A recent report by financial advisory firm, Ernst and Young, shows that at least 17 out of the existing 24 Deposit Money Banks may be unable to meet the Central Bank of Nigeria’s capital requirement if it is increased from its current N25bn.

The new report, titled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation”, claims only only seven banks may survive capital base of commercial banks in the country by 15-fold from the current N25bn.

In multiple statements, CBN Governor Olayemi Cardoso has indicated that the central bank would take into account raising the minimum capital base of banks in the nation as part of its efforts to bolster their ability to support Nigeria’s ambition to become a $1 trillion economy by 2026.

Banks holding regional, national, and international licences are currently required to maintain a minimum capital base of N10 billion, N25 billion, and N50 billion, respectively. The capital base is currently stratified based on the type of banking licence.

The global financial services firm stated in the report that while financial soundness indicators show that Nigerian banks were generally safe and resilient as of 2023, some banks may depend on different recapitalization options, such as mergers and acquisitions, initial public offerings, placements and/or right issues, and undistributed profit (retained earnings).

Based on the report, a sequence of mergers and acquisitions, similar to those that occurred during the previous recapitalization exercise in 2004/2005, will result from the CBN’s recent plan to enhance banks’ capital bases.

The report read partly, “The recent plan by the CBN to increase the capital base of banks could again lead to M&A activities but not as widespread as was the case in 2004/2005 given the relatively solid financial positions of the banks today as well as the occurrence of several M&A activities in the banking sector over the past 10 years.

“While the CBN governor did not indicate the magnitude of the proposed hike in the capital base, we have assumed what the proposed increment will be based on three different scenarios underpinned by current macroeconomic conditions. On the back of that, we were able to determine the number of banks (across the three licence types) that may fall below the new minimum capital thresholds.

“In a worst-case scenario, i.e., given a capital multiplier of 15, about 17 out of 24 banks would not meet the new minimum capital.”

“On this basis, a worst-case scenario given a 15x capital multiplier for 24 banks will be considered based on the type of banking licenses held. We have benchmarked the current capital of these banks against the current capital requirement and four recapitalization scenarios,” it noted.

About 20 years have passed since the CBN’s 2004 banking reform, which raised the then-current capital base from N2 billion to N25 billion. This is when the proposed increase in the capital base would take place.

Massive merger and acquisition activities characterised the 2004 banking reform, which ultimately led to the country’s bank count dropping from 89 to 25.