inflationary pressure in the domestic economy.”
In a move aimed at boosting efficiency and productivity, the NNPCL is seeking to transfer the operations of the Port Harcourt refinery to private entities.
This was disclosed in an expression of interest notice issued by the NNPCL on its website in January.
New IFRS Accounting Standard will aid investor analysis of companies’ financial performance The International Accounting Standards Board (IASB) today completed its work to improve the usefulness of information presented and disclosed in financial statements. The new Standard, IFRS 18 Presentation and Disclosure in Financial Statements will give investors more transparent and comparable information about companies’ financial performance, thereby enabling better investment decisions. It will affect all companies using IFRS Accounting Standards.
IFRS 18 introduces three sets of new requirements to improve companies’ reporting of financial performance and give investors a better basis for analysing and comparing companies:
Improved comparability in the statement of profit or loss (income statement).
Currently, there is no specified structure for the income statement. Companies choose their own subtotals to include. Often, companies report an operating profit, but the way operating profit is calculated varies from company to company, reducing comparability.1
IFRS 18 introduces three defined categories for income and expenses—operating, investing, and financing—to improve the structure of the income statement and requires all companies to provide new defined subtotals, including operating profit. The improved structure and new subtotals will give investors a consistent starting point for analysing companies’ performance and make it easier to compare companies.
Enhanced transparency of management-defined performance measures Many companies provide company-specific measures, often referred to as alternative performance measures. Investors find this information useful. However, most companies don’t currently provide enough information to enable investors to understand how these measures are calculated and how they relate to the required measures in the income statement.
IFRS 18, therefore, requires companies to disclose explanations of those company-specific measures that are related to the income statement, referred to as management-defined performance measures. The new requirements will improve the discipline and transparency of management-defined performance measures and make them subject to audit.
More useful grouping of information in the financial statements Investor analysis of companies’ performance is hampered if the information provided by companies is too summarised or too detailed. IFRS 18 sets out enhanced guidance on how to organise information and whether to provide it in the primary financial statements2 or in the notes. The changes are expected to provide more detailed and useful information. IFRS 18 also requires companies to provide more transparency about operating expenses, helping investors to find and understand the information they need.
Andreas Barckow, IASB Chair, said:
IFRS 18 represents the most significant change to companies’ presentation of financial performance since IFRS Accounting Standards were introduced more than 20 years ago. It will give investors better information about companies’ financial performance and consistent anchor points for their analysis.
IFRS 18 is effective for annual reporting periods beginning on or after 1 January 2027, but companies can apply it earlier. Changes in companies’ reporting resulting from IFRS 18 will depend on their current reporting practices and IT systems.
IFRS 18 replaces IAS 1 Presentation of Financial Statements. It carries forward many requirements from IAS 1 unchanged. IFRS 18 is the culmination of the IASB’s Primary Financial Statements project.
The Director of Financial Policy & Regulatory Department of the Central Bank of Nigeria (CBN), Haruna B. Mustafa, has provided reasons for the exclusion of retained earnings of banks in the proposed capitalization process.
In the latest edition of CBN podcast published on the bank’s website on Monday, the CBN Director stated that the apex bank’s exclusion of retained earnings is to ensure that deposit money banks across the country inject fresh funds into their capital base.
He stated, “What we have simply done is to nudge the banks to inject fresh capital and this is without prejudice to what the component of shareholder’s funds could be. And like we have stated in our circular, shareholders’ funds would continue to be recognised in the computation determination of banks capital adequacy ratio which is an important metric in our assessment of the soundness of banks.”
Mustafa further noted that the recapitalization program is geared towards boosting the capacity of banks to take on bigger projects for the country’s growth and development.
He also referenced the bank’s recapitalization exercise of 2004 and how it helped in insulating banks across Nigeria from the ripple effects of the global financial crisis of 2008, noting that efforts of the current recapitalisation would help to strengthen Nigerian banks against unforeseen global financial threats.
