Fitch: Tier-3 Banks May Face Mergers, or Licence Downgrades

Fitch Ratings has cautioned that Union Bank of Nigeria (UBN) and other tier-3 banks in the country may be forced into mergers, acquisitions, or licence downgrades due to their struggles in meeting the Central Bank of Nigeria’s (CBN) new paid-in capital requirements.

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In a report released last week, the global credit rating agency noted that while first-tier and tier-2 banks have made substantial progress in raising fresh capital, smaller banks have been slow to recapitalise. This has increased the likelihood of consolidation or regulatory downgrades for tier-3 banks that fail to meet the CBN’s capital thresholds.

The CBN had, in March 2024, raised the paid-in capital requirements for commercial, merchant, and non-interest banks as part of efforts to strengthen financial stability and ensure banks have sufficient buffers to absorb economic shocks. To comply with the new rules, banks have three options: raising fresh equity, merging with other banks, or downgrading their licences.

While larger banks have leveraged shareholder backing and capital markets to secure funds, third-tier banks have struggled to attract the necessary investment. Fitch highlighted that many of these smaller banks are still awaiting shareholder approval or are in the process of finalising their capital-raising plans, putting them at risk of failing to meet regulatory deadlines.

Union Bank of Nigeria, for instance, remains in breach of the CBN’s 10 percent Capital Adequacy Ratio requirement. Wema Bank, on the other hand, has received shareholder approval to raise capital and plans to begin fundraising by April 2025 in a bid to retain its national banking licence. Coronation Merchant Bank has also secured board approval for capital raising, but its next steps remain uncertain.

Fitch warned that unless these banks take immediate steps to secure fresh capital, they may have no choice but to merge with stronger institutions or downgrade their licences to comply with the CBN’s regulatory requirements.

In contrast, major financial institutions have made significant strides in meeting the new capital thresholds. Access Bank and Zenith Bank, for example, have already raised enough funds to meet the N500 billion benchmark required for international banking licences. First HoldCo, United Bank for Africa, and Guaranty Trust Holding Company are raising capital in phases, with some awaiting final regulatory approval for recent rights issues.

Fidelity Bank and FCMB Group, categorised as second-tier lenders, have completed initial capital-raising rounds but will need additional funds to maintain their international banking licences. Fitch also observed that Ecobank Nigeria and Jaiz Bank have already met the regulatory threshold, requiring only minor capital injections to stay compliant. However, Ecobank Nigeria remains in breach of the 10 percent Capital Adequacy Ratio requirement and has plans in place to restore compliance.

Despite the economic headwinds, investor sentiment towards capital raising has been positive, allowing most top and mid-tier banks to secure funding. This strong appetite for equity issuance has reduced the likelihood of widespread consolidation among the larger banks.

Fitch expects ongoing recapitalisation efforts to bolster capital buffers across the banking sector, helping to mitigate losses stemming from naira devaluation and external economic pressures. A stronger capital base will also enhance banks’ resilience against foreign exchange volatility and regulatory risks while creating more opportunities for business expansion.

However, the agency noted that while recapitalisation will strengthen banks’ financial positions, it is unlikely to lead to an upgrade in their credit ratings due to broader macroeconomic challenges. Fitch maintained that, despite capital raises, no Nigerian financial institution is expected to surpass the country’s sovereign rating of ‘B-’ in the near term.