Implications

Bank recapitalization involves the process of enhancing the capital structure of a bank by introducing additional capital. This usually has some upside and downside effects. Thus, outlined below are some of the possible implications of the recapitalization exercise include, but not limited to:

Upsides of Recapitalization:

Close monitoring and Supervision:

Recapitalization ensures there is proper scrutiny and supervision over banks’ activities by the regulatory authorities. This will enable the banks to meet up with the capital adequacy requirements imposed by the CBN.

Enhanced Capital Base:

Recapitalization will birth bigger, stronger, and healthier banks which ensure financial stability. This can boost the capacity of banks to absorb losses and maintain going concerns even during economic upheaval.

Improved investors’ confidence:

When there is recapitalization investors and depositors will have more confidence in the banks’ stability and solvency. This can lower the level of withdrawals by depositors and reduce funding costs for the banks.

Additional Capital Inflows:

When there is recapitalization, foreign investments will be attracted into the economy, which may enhance the Nigerian currency (naira).

Improved Lending Capacity:

With increased capital, banks are more equipped to lend to businesses, especially the real sector of the economy e.g., agriculture, manufacturing, retails, etc. This can stimulate investment and improve economic growth.

Economic Growth:

Recapitalization will ensure banks are more positioned to support the Federal Government intended goal to achieve $1 trillion economy by the year 2030.

Resilience:

Banks will become more resilient to global, market, and economic challenges/ headwinds.

Enhanced Owners’ Equity Value:

Recapitalization can result in merger or acquisition of some banks. A successful M&A scheme can create additional value to the shareholders through synergy.

Downsides of Recapitalization:

Loss of Identity:

Some banks may collapse or lose identity to another bank through acquisition.

Job losses:

Recapitalization can result in acquisition of one bank by another. When this happens, the acquiring bank may shutdown the underperforming segments, which may result in job losses.

Issue Costs:

Costs associated with underwriting and raising additional equity capital, including regulatory fee, professional fees, marketing expenses, etc. will be incurred. This may portend additional financial burden on the banks.

Dilution of Ownership:

The proportional ownership of the existing shareholders may be impaired when issuing new shares due to the recapitalization. This will lead to reduced dividend per share, and in effect, discontent the shareholders. As a result, there may be shareholder activism, management change, etc.

Management Concerns:

The implementation of recapitalization exercise is a tedious, time-consuming, and complex activities. Considerable management efforts are required to ensure proper coordination with investors, regulators, and other relevant stakeholders. This may distract management from the smooth running of the day to day business activities.

The successful implementation of the recapitalization plan will depend largely on some prevailing factors, including the market conditions, regulatory environment, and the peculiarity of the individual bank. Though, the potential benefits of recapitalization may outweigh its costs, the challenges that ensue will need to be judiciously managed to ensure its sustainability.