However, the CBN noted that new capital would comprise of paid-up capital and share premium, excluding shareholders’ funds- a policy that has generated a lot of conversation.
Banks face mixed outcomes as a tight global economy runs its course and new headwinds lurk on the 2024 horizon. Asia Pacific banks look brighter than they did at the end of 2022, reflecting improved economic conditions. Still, as expected, a few Asian banks navigate narrow corners as their economies puff across the annual finish line. However, African economies have had tougher situations, and their banks have been pulled into more difficult realities.
Fortunately, Nigerian banks have turned out better than the economy. While the economy’s growth rate fell from 3.54% in Q4 2022 to 2.31% in Q1 and 2.51% in Q2 before rising to 2.54% in Q3 2023, banks have seen their financial books grow steadily as top and bottom-line earnings rise. Earnings for the banking industry have grown 44% annually over the last three years. Nigerian bank average prices have risen by 97.4% in the past year and by 86.9% year to date (YTD). The banking sector Index of the Nigerian Exchange Group (NGX) has risen from 2.60% in the first trading day of January to 102.03% YTD as of December 14, 2023. The rise in the Banking Sector Index reflects an improvement in their business fortunes. So why are Nigerian banks brooding over recapitalisation either by Rights Offers (new money raised from existing shareholders), or Initial Public Offerings (new money raised from new shareholders), or mergers?
At the heart of the recapitalisation conversation is the issue of the size of bank equity and tier 1 capital, given the requirements of Basle III. Analysts have questioned the adequacy of the size of Nigerian banks’ equity in the face of the naira’s depreciation and the government’s intention to attain a US$1trn economy over the next seven years. The result is that the government must achieve a gross domestic product (GDP) growth of at least 11.14% annually. To support this growth, Nigerian banks must increase their lending sizes and identify big-ticket transactions that could lead to faster-paced growth. One calculation is if N25bn was the threshold for banks when the naira to dollar exchange rate was N130.15 in 2005 (the first recapitalisation of banks in the 2000s era), with the exchange rate at N1000 to a dollar, the adjusted capital base of banks should be roughly N800bn. The new calculated base would merely keep the relative equity size of Nigerian banks where they were 18 years ago.
Proshare analysts have pointed out that good banks may come in different sizes. Setting a standard size for all banks may not be systemically optimal. Indeed, adopting a one-size-fits-all approach may have unintended consequences, as in the early 2000s, banks with governance challenges with N2bn capital base suddenly had more severe problems when they got the large recapitalisation boost of N25bn to play with as they lost their way to becoming toxic asset dumpsites. It took the stern hand of CBN’s erstwhile governor, Khalifa Sanusi Lamido Sanusi III, to set the banks straight and reestablish systemic confidence in 2010. The Sanusi action came to a mere half-decade after the Chukwuma Soludo-led CBN decision to engineer the merger and recapitalisation of banks in 2005, shrinking the number of banks from 89 to 25 with a minimum capital base of N25bn. After eighteen years, Soludo’s N25bn threshold appears to have run its course and requires reevaluation.
The issue, however, is that with a slow-growth economy (2.54% as of Q3 2023) and inflation in the upper double digits (27.33% as of October 2023), some analysts have argued that the timing of recapitalisation must be handled carefully to prevent a disruption to the financial system that could worsen economic outcomes. The refrain is sensible but not conclusive. As of the financial year end (FYE) 2022, none of Nigeria’s Tier 1 banks listed on the Nigeria Exchange Limited (NGX) had a share capital of N25bn despite significant shareholders’ funds. First Bank Holding Company (FBNH) had the largest share capital of N17.948bn, followed by Access Holding Company (Access Corp) of N17.773bn.
Nevertheless, both banks had shareholders’ funds above N1trn. In other words, for the larger banks, recapitalisation would mean a reclassification of their reserves and restatement of share capital. In this light, analysts expect that in 2024, several banks will offer bonus shares to existing shareholders, while a few might opt for fresh Rights Offers (purchasing more shares by existing shareholders).
