Banking Sector’s Recapitalization, Worries/Benefits to Capital Market Investors

History/Effects of last Recapitalization

The year 2004, when the Banking sector generally approached the investing public for funds remains an historic moment in the history of the Nigeria Equities Market. Aside from attracting new investors, the market also became more sophisticated, thereby improving the benefits of investing. Now that proposals on Recapitalising the sector is already an object of discuss, it is necessary to observe the possible impact on all stake holders, should the market be used to as main instrument in building the bank’s capital base.

Although it is not still very clear what the Central Bank had in mind, we are of the opinion that the market remained a key instrument in achieving its purpose. Recall that the CBN Governor, Mr. Godwin Emefiele, while announcing the plan to recapitalize the banks, said the 2004 banking industry recapitalization, which increased banks’ capital base from N2 billion to the N25 billion, had weakened. His point of valuation was the large difference in the naira/dollar translational rate that had changed from N100/$ to N360/$. In his statement he noted that the improvement from N2 billion to N25 billion Naira which was an equivalent of $200 million is now below $75 million, hence the need for recapitalization.

First Point of Worry

Our first point of concern is the high shares outstanding currently run by the banks. We are of the opinion that most banks may be forced to consider share reconstruction before the said recapitalization. This may be necessary for the banks to grow its shares outstanding and still maintain its return to its long standing investors. See below for current shares outstanding of the banks.

Next Point of Worry

Although this should not be of any threat to all, depositors inclusive, since the central bank of Nigeria had done this (Merger & Acquisition Process) severally without anyone playing at a loss. But in our opinion, it is another possibility to consider, especially for investors with low risk appetite. There are few listed banks which are currently struggling to swim above the waters, should the plan be executed, such bank might have to consider either merging with other banks or agree to be acquired by a bigger operator.

The Benefits

1. As in 2004 when the banking sector was made to recapitalized, we foresee the market and its investors benefitting more from the process (depending on the CBN option for raising the capital). This is because the process will hype the market and therefore attract new entrants.

2. If Share Re-Construction Comes Before?

Now, if the shares were reconstructed before the raising of the capital, investors are definitely going to stay on a better ground; since recapitalization goes with increase in price/unit of shares. In other words, new entrants will be done with the new price. The implication of this is that, the rush that will accomplish the recapitalization will undoubtedly improve old investors’ worth as price is expected to rise towards and after the process.

Action Point

Since the CBN is still silent on its final resolve to effect the recapitalization process, and its planned process to recapitalize the banks is yet to be unveiled, we recommend that traders should avoid any form of panic buying/selling until the regulators are clear with their positions. In other words, investors are expected to watch closely for development in this regard.

By: Jeariogbe Tunde Segun (Founder: Tradelines DotBiz Investment Ltd-www.tradelines.com.ng)