The ongoing process by the Central Bank of Nigeria to increase the capital base of Deposit Money Banks may not lead to a higher Gross Domestic Product, analysts at Proshare have said.
The economists explaining their findings which contradict comments by officials of the current administration said the assumption associating big banks with larger economies is unproven.
They stated that an increase in the capital of a commercial bank might not necessarily result in improved performance, as indicated in the Third Edition of their Tier 1 Banks Report released on Wednesday.
The Proshare Bank Strength Index evaluates banks using a pool of financial metrics based on audited financial statements for the Financial Year 2023. In the report, it named Access Corp, Zenith Bank, FBNH, ETI, UBA, and GTCO as Tier-1 banks in 2024, reinforcing the Afrinvest-inspired concept of FUGAZE.
Government officials including the CBN Governor, Olayemi Cardoso, have reiterated that the recapitalisation plan will foster stronger, healthier, and more resilient banks capable of withstanding economic shocks and supporting the federal government’s goal of achieving a $1tn GDP by 2030.
“We need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0tn economy shortly? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital,” Cardoso said at the 58th Chartered Institute of Bankers of Nigeria Annual Bankers’ Dinner last year.
In early June, the Central Bank of Nigeria revealed that banks had started to submit their recapitalisation plans.
“Our banks have begun submitting implementation plans for the banking sector recapitalisation programme in compliance with the CBN Circular reviewing the minimum capital requirements for commercial, merchant, and non-interest banks,” central bank spokesperson Hakama Sidi Ali said in a statement.
This was as some bank chiefs started to bet on their companies by increasing their stakes acquiring about 1.86 billion shares worth about N39.32bn between the end of May to June.
However, the Proshare report read in part, “Policymakers have associated big banks with larger economies and faster-growing gross domestic products, but the assumption is unproven.
“Nigeria’s GDP in 2005 was N38.78trn and rose to N77.94trn, roughly two times in 2023, suggesting an average annual growth of 3.55% in the last two decades. However, between 2000 and 2005, bank equity sizes grew over ten times or by 1,150% from N2bn to N25bn.
“In other words, for a decade and a half, banks have used ten times more equity in their businesses than before 2005, yet the country’s GDP growth has been fairly modest. We must realise that when banks grow bigger, they are not necessarily better. A bigger bank unlocks opportunities for creating larger business value at lower operating costs.”
As lenders expand in size and scale to meet the demand of a US$1trn economy, the analysts called for attention to macro and microeconomic risks, as seen in the United States of America.
Poor asset and liability management was a major contributor to the failure of several US banks, such as Silicon Valley, First Republic, and Signature Banks, in 2023.
It noted that with an ongoing Central Bank of Nigeria-inspired banking sector recapitalisation programme, investment in financial technology, customer service scalability, and digital asset engineering would take a fresh turn between 2024 and 2026.
Proshare analysts added, “With higher capital levels, banks must use the larger amounts of cash available to improve shareholder returns and customer service experiences. Many banks will get cut at the knees by lacking a deliberate strategy to transition from cash flow to value creation. Recalling the challenges faced by banks during the Charles Soludo-inspired in 2005, a few bank executives would have more money than business skills, resulting in a terrible waste of additional capital.”
The report further stated that raising Nigerian banks’ equity base is no guarantee for economic growth and development. “Transforming bank equity into drivers of economic growth requires more than money, it requires a coordinated public and private sector plan, with what Proshare analysts have repeatedly called a whole-of-government approach to policies, programmes, and processes.”
