If a Microfinance Bank collapses due to illiquidity, the impact could extend to the corresponding bank, potentially affecting its stability.
The ongoing recapitalization exercise among banks has significantly increased transactions in Nigeria’s equities market by 44 percent during the first seven months of 2024.
Data from the Nigerian Exchange Limited (NGX) indicates that stock transactions between January and July 2024 amounted to N3.095 trillion, up from N2.154 trillion during the same period in 2023—a difference of N941.62 billion.
“The first half of 2024 was tumultuous for the Nigeria Exchange Group (NGX), with macroeconomic shifts and policy changes shaking up the market,” said analysts from Lagos-based Comercio Partners. “The banking sector was particularly prominent, grappling with its recapitalization challenges, which were a major driver of the market’s fluctuations.”
Comercio Partners further suggested in their second-half (H2) macroeconomic and market outlook that the recapitalization exercise would lead to increased activity in the equity market as banks seek to raise additional capital to meet the new benchmarks.
Activity on the Nigerian stock market has surged as banks accelerate their capital-raising programs. Institutions like Fidelity Bank, GTCO, and Access Holdings have completed their capital-raising efforts, while FCMB Group and Zenith Bank are still in the market for share sales.
Read also:
- Nigeria’s foreign investments rising on proposed bank recapitalisation -Cardoso
- Another bank recapitalisation, why CBN insists — Cardoso
- Bank recapitalization to boost capital inflow.
On March 28, 2024, the Central Bank of Nigeria (CBN) announced a two-year bank recapitalization exercise, starting on April 1 and ending on March 31, 2026.
“This exercise could potentially bring an influx of capital into the domestic economy through offshore capital-raising activities and enhance the capacity of lenders to support credit creation in the real sector, as stronger and more resilient banking entities emerge post-recapitalization,” stated analysts from Lagos-based Coronation Research in their recently released mid-year economic report.
However, the report also cautioned that the recapitalization could dilute returns for existing shareholders, possibly encourage risky behavior among banks as they strive to meet the capital requirements, and could lead to a concentration of market power among a few banks.
As of July 31, the market had returned +30.76 percent year-to-date, though this figure had decreased to +28.35 percent by August 23.
“The Nigerian stock market started the year strong with significant gains in January, but momentum waned in subsequent months due to the CBN’s hawkish monetary policy and disappointing corporate earnings, leading to a predominantly bearish first half,” noted analysts from Meristem Research in their 2024 half-year outlook.
Looking ahead, Meristem Research predicts continued sideways trading in the equities market for the rest of the year, but they maintain an overall positive outlook for 2024, driven by corporate actions, enhanced liquidity in the foreign exchange market, and improved investor sentiment.
The NGX’s domestic and foreign portfolio investment (FPI) report reveals that domestic stock buyers nearly doubled their transactions in the first seven months of 2024, reaching N2.497 trillion compared to N1.96 trillion in the same period in 2023. Retail investors also doubled their equity transactions to N1.27 trillion, up from N640.44 billion in 2023, while domestic institutional investors’ transactions amounted to N1.226 trillion, slightly down from N1.328 trillion in the previous year.
The CBN’s recapitalization plan requires minimum capital levels of N500 billion, N200 billion, and N50 billion for commercial banks with international, national, and regional licenses, respectively. The capitalization requirements for merchant banks have been raised to N50 billion, and for non-interest banks, the national requirement is N20 billion, and the regional requirement is N10 billion.
“After breaking through the historic resistance of 66,121.93 points, the NGX-ASI is positioned for further gains in 2024, supported by the improved economic outlook for Nigeria and the resilient financial performance of listed companies.
In H2-2024, we anticipate a mix of factors—including the high base effect expected in Q3-2024, potential moderation of interest rates, corporate actions, and monetary policy easing in advanced economies—to drive bullish trends at various intervals. Financial system liquidity will also play a positive role,” said analysts from United Capital in their H2 outlook for the equities market.
