Nigeria’s Bank Recapitalization Order May Spur Mergers Among Smaller Lenders Before 2026 Deadline, Says S&P

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Nigeria’s directive for banks to recapitalize by 2026 is expected to prompt smaller banks to merge with rivals, according to S&P Global Ratings.

The recapitalization effort will affect banks differently based on their size and financial health, with tier-one and mid-sized banks likely to meet the deadline, while smaller banks may turn to mergers and acquisitions, stated Samira Mensah, an analyst at S&P Global Ratings. Approximately half of Nigeria’s banks are classified as small.

“Top-tier banks have consistently accessed capital markets and Eurobonds, making them well-known to investors,” Mensah explained in an interview in Lagos.

In March, the Central Bank of Nigeria mandated lenders to increase their capital within two years to strengthen their defenses amid a nearly 70% naira devaluation over the past year, high inflation, rising borrowing costs, and weak economic growth. Nigeria’s economy, which was Africa’s largest in 2022, is projected to fall to fourth place this year due to the currency’s plunge.

“We frequently communicate with investors who are concerned about which banks may face regulatory forbearance regarding solvency ratios due to naira depreciation,” Mensah added.

The central bank has ordered banks with international operations to increase their capital tenfold to 500 billion naira ($325 million) and those with local operations eightfold to 200 billion naira. Smaller lenders operating in specific regions must raise their capital fivefold to 50 billion naira.

Some of Nigeria’s 26 commercial banks, including Access Holdings Plc, the largest by assets, and Fidelity Bank Plc, a mid-sized lender, are already selling shares to raise capital.

In April, Mustafa Chike-Obi, chairman of the Bank Directors Association of Nigeria, noted that some lenders might struggle to meet the recapitalization requirements due to an unfavorable operating environment that deters investor interest.

Top-tier banks are expected to raise funds locally and offshore due to their operational scale and profitability, with mid-sized banks like Fidelity Bank and FCMB Group also likely to succeed, Mensah said.