The Liquidity Bungee Jump
Several Nigerian banks advertise consistent quarterly profits, but a few challenges restrict their growth and bottom lines. The problems include liquidity challenges in the foreign exchange market, relatively low capitalisation, high and constant discretionary CRR debt, and increased competition from emerging neo-banks. Before the recent signal from the Central Bank of Nigeria (CBN) that banks may be made to recapitalise, analysts have called for a recapitalisation of the Nigerian banking industry to support their capacity to finance big-ticket transactions, shore up their capitalisation in dollars and reposition them for sustained shareholder value. While the market awaits details from CBN on the new minimum capital base of banks, a few banks have raised fresh equity, and some have announced plans to strengthen their capital (through a Rights Issue, which offers new shares to existing shareholders, possibly at a discount).
The Rising Tide of Raising Capital-The Rights Ways
Following the conclusion of the share capital raise of Fidelity Bank through a Private Placement of 3.04bn ordinary shares of 50k each, Shareholders of FBNH have also resolved that the company’s issued share capital be increased from N17.95bn of 35.90bn ordinary shares of 50k each to N22.43bn, an addition of 8.97bn ordinary shares and that there should be a capital raise of up to N150bn through Right Issue. Wema Bank Plc has also submitted and gotten approval from the NGX to list a Rights Issue of 8.5bn ordinary shares of N0.50 each at N4.66 per share (based on two new ordinary shares for every three ordinary shares already held by shareholders). These moves align with the call for banking sector recapitalisation since the intrinsic and dollar values of the current capital requirement have been eroded and are too weak to withstand negative shocks or finance big-ticket transactions. Some analysts have argued that many banks’ inability to meet the current N25bn capitalisation portends enough threats to the financial system. Others argued that the banks are capitalised enough for the country’s current development and should not be the victim of the country’s FX challenges. A Highcap Securities analyst noted, ‘So far, bank financials figures show that many are already over-capitalised. Their balance sheets are quite healthy and impressive.’ For banks raising new capital, this would support growth prospects, and the Right Issue approach could preserve the relative share of existing shareholders’ stakes. However, the pre-emptive Rights waiver on undersubscribed shares could dilute the shareholders’ stake.
Nigerian banks have a history of raising capital through various means, such as Public Offerings, Private Placements, Rights Issues, and Mergers and Acquisitions (M&As), for reasons that include regulatory orders, balance sheet expansion, and risk-bearing capacity strengthening. More broadly, the compelling reasons for regulatory order to recapitalise banks are:
To meet the regulatory minimum capital adequacy ratio and mitigate risks like credit, market, operational, and liquidity risks. The capital requirement measures the bank’s ability to absorb losses and protect depositors and is currently set at 15% CAR for systemically important banks and 10% for other banks.
Support banks’ capital needs to fund their lending activities, invest in new products and services, and enter new markets, all necessary to finance developmental goals.
Enhance operational efficiency and resilience, which are needed to improve financial technology infrastructure, digitise processes, and optimise cost structure.
Create value for shareholders and stakeholders.
Recapitalisation: Of Share Capital and Shareholders’ Funds
Nigerian banks have evolved since the 2005 bank recapitalisation, when the minimum paid-up capital was raised to N25bn from N2bn. However, the exchange rate volatility has significantly eroded the value of the capital. All the listed banks have a share capital below N25bn, with FBNH having the highest at N17.95bn and Unity Bank having the least at N5.84bn. In dollars, the share capital is lower than US$20m as FBNH has $18.87m and Unity has US$6.14m. Some analysts have argued that the share capital size is insufficient to fund a mega project to achieve the targeted N1trn gross domestic product (GDP). Hence calling for another recapitalisation.
