Recapitalisation Drives Merger Fever as Two Smaller Banks Begin Merger Talks

• Smaller Nigerian banks face tough times meeting the N500 billion recapitalisation requirement set by the Central Bank of Nigeria
• An analysis of the banking consolidation shows that smaller banks are battling to raise the required minimum capital
• Already, two Nigerian banks have received approval from the Central Bank of Nigeria (CBN) to merge

Legit.ng’s Pascal Oparada has reported on tech, energy, stocks, investment and the economy for over a decade.

The Central Bank of Nigeria's (CBN) recapitalisation target is set to significantly reshape the country's banking landscape, particularly impacting smaller banks. 

The deadline for meeting the new capital requirements is March 31, 2026.

Impact of CBN's recapitalisation target on smaller banks

According to reports, two Nigerian banks, one with a regional license and another with a national license, have started merger talks, which may be finalised in the coming months.

The CBN's directive, which mandates a minimum capital of N500 billion for commercial banks with international licenses, N200 billion for national licenses, and N50 billion for regional licenses, presents a substantial challenge for smaller banks. 

Breakdown of the impact

Increased Capital Adequacy Ratios: The primary goal is to strengthen the financial resilience of banks, enabling them to absorb unexpected losses and withstand economic shocks. This will lead to improved capital adequacy ratios across the industry.

Challenges in Meeting Requirements: Many smaller banks, especially those with regional or national licenses, will struggle to raise the substantial amount of fresh equity required. This is due to a combination of factors, including current economic conditions, investor appetite, and the sheer scale of the capital needed.

Mergers and Acquisitions (M&A): This is the most anticipated outcome for smaller banks. Those unable to raise the required capital organically will be forced to either merge with stronger institutions or be acquired. This will lead to a consolidation of the banking sector, reducing the number of players.

License Downgrades: Some smaller banks might opt to downgrade their operating licenses (e.g., from national to regional) if they cannot meet the capital requirements for their current license tier. This would restrict their operations and market reach.

Enhanced Risk Management: To manage the larger capital base effectively and ensure compliance, banks will need to adopt more rigorous risk management practices, including better credit risk assessment and operational risk management. This may require investment in new tools and technologies.

Reduced Financial Inclusion (Potential): While the recapitalisation aims for a stronger banking sector, there's a risk that smaller, community-focused banks that serve rural or underserved areas might disappear through mergers, potentially impacting financial inclusion if larger banks don't fill the gap.

Tighter Credit Conditions for SMEs: Smaller banks often play a crucial role in lending to Small and Medium-sized Enterprises (SMEs). With stricter capital requirements, banks may adopt more conservative lending practices, making it harder for SMEs to access financing.

Temporary Restrictions: The CBN has already implemented measures like temporarily barring banks that haven't met requirements from paying dividends and bonuses to encourage capital retention. This impacts investor confidence in the short term for affected banks.

Prediction of banks that may merge or be acquired

While it's difficult to name specific banks with certainty, based on reports and industry analysis, the following types of banks are more likely to be involved in mergers or acquisitions:

Tier-3 (Regional) banks: 

These banks face the greatest pressure as they often have smaller capital bases and limited access to capital markets compared to larger institutions. They are the most probable candidates for outright acquisitions or mergers among themselves to meet the N50 billion regional license threshold.

Some Tier-2 (National) Banks 

While some Tier-2 banks are actively raising capital, those that are lagging or face significant capital deficits might consider horizontal mergers with other Tier-2 banks to achieve the N200 billion national license requirement. It's less likely they'll be acquired by Tier-1 banks, as most aim to survive independently.

Banks with existing capital adequacy challenges 

Any bank currently struggling to meet the CBN's Capital Adequacy Ratio (CAR) requirement, even before the new recapitalisation, will be under immense pressure.

Banks with limited access to fresh capital

Those without strong shareholder backing or the ability to attract substantial new investment (e.g., through rights issues or public offers) are prime candidates for consolidation.

It's important to note that many banks are actively pursuing various capital-raising strategies, and the landscape is dynamic. The CBN has also stated that a merger between Providus Bank and Unity Bank has already been approved, indicating the trend has begun.

Experts list 10 Nigerian banks to meet CBN’s N500bn target

Legit.ng earlier reported that the Nigerian banking system is undergoing a significant transformation driven by the Central Bank of Nigeria's (CBN) new minimum capital requirements.

This recapitalisation exercise, set to conclude by March 31, 2026, aims to strengthen the financial sector, enhance its resilience to economic shocks, and better position it to support Nigeria's economic growth ambitions, including a projected $1 trillion GDP by 2026.

However, analysts have projected that the Tier-1 Banks, which dominate the Nigerian banking landscape, will likely scale the hurdle.

Source: Legit.ng