Commercial banks demanding from the Central Bank of Nigeria (CBN) to present a clearer directive on the treatment of retained earnings in the recapitalisation of banks, The Nation has learnt.

The demand become more urgent as countdown to the two-year recapitalisation timeline begins.

The recapitalisation exercise is expected to commence from April 1, 2024 (today), through March 31, 2026.

Retained earnings are the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders.

This represents the portion of the company’s equity that can be used, for instance, to invest in new equipment, research and development, and marketing.

Many of the lenders pushing for clarity believe a definite pronouncement devoid of ambiguity will guide their capital raising plan.

Adding their voices to the debate, analysts at Afrinvest West Africa Limited, an international investment and research company, said they anticipate further clarification on the treatment of retained earnings from the CBN as implementation week commences.

In emailed note to investors, the analysts said: “Assuming the re -engineering of retained earnings to bolster eligible capital levels (that is share capital and share premium as defined by the CBN for the recapitalisation exercise), our estimation indicates that approximately N901.8 billion combined would be needed by Wema Bank, First City MB, Fidelity, Unity, and Sterling banks to reach new benchmarks.”

The CBN had last week, announced the upward review of the minimum capital requirement for lenders in the country to mitigate the impact of external and domestic shocks via negative exchange rate movement and elevated inflation.

The apex bank mandated minimum capital of N500 billion, N200 billion, and N50 billion for Commercial Banks with International, National, and Regional licenses respectively.

Likewise, the CBN also raised capitalisation baseline for Merchant Banks (N50 billion) and Non-interest Banks (National: N20 billion and Regional: N10 billion).

The CBN specified that minimum capital for existing banks should comprise only paid-up capital and share premium. For proposed banks (new banking license applications after April 1, 2024) the paid-up capital should meet new standards.

They explained that from initial assessment, positives from the recapitalisation drive includes strengthening the capacity of banks to support credit creation in the real sector, the potential influx of capital into the domestic economy through offshore capital-raising endeavours and the likelihood of the emergence of stronger and more resilient banking entities post-recapitalization.

However, potential headwinds can materialise in form the dilution of returns for shareholders, the risk of lenders inadvertently generating bad risk assets or engaging in high-risk behaviours to deploy additional liquidity, and the possibility of high industry concentration following consolidations, leading to oligopolistic influence.

Managing Director, Dexterpro Limited, Olusegun Badaru, in one of his LinkedIn posts, explained that the devaluation of the naira leads to a decrease in the value of assets held by Nigerian banks, which can significantly impact their balance sheets, as the value of loans, investments, and other assets denominated in foreign currencies will decline when converted into naira.

“As a result, banks may face challenges in maintaining their capital adequacy ratios and meeting regulatory requirements,” he said .

He explained that recapitalisation serves several purposes. Firstly, it strengthens a bank’s capital base, improving its ability to absorb potential losses and maintain stability. Adequate capitalisation provides a buffer against unexpected shocks and helps instill confidence in depositors, investors, and regulators.

“Recapitalisation enables banks to meet regulatory requirements and comply with capital adequacy ratios set by regulatory authorities such as the CBN. Compliance with these ratios is crucial for maintaining a sound and resilient banking system,” he said. (The Nation)

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