Meanwhile, the shareholders’ funds have improved over the years, and five banks have above N1trn, closely attaining the N2trn mark. Banks’ robust retained earnings have supported the continuous growth of the shareholder’s fund. Interestingly, most listed Nigerian banks comply with the Basell III capital adequacy ratio requirement, far above the 10.5% minimum requirement. UBA has the highest at 28.30%, and Wema has the lowest at 12.74%, excluding Unity Bank and other unlisted banks with negative CAR. The higher CAR might suggest a stronger capital position and ability to meet obligations. However, analysts still believe that the banks require fresh capital injection to drive key sectors of the economy. The recapitalisation process should follow a structured, lengthy time frame to avoid a reoccurrence of the 2005 era, which led to large mergers and acquisitions
(see table 1 below).
Implications for Minority Shareholders
According to a financial analyst, Olatunde Amolegbe, raising new shares through a right issue or public offering leads to lower earnings per share initially due to a larger amount of shares outstanding, but this will recede as the bank does more business and makes more money. The typical market reaction to recapitalisation is a slowdown in secondary market activities in the issuer’s shares since investors know that new shares will typically be issued at a discount, and they can buy cheaper.
Rights Issues present an open door to existing shareholders to exercise buying rights of new shares in proportion to their existing shareholdings and at a discounted price. Minority shareholders also have these open doors presented before them and may decide to participate in the right issue even though they are not obliged to do so. However, choosing to participate or not to participate will have crucial implications.
Right issues can potentially dilute minority shareholdings or ownership percentages. Dilution of minority shareholdings becomes possible when minority shareholders do not participate in the rights issue and, as such, reduce the shareholders’ equity stake in the company.
The dilution of a minority shareholder’s holdings reduces the percentage of shares owned and potentially the shareholder’s rights and voting power. Voting rights may, however, be increased with minority shareholder’s decision to participate in the rights issue.
Shareholders can trade the rights allocated to them on the domestic stock exchange. This affords the shareholders who choose not to partake in the right issue the discretion to determine whether to divest their rights, potentially realising profits or incurring losses contingent on prevailing market conditions, or to exercise their rights to acquire additional shares.
An allotment of additional shares through the right issue may be unfairly prejudicial due to possible concerns related to share dilution. Such dilution of claims held by minority shareholders is conceivable when they are precluded from participating in the rights issue, diminishing their equity stake in the company. Sections 343-346 of CAMA 2020 (amended) grant minority shareholders legal recourse in case of prejudice.
Concerns may arise among minority shareholders regarding the transparency and execution of the rights issue. Companies must engage in effective and transparent communication, elucidating the rationale behind the rights issue, its repercussions on current shareholders, and the planned utilisation of the raised capital. Such communication can influence earnings per share.
Increasing the number of shares in circulation can shape the market’s assessment of a company’s financial well-being and outlook. If investors construe the rights issue as a favourable indicator, it can positively affect the company’s overall valuation and shareholders’ positions.
Price Movement: Rounding up Investors’ Sentiments
The announcement of the Right Issues sparked a fair movement in stock prices. According to a market analyst, ‘the market has accepted the announcement of the Fidelity Bank and FBN rights issue in good faith, as their share price has increased. This means they will do more for the economy and empower businesses if they access more funds. The major fear in FBN is the power struggle between major shareholders, which has impacted the share price in the market. Fidelity is going well with no issues, while regulators must pay close attention to the FBN development as it concerns the major shareholders.’
Following Fidelity Bank’s decision to increase its share capital to 3.2bn ordinary shares, its share price rose from N4.79 on July 4 to about N9.05 on December 7. Similarly, FBNH’s share price soared from N11.05 on October 11 to N29.4 on December 6, 2023, propelled by the bank’s announcement to raise N139bn in additional capital through a Rights Issue (see chart 1 below).
Chart 1:
Analysts’ Thoughts – Capital Requirements and Financing Development
The call for bank recapitalisation has elicited mixed opinions. A few analysts have argued that bank recapitalisation is unnecessary and represents poking a finger into the eye of an imaginary storm. They argue that if a system is not broken, there is no point in fixing it. The school’s advocates argue that Nigerian banks are performing exceptionally well, noting that they are prudentially sound and financially profitable. Raising their capital base would reduce investors’ return on equity (ROE) and push down equity prices.
