LAGOS, Nigeria (VOICE OF NAIJA) – Commercial banks are urging the Central Bank of Nigeria (CBN) to provide clearer directives regarding the treatment of retained earnings in the ongoing recapitalization of banks.
With the countdown to the two-year recapitalization timeline starting, from April 1, 2024 , through March 31, 2026, banks seek clarity on how retained earnings will factor into their capital raising plans
The Nation reports that retained earnings represent profits remaining after a company settles all its financial obligations, including dividends to shareholders.
“This portion of equity can be reinvested in the company for various purposes such as new investments, research, and marketing.
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Several lenders are advocating for clearer directives from the (CBN) regarding the treatment of retained earnings, as reported by industry sources. These lenders emphasize the need for unambiguous guidance to inform their capital raising strategies.
Analysts at Afrinvest West Africa Limited, an international investment and research firm, have joined the discussion, expressing their anticipation for additional clarity on the handling of retained earnings from the CBN. As the implementation week for the recapitalization process approaches.
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.”
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Recall last week, VONa reported that the apex bank announced an upward review of the minimum capital requirement for banks to mitigate the impact of economic shocks. Commercial banks with different license categories are required to meet minimum capital thresholds ranging from N500 billion to N50 billion, while Merchant Banks and Non-interest Banks also have revised capitalization baselines.
While the recapitalization drive is expected to strengthen banks’ capacity to support credit creation and potentially attract capital into the economy, there are concerns about potential challenges. These include dilution of returns for shareholders, increased risk of generating bad assets, and the possibility of industry consolidation leading to oligopolistic influence.
Managing Director of Dexterpro Limited, Olusegun Badaru, in one of his LinkedIn posts highlighted the impact of naira devaluation on banks’ balance sheets, emphasizing the importance of recapitalization in maintaining stability and regulatory compliance.
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Recapitalization serves multiple purposes, primarily enhancing a bank’s capital foundation, bolstering its capacity to absorb potential losses, and maintaining stability. It also acts as a buffer against unforeseen shocks, instilling confidence among depositors, investors, and regulators.
“Recapitalization 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