Stringent capital requirement imposed by the Central Bank of Nigeria (CBN) may have stripped deposit money banks of funds that would have improved earnings if invested.
Pressure to boost capital adequacy ratio (CAR) mounts on the financial institutions preparatory to the full implementation of Basel II and III.
Godwin Emefiele, CBN governor.
FBN Holdings sold $450 million of securities due 2021 in July, while Ecobank last month issued $200 million of notes maturing in 2021.
In June, Access Bank sold $400 million of seven-year subordinated notes while Stanbic IBTC Holdings said on August 7 that it may raise N30 billion in bonds to support growth.
Union Bank is in talks with Atlas Mara to raise $275 million. The African investment vehicle of former Barclays boss, Bob Diamond, is expected to make a decision on whether to buy the minority stake.
One of its purchases, ADC African Development Corporation, already owns a 9.1 per cent indirect stake in UBN.
Doha-based Qatar National Bank (QNB),bought 1.77 billion Ecobank ordinary shares and 732.3 million preferred shares, valued at N35.6 billion at N17.01 per share. The transaction gives the new investors 12.5 per cent stake in Ecobank.
QNB bought the shares from the Asset Management Corporation of Nigeria (AMCON) on the Nigerian Stock Exchange (NSE) and the partnership will enable Ecobank to consolidate in North Africa.
Raising funds to beat tougher rules
Against backdrop of tougher regulatory requirement, FBN Capital, the investment-banking unit of FBN Holdings, stated in a report that systematically important banks (SIBs) may raise as much as N405 billion ($2.5 billion) this year, compared with N342 billion ($2 billion) in 2013.
The big four banks considered “too big to fail” – First Bank, Ecobank, Access Bank, and Union Bank – are all shopping for some N405 billion from both local and foreign sources to shore up their cash reserves.
The CBN recently reviewed capital requirements for banks and discount houses, excluding non-distributable regulatory reserve and other reserves in the computation.
In other words, the CBN removed some assets banks can count as capital.
Banks hold a portion of assets as either cash or marketable investments. Statutory reserves are the amount of liquid assets that firms must hold in order to remain solvent and attain partial protection against a substantial investment loss.
The CBN had directed banks considered “too big to fail” to boost minimum capital ratios to 16 per cent last year. It issued a circular on August 5, 2014 limiting Tier 2 capital to 33 per cent of Tier 1 capital.
Minimum capital requirements for banks with operations outside the country were kept at 15 per cent and at 10 per cent for those with interests only in Nigeria.
The objective was to raise the quality and loss absorbency of the capital base of banks. But the changes slashed 100 to 400 basis points off the capital adequacy ratios of most banks.
With increasing exposure to the Eurobond market, the need to provide a strong buffer for external shocks and guarantee confidence in Nigerian banks necessitated more stringent capital requirement.
This is why the CBN changed the way lenders calculate capital buffers to align with global standards and increase their ability to withstand losses.
Why CBN raises the stakes
The CBN’s action is preparatory to tapping into the G20 proposal that will require top banks to issue special bonds as capital that can assist them in times of crises.
In the international financial community, government leaders are expected to agree in November that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue.
The bonds, to be known as “Gone Concern Loss Absorption Capacity” or GLAC, are seen by regulators as essential to stopping the world’s biggest banks from being “too big to fail.”
Ecobank had the lowest at 16 per cent CAR in half year (H1) 2014 within Tier-1, at par with the 16 per cent requirement for SIBs.
FBN Holdings’ CAR berthed at 17.6 per cent in H1:2014, 1.6 per cent above the 16.0 per cent requirement. This necessitated its $450 million Eurobond concluded last July.
In Tier-2, Diamond Bank recorded the lowest CAR with 17.3 per cent (FY:2013), 1.3 per cent above the 16 per cent requirement.
However, with its recent Eurobond ($200 million) and ongoing Rights Issue ($312.5 million) capital raising exercise, the bank’s CAR may increase above 20 per cent.
CAR requirement for SIBs was raised to 16 per cent in the second half of 2013, coupled with the partial adoption of BASEL II.
The recently introduced 33.3 per cent Tier-2 ceiling of total Tier-1 capital, places a restriction on banks that intend to raise further Tier-2 capital in the second half of the year.
Hence the banks are compelled to explore the Tier-1 capital (equity) raise option.
In March this year, the CBN raised requirements on private deposits to 15 per cent from 12 per cent after jerking up cash-reserve requirements (CRR) on deposits by government ministries and agencies and state-owned companies to 75 per cent from 50 per cent last year.
This development also implied that about N2 trillion of investible funds of banks was sterilised out of the banking system, compelling some banks to cut down on costs, collapse departments and branches.
The capital changes are making it “tougher for banks to generate profits to pay as dividends,” Richard Segal, Head of International Credit Strategy at Jefferies International in London, said in an e-mail.