Nigeria: Exclusion of Retained Earnings Poses Challenges for Nigerian Banks’ Recapitalization, Warns Moody’s

Moody’s Rating has cautioned that the exclusion of retained earnings from Nigeria’s deposit money banks’ (DMBs) capital base calculation will complicate recapitalization efforts for these lenders, according to a recent report.

However, the firm noted that Nigerian banks’ adherence to minimum capital requirements could yield positive credit ratings for these financial institutions within its coverage universe.

The Central Bank of Nigeria (CBN) has directed banks to submit implementation plans by April 30, 2024, following its announcement of a significant increase in new capital requirements for banks, effective March 31, 2026.

Under the new regulations, the minimum capital requirements for international commercial banks will surge tenfold to N500 billion from 2026 onwards, while national commercial banks will face an eightfold increase to N200 billion, and regional commercial banks will see their requirements rise fivefold to N50 billion.

The banking industry stands to benefit from these higher capital requirements, as they will result in stronger balance sheets, enabling banks to expand their loan portfolios and absorb unforeseen credit losses before the eventual implementation of Basel III.

To comply with the new requirements, banks have three primary options: raising ordinary equity through the sale of subscription shares, merging through acquisitions, or downgrading their banking licenses.

For instance, following the sale of its UK subsidiary in September 2023, Union Bank of Nigeria reverted to a national license from an international one, reducing its capital requirement from NGN50 billion to NGN25 billion.

Moody’s estimates that the aggregate shortfall of the nine banks it rates, compared to the impending capital requirement, is approximately N2.6 trillion ($2.1 billion) if they maintain their current license categories. This shortfall represents 26% of their existing aggregate shareholders’ funds.

Currently, seven banks hold international commercial banking licenses, including Access Bank, FCMB, Fidelity Bank, First Bank, GT Bank, UBA, and Zenith, while Union Bank and Sterling Bank possess national licenses. The new required minimum capital must comprise solely paid-up capital and share premium.

Despite both retained earnings and additional Tier 1 capital contributing to the capital adequacy ratio (CAR), which stands at 15% for commercial banks with international operations designated as domestic systemically important banks (D-SIBs) and 10% for national banks, they cannot be applied to the required minimum capital.

Moody’s highlighted that the exclusion of retained earnings from qualifying capital may complicate banks’ recapitalization plans, as accumulated earnings not distributed as dividends cannot be utilized.

This exclusion may necessitate banks issuing fresh common stock, raising concerns among investors about potential share value dilution.

Moody’s anticipates significant consolidation within the banking sector, particularly where raising the required capital is unfeasible, as banks seek to comply with the new regulations.