According to David Adonri of Highcap Securities, ‘banks have become over-capitalised due to the windfall from recent market reforms, while the real productive sector has become undercapitalised. Ordinarily, the proposed recapitalisation exercise should be directed at the real sector, not banks. Further, the migration of financial assets to the banking sector may reenact what happened in the past when the absorptive capacity of the real sector could not clear the excess cash in bank vaults. That eventually caused an asset bubble in the Capital Market and Housing sector. Banks are already concerned about the safe deployment of their huge funds, and capital expansion could reduce their returns on investment.’
Another school of thought argues that banks need to strengthen capital bases in a growing uncertain world to cope with potential shocks to short to medium-term loan assets. The proponents of this view argue that with Basle III compliance becoming of greater importance (as countries consider meeting the requirements of Basle IV), Nigeria’s bank leverage should be reduced by larger equity amounts. The bigger the bank equity, the lower the bank leverage and as a corollary, the lower the returns on equity (ROE). However, equity returns are only helpful if banks are safe. This school insists that bank equity must be raised in volatile exchange rates, high import dependence, and high inflation rates. Proshare analysts lean towards this school. The Proshare twist is that the recapitalisation of banks should be tier-based rather than a blanket statutory imposition on all banks regardless of the size of their operations. The analysts believe that Proshare’s tier 1 report could provide a basis for classification. The analysts have, however, admonished that the banks’ recapitalisation process should be phased to avoid systemic shocks and operational dislocations.
The analysts, however, doubt the absorptive capacity of the Nigerian economy to handle banks with N800bn to N1trn capitalisation. The stock market would be in a wild growth mode out of sync with underlying macroeconomic triggers. In addition, the absence of quality loan assets to absorb the rush of new funds could lead to declining loan asset quality and a rise in nonperforming loans (NPLs).
Nevertheless, analysts like Ambrose Omordion of InvestData have argued that recapitalisation will help banks expand by financing projects that can unlock economic value. ‘Beyond buying bank shares, investors should diversify their portfolio by looking at real estate and technology,’ he argues.
In the broad scheme of things, banking sector recapitalisation appears inevitable. However, the size of the new capital base of banks and the timing of the exercise remains obscure. With banks throwing their hats, fedoras, and bonnets into the Rights Offer ring, the recapitalisation journey of local lending institutions eighteen years after the last exercise seems alive and fit.
In an article in Businessday dated March 29, 2024, and titled “Why CBN excluded retained earnings in its recapitalisation terms”, Wasiu ALLI discussed the reasons behind the Central Bank of Nigeria’s (CBN) decision to exclude retained earnings from the capitalization terms for banks.
In that piece, the CBN, when defining share capital, it made a key point to exclude ‘retained earnings’ from the calculation, allowing only the bank’s ordinary share capital and share premium for consideration as new regulatory capital under its new capital structure parameters.
This has elicited concerns from the professional space who argues that the exclusion of retained earnings from the components eligible for the bank’s capitalization should be reevaluated.
This is particularly important given that the apex bank has endorsed the adoption of International Financial Reporting Standards (IFRS) by entities, as approved by the Financial Reporting Council of Nigeria (FRC). IAS 1 – Presentation of Financial Statements outlines the general requirements for the presentation of financial statements. This provision recognises that retained earnings are typically presented on the statement of financial position under equity through the statement of changes in equity.
Further, Share Premium, which constitutes gains from issuing shares at a price exceeding the nominal value after deducting issuance costs, is considered a reserve, much like undistributed profits accumulated over the years, now referred to as retained earnings.
It is therefore a considered opinion and suggested that the apex bank should reconsider its stance and allow retained earnings to be considered as part of banks’ capital for capitalization purposes.
To ensure accuracy, unrealized gains that form part of retained earnings, such as foreign exchange gains on transaction conversions and restatements of receivables and payables denominated in foreign currency at closing rates by the end of each reporting period, should be excluded.
