Bankers oppose exclusion of retained earnings in CBN recapitalization terms

Bankers are voicing opposition to the Central Bank’s decision to omit retained earnings from the share capital calculation in its recent recapitalization guidelines.

The Central Bank announced on Thursday a new set of capital thresholds for Nigerian banks, requiring international, national, and regional banks to maintain minimum share capital of N500 billion, N200 billion, and N50 billion, respectively.

However, in defining share capital, the Central Bank excluded retained earnings from the calculation. Instead, it specified that share capital comprises only the banks’ ordinary share capital and share premium.

“For existing banks, the capital requirements specified above shall be paid-in capital (Paid-up plus Share Premium) only. Bonus issues, other reserves and Additional Tier 1 (AT1 Capital shall not be allowed or recognized to meet the new minimum capital requirements.” CBN

In accounting terms, retained earnings are considered a component of a company’s equity because they represent profits that have not been distributed as dividends but are instead reinvested in the bank.

Many bankers, who requested anonymity when speaking to Nairametrics, expressed the view that the Central Bank’s decision to exclude retained earnings from share capital calculations is flawed.

They argue that this approach fails to acknowledge the actual value that these earnings represent which goes against the conventional and legal treatment of a company’s capital structure.

Some bankers also expressed the opinion that while the Central Bank prefers banks to retain most of their earnings to reinforce their capital base, it should not concurrently prevent them from counting these undistributed earnings as part of their capital.

According to estimates by Nairametrics, the ten largest banks in the country possess a cumulative total of N4.2 trillion in retained earnings.

With the exception of Sterling Bank, none would require additional capital raising if retained earnings were recognized as part of share capital.
This may explain the widespread dissatisfaction among bankers with the Central Bank of Nigeria’s (CBN) directive.

It seems that the Central Bank is prioritizing direct capital injections into banks rather than relying on accounting entries to satisfy recapitalization requirements.

Although the Central Bank has permitted mergers and acquisitions, this suggests it anticipates that some banks might struggle to meet the new capital requirements.

The Central Bank has stated that the purpose of raising capital is to “engender the emergence of stronger, healthier and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030” in line with the Renewed Hope agenda of the Tinubu administration.

The Central Bank contends that larger banks with substantial capital bases are essential, as they can offer more significant levels of credit.

This capacity is deemed critical to facilitating and accelerating the growth of the national economy.