Nigerian Banking Stocks Plummet as CBN Announces Recapitalization Exercise

Nigerian stock market plunges as banks face recapitalization exercise, erasing $4.6B in investor wealth. CBN aims to strengthen banking sector, but concerns over impact on confidence and SME financing remain.

Nasiru Eneji Abdulrasheed
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Nigerian Banking Stocks Plummet as CBN Announces Recapitalization Exercise

Nigerian Banking Stocks Plummet as CBN Announces Recapitalization Exercise

The Nigerian stock market experienced a significant decline last week, with banking stocks leading the losses following the Central Bank of Nigeria's (CBN) announcement of a bank recapitalization exercise. The sell-off in banking stocks erased N1.57 trillion in investor wealth, as the market capitalization dropped by 2.7% to N56.286 trillion and the All Share Index (ASI) fell by 2.7% to 99,529.75 points.

Major banks such as Guaranty Trust Company (GTCo), Zenith Bank, United Bank for Africa (UBA), FBN Holdings, and Access Corporation were hit the hardest, driving the 11.5% decline in the banking index. The financial services sector led the trading activity, contributing 71.87% and 69.39% to the total equity turnover volume and value, respectively.

The CBN's recapitalization exercise, which has the express approval of President Bola Tinubu, aims to enhance the banking sector's contribution to the economy and ensure its resilience in supporting economic activities. The new minimum capital requirements are set at N500 billion for commercial banks with international authorization, N200 billion for those with national authorization, and N50 billion for banks with regional licenses.

Why this matters: The recapitalization exercise is expected to have far-reaching implications for the Nigerian banking industry and the economy as a whole. It aims to strengthen the banking sector's ability to finance infrastructure projects and support the government's vision of a $1 trillion Nigerian economy by 2026. However, the immediate impact on investor confidence and market stability remains a concern.

Dr. Muda Yusuf, CEO of the Center for the Promotion of Private Enterprise (CPPE), emphasized the importance of the CBN assuring depositors about the safety of their funds and sustaining confidence in the stability of the Nigerian banking system. He also highlighted the need for improved access to credit by small businesses to support economic growth and inclusion, noting the estimated N40 trillion financing gap in the Nigerian SME space.

Analysts anticipate a continuation of bearish sentiments in the market, especially with ongoing reactions to the CBN's recapitalization program. The top tier-1 banks, including GTCO, UBA, Zenith Bank, and Access Holdings, reported a total profit after tax of N2.44 trillion in 2023, a 241.5% increase from 2022. However, the CBN has directed banks not to use any foreign exchange revaluation gains to pay dividends or meet operating expenses, preventing them from utilizing their expansive retained earnings to meet the new capital requirements.

"The strategic timeline for the recapitalization will help minimize disruptions and dislocations in the financial system," Yusuf stated, noting that the current categorization of banks with differential capital requirements should be maintained to allow for inclusion and reduce the risk of dominance by a few big banks.

Key Takeaways

  • Nigerian stock market declined 2.7% due to banking stocks sell-off after CBN recapitalization
  • Top banks lost N1.57 trillion in investor wealth, with banking index down 11.5%
  • CBN's recapitalization aims to strengthen banking sector, support $1 trillion economy by 2026
  • Concerns over impact on investor confidence and need to assure depositors' fund safety
  • Banks barred from using forex gains to pay dividends or meet new capital requirements