Similarly, gains on the fair value adjustment of financial assets classified as Fair value through profit or loss should be excluded, unless these financial assets no longer exist due to sale, in which case the gains can be considered realized.
Reasons Why Retained Earnings Should Be Considered for Capitalization:
1. Stability and Solvency: Retained earnings represent a bank’s accumulated profits that have not been distributed to shareholders but retained for reinvestment. Utilizing these earnings can strengthen a bank’s capital base, enhancing its stability and solvency.
2. Enhanced Market Confidence: Using retained earnings for recapitalization signals to investors that the bank has generated enough profits to support growth plans, bolstering market confidence in its ability to operate profitably.
3. Reduced External Funding Dependency: Recapitalizing with retained earnings reduces reliance on external funding sources like debt or equity financing, lowering financial risk and reducing interest payments or dilution of existing shareholders’ stakes.
4. Preservation of Shareholder Value: Utilizing retained earnings for recapitalization preserves existing shareholders’ ownership stakes, maintaining confidence and protecting their interests during the process.
Overall, including retained earnings in Nigerian banks’ recapitalization efforts is deemed justified, providing a stable source of internally generated capital that enhances financial strength, market confidence, and shareholder value preservation.
In conclusion, the CBN is urged to reconsider its exclusion of retained earnings in bank capitalization by carefully analyzing the composition of each bank’s profit for the period and excluding all forms of unrealized gains from its constituents.
After 9 years of Emefiele who conjured different ways and means to traumatize an entire generation, nous and prudence have been restored to the Apex bank at Plot 33, Abubakar Tafawa Balewa Way, Central Business District, Abuja.
Nigeria’s new Central Banker, Dr Olayemi Cardoso seems to be righting the wrongs of the embattled ex-Central Bank Governor of Nigeria, who oversaw an FX backlog of $7 billion, a 14.02 percent rise on inflation from 8.2% to 22.41% during his reign, reckless abuse of Ways and Means that contravened the CBN Act coupled with shoddy intervention financing, all of which made a mess of CBN’s balance sheet.
In December 2023, the CBN issued a circular which was a thinly veiled dig at the previous management. “In furtherance of the Central Bank of Nigeria’s new policy thrust focusing on its core mandate of ensuring price and monetary stability, the Bank has commenced its pullback from direct development financing interventions – accordingly, the CBN would be moving into more limited policy advisory roles that support economic growth”.
With a series of policy changes in the past quarter, communicated via Friday-released circulars, Nigeria is beginning to witness different reforms that seek to steady the nation’s ship.
So far, remittances have been flowing in through the proper channels, portfolio investors have their interests piqued and market theorists seem to align with his methods in combating inflation with the monetary tools at the bank’s disposal.
So do we still need an economist as CBN governor or do we just need someone who has common sense? Do we need someone who would just focus on the apex bank’s objectives or someone who would gaslight Nigerians to queue under canopies to collect limited redesigned naira notes?
Let’s examine what is the objective of the CBN. The CBN Act of 2007 of the Federal Republic of Nigeria charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government.
The objectives of the CBN are as follows:
●Ensure monetary and price stability;
●Issue legal tender currency in Nigeria;
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●Maintain external reserves to safeguard the international value of the legal tender currency;
●Promote a sound financial system in Nigeria; and
●Act as a banker and provide economic and financial advice to the Federal Government.
Now, there were question marks on Dr Yemi Cardoso when he was appointed CBN governor. There were legitimate concerns over how his friendship with the current Nigerian president might affect the independence of the Central Bank. Their friendship began when he first met Tinubu, a Treasurer at Mobil while being a bank officer handling Oil accounts.
There was also worry around Cardoso’s suitability for the role, with preference in some quarters for someone with a strong macroeconomic background, perhaps a Professor in economics who would have the gravitas to turn the tide. However, people largely forget that the CBN has a large army of Ph.D. economists that they can deploy to help guide policy decisions.
