Banking sector capital raise exposes new challenges – Afrinvest

The Chief Executive of Afrinvest, Ike Chioke, has said the ongoing banking capital raise exposes new challenges as it is not just the banks that will need to grow. Every other aspect of the economy needs to grow alongside it. Chioke made the disclosure at the launch of the 2024 Banking Sector report titled “Bank […]

The Chief Executive of Afrinvest, Ike Chioke, has said the ongoing banking capital raise exposes new challenges as it is not just the banks that will need to grow. Every other aspect of the economy needs to grow alongside it.

Chioke made the disclosure at the launch of the 2024 Banking Sector report titled “Bank Recapitalisation catalyst for $1 trillion Economy.”

He said the ongoing recapitalisation is good as it will strengthen the balance sheet, strengthen their credit rating. But the capital raise poses new challenges.

“The recapitalisation means that all their return numbers will go down. Return on equity will go down. Return on assets will go down.

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“They can’t easily go and start increasing the risk assets that they’re giving. By lending more money to customers. If there are no safeguards, otherwise they’ll end up losing that money. So, there are issues to think about at the same time, while they’re raising money.”

He further argues that, “There are all sorts of other challenges, which include the current cash reserve ratio, liquidity ratios, which are quite high. At the same time, you have a government that’s running its budget on a deficit. That means they’re printing more money, putting cash into the system. And that same cash you’re trying to quarantine at the central bank. So there are a lot of mixed signals.

“In the same economy where many of us feel challenged by the cost-of-living crisis, the pinch of exchange rate devaluation. And yet the same little income that we have is what we need to put aside and invest in private stocks. So, lots of complicated issues that we need to deal with.”

Speaking on other issues, he said in 2024, the possibility of an end to the current tight interest rate cycle by the CBN could consolidate the banking sector’s emergence from its worst scare, while a lower inflation rate would reduce the risk of loan defaults. In addition, recovery in bond assets valuation, net margin preservation from cheaper deposits and technology-facilitated cost efficiency could provide support for lenders.

Olayemi Cardoso represented by the Acting Director, Financial Policy Department, Mr John Simon Onoja said the recapitalisation has provided opportunity for the dilution of shares and ownership for those who are even smaller investors.

He said; “Another opportunity has come for the smaller investors to be able to own part share in the financial institutions, which we know have always been doing very well. The equity market also is already being boosted.

“We are currently working with the banks, reviewing their capital plans, and other activities relating to the capital range. We are also conscious of the fact that the capital that is going to be imported into the country is essentially from foreign direct investors.

“We are giving them assurance. We are working on the policy for that, that in the place that they are not able to be taken up, they will not suffer any form of devaluation loss. They’ll be able to go back home with their currency and the value that we brought them into the country.”