A recent directive on exclusion of non-distributive regulatory reserve and other reserves in the computation of the capital base of banks and discount houses could quicken the pace of fund raising by banks and other financial institutions.
Many banks have been raising funds in recent period. Diamond Bank is currently raising N50.4 billion new equity funds. Unity Bank had recently closed application list for a combined new equity issue of N39 billion. Wema Bank and Sterling Bank had earlier raised new equity funds.
The Central Bank of Nigeria (CBN) last week in a circular to all banks and discount houses highlighted details on the exclusion of non-distributable regulatory reserves and other reserves in the computation of regulatory capital of banks and discount houses.
The highlights of the circular indicated that the regulatory risk reserve will be excluded from the regulatory capital when computing the Capital Adequacy Ratio (CAR), collective impairment on loans and receivables and other financial assets will henceforth not form part of Tier-2 capital, other comprehensive income reserves will be recognised as part of Tier-2 capital but limited to 33.3 per cent of total Tier-1 capital and while unaudited other comprehensive income gains will not be recognised as part of capital, unaudited other comprehensive income will be deducted from total qualifying capital.
The circular, which implementation started immediately, was part of efforts to ensure more prudent assessment of the regulatory capital of Nigerian banks and in line with global efforts aimed at raising the quality and loss absorbency of the capital base of banks.
Capital market pundits said the new policy would significantly impact on the capital adequacy ratios of banks and might spur them to seek additional equity funds to bolster their capital base.
Increased fund raising by banks, which represent the most active block in the capital market and control nearly one-fifth of total market capitalisation at the Nigerian Stock Exchange (NSE), is expected to enliven the primary market.
Analysts at Afrinvest (West Africa) noted that the new policy would further exert pressure on the banks’ capital adequacy ratios in the third quarter of 2014, when the policy will be used in calculating third quarter earnings and financial statements.
The capital adequacy ratios of tier 1 banks had declined to 20.0 per cent by the end of 2013 as against 23.3 per cent in 2012.
Analysts pointed out that the regulatory risk reserves accommodates the difference between the allowance for impairment losses on loans and advances based on CBN’s prudential guidelines compared with the loss incurred model used in calculating impairment charges under International Financial Reporting Standards (IFRS).
A review of the banks’ capital adequacy ratios (CAR) as at first half 2014 showed that Ecobank Transnational Incorporated (ETI) has the lowest CAR at 16.0 per cent, at par with the 16.0 per cent regulatory requirement for systemically important banks (SIBs). FBN Holdings has 17.6 per cent, slightly above the requirement for SIBs. Among tier 2 banks, Diamond Bank has the lowest CAR with 17.3 per cent, which underlined the strategic importance of the bank’s ongoing rights issue.
“The recently introduced 33.3 per cent Tier-2 ceiling of total Tier-1 capital, places a restriction on some of the banks that intend to raise further Tier-2 capital in the second half of 2014, hence, they may be forced to explore the Tier-1 capital’s equity raise option,” Afrinvest stated.
Analysts noted that the new policy would increase confidence of foreign banks in Nigerian banks, based on the stringent capital requirement, which is in tandem with global counterparts, noting that in the light of Nigerian banks’ exposure to the Eurobond market, the prospects of volatility or depreciation in foreign exchange can be significantly absorbed.
The new CBN policy comes in the wake of impending implementation of the Basel II by the Nigerian financial services authorities. The Nation had recently reported that Nigerian banks might raise some N400 billion in the current capital raising phase to strengthen their capital base in view of the impending implementation of the Basel II.
Basel II seeks to strengthen banks’ risk and capital management through three main areas, otherwise known as pillars. The first pillar deals with minimum capital requirements, the second pillar deals with supervisory review process while the third pillar deals with processes relating to market discipline. The pillars generally ensure that the greater the risk to which a bank is exposed, the greater the amount of capital and required supervisory framework.
After initial delay, Nigeria has set October 31, 2014 as the cut-over date for the implementation of Basel II.
Market sources had noted that while the average capital adequacy ratio in the Nigerian banking industry is currently high and most banks are above regulatory benchmark, banks might need to support their adequacy ratios, which are expected to fall after the cut-over.
Several analysts’ reviews on the banking sector have outlined capital raising as a major theme for the Nigerian banking sector citing new regulations and emerging business opportunities.