“There had been a dislocation of monetary transmission mechanism, for quite some time, which rendered the MPC meetings largely ineffective” – Cardoso said in one of his speeches, as he said the Bank has reviewed the effectiveness of the Central Bank’s monetary policy tools and had spent time fixing the transmission mechanism to ensure the decisions of Monetary Policy Committee (MPC) meetings resulted in desired objectives.
Now he is doing the conventional work needed to battle against inflation which is his prerogative. He has tightened and aggressively hiked rates to an accumulated 600 basis points this quarter. Yields on one-year Treasury Bills now flirt within the 19%-27% range. NAFEM has recorded its highest FX turnover since the beginning of this administration as Naira assets are beginning to look more attractive than holding dollars.
The FX backlog has been cleared and Cardoso contracting Deloitte to work out the invalid claims of about $2.3 billion has proven shrewdness which his predecessor struggled to fathom.
Two interesting things can be observed with his FX management. One, the approach to liberating the FX market with liquidity, and two, the attempt to achieve convergence of the official and parallel market exchange rates. In some developed and stable countries, black market premiums rarely exceed 5%. Black market premiums measure differences between NAFEM rates and the spot rates. At some point in Nigeria, black market premiums exceeded over 20%.
Cynics argue that applauding Cardoso for the recent naira rally after taking the dollar at N700/$1 to the four-digit territory is a bit ironic. However, they forget that at the other end of a lower exchange rate was an ever-growing backlog which in the long run reduces investors’ confidence and stifles liquidity.
Since March 2020, liquidity challenges in the Nigerian foreign exchange (FX) market have consistently affected the accessibility of its equity market, leading to capital repatriation concerns and a significant gap between the official and parallel exchange rates for the Nigerian Naira. This caused global institutional investors to face recurring challenges with index replicability and investability of the MSCI Nigeria Indexes and other indexes they are part of.
Whatever it is, the unorthodoxy of using depleted reserves to heavily defend the currency while dishonoring FX commitments which saw Nigeria relegated to standalone markets with the likes of Argentina seems to be coming to an end.
Cardoso has a lot to do going forward, but market participants see a man who knows what he is doing. He needs some help from the “fiscal side” in the fight against inflation and FX inflows as carry trade from portfolio investors could be evanescent. Crude oil receipts and non-oil export earnings need to come in to support the rates or build the FX reserves.
Cardoso’s onerous task is to tame inflation, however month-on-month inflation has followed an upward trajectory and there’s no assurance it may peak in H1 of 2024. His deployment of monetary tools and FX management would be tested in the long run as without support from his bosom colleague Wale Edun, the Minister of Finance, he may not have enough wriggle room to emerge victorious.
One thing we are encouraged by is that he would not encourage the excesses of the FG and has said CBN will no longer grant loans to FG until the outstanding is paid. By also hiking rates, he has ignored the wishes of the President who prefers a low-interest rate environment to boost economic growth.
For now, it appears there is an end to the days when the Central Bank failed to strictly adhere to the law. They would now limit advances under ways and means to 5 percent of the previous year’s revenue. FG now has to be creative in looking for alternative sources of financing.
But there are a few concerns the CBN governor must begin to consider. How would the CBN resolve its monetary policy conundrums where high MPR is affecting Nigeria’s high growth and employment costs on the economy?
Can interest rates keep following inflation to where it is not known as food inflation and arbitrary price gouging as a result of FX volatility means there’s still some upside for inflation? How long will he hold on to the liquidity ratio with CRR going higher? What are the opportunity costs of liquidity management with yields at 27%?
How does he reform the bank in a way that functionally separates its responsibilities for monetary policy and micro/macro-prudential policies? How does he disprove the Economist’s theory that the CBN is inexperienced in handling a managed float exchange rate system?
When you open the website of the Bank of England, the first thing you see is the tagline “Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability”, it is safe to say that Cardoso and the new Central Bank team is determined to promote the good of the people of Nigeria the same way.
