Why Nigeria’s Banks Nonetheless on Shaky Floor with Large Income, Weak Capital

BY BLAISE UDUNZE

Regardless of the delicate 2024 economic system grappling with inflation, forex volatility, and weak development, Nigeria’s banking trade was extensively portrayed as profitable and robust amid triumphal headlines. The figures appeared to sign energy, resilience, and superior administration because the Tier-1 banks resembling Access Bank, Zenith Bank, GTBank, UBA, and First Bank of Nigeria, collectively reported earnings approaching, and in some circumstances exceeding, N1 trillion. Surprisingly, a 12 months later, these identical banks touted as sound and stable are locked in a frenetic race to the capital markets, issuing rights affords and public placements back-to-back to satisfy the Central Bank of Nigeria’s N500 billion recapitalisation thresholds.

The contradiction is obvious. If Nigeria’s greatest banks are so worthwhile, why are they unable to internally fund their new capital necessities? Why don’t have any fewer than 27 banks tapped the capital market in fast succession regardless of repeated assurances of balance-sheet robustness? And extra basically, what do these file earnings really say about the true well being of the banking system?

The recapitalisation directive introduced by the CBN in 2024 was formidable by design. Banks with worldwide licences had been required to boost minimal capital to N500 billion by March 2026, whereas nationwide and regional banks confronted decrease however nonetheless substantial thresholds starting from N200 billion to N50 billion, respectively. Wanting on the coverage, it was bought as a contemporary reform meant to make banks stronger, extra resilient in robust instances, and higher in a position to help main long-term financial growth.  In concept, sturdy banks ought to welcome such reforms. In observe, the scramble that adopted has uncovered uncomfortable truths concerning the construction of financial institution profitability in Nigeria.

On the coronary heart of the inconsistency is a elementary misunderstanding typically inspired by the banks themselves between earnings and capital. Unknown to many, profitability, regardless of how spectacular, doesn’t mechanically translate into regulatory capital. Primarily, the CBN’s recapitalisation framework really focuses on cash paid in by shareholders when shopping for shares, contemporary fairness injected by traders over retained earnings or earnings that exist primarily on paper.

This distinction issues as a result of a lot of the revenue surge recorded in 2024 and early 2025 was neither cash-generative nor sustainably repeatable. A good portion of these headline banks’ earnings reported really got here from international change revaluation positive aspects following the sharp fall of the naira after exchange-rate unification. The trade witnessed that banks’ holding dollar-denominated belongings their books confirmed larger numbers as their stability sheets swell in naira phrases, creating monumental paper earnings with out a corresponding enchancment in underlying operational energy. These positive aspects inflated revenue statements however did little to strengthen core capital, particularly after the CBN barred banks from utilizing FX revaluation positive aspects for dividends or routine operations. In impact, banks seemed richer with out turning into stronger.

Past FX results, Nigerian banks have more and more relied on non-interest revenue charges, prices, and transaction levies to drive profitability. Whereas this mannequin is profitable, it doesn’t essentially deepen monetary intermediation or develop productive lending. Excessive earnings constructed on buyer prices relatively than mortgage development supply restricted help for long-term balance-sheet enlargement. Additionally they go away banks weak when macroeconomic circumstances shift, as is now taking place.

Certainly, the recapitalisation train coincides with a turning level within the financial cycle. The extraordinary circumstances that supported financial institution earnings in 2024 and 2025 are starting to unwind. Analysts now warn that Nigerian banks are approaching earnings reset, as web curiosity margins the spine of conventional banking profitability, come beneath sustained strain.

Renaissance Capital, in a January observe, initiatives that main banks together with Zenith, GTCO, Entry Holdings, and UBA will wrestle to ship earnings development in 2026 similar to current efficiency.

In an actual sense, the CBN is predicted to decrease rates of interest by 400 to 500 foundation factors as a result of inflation is slowing down, and because of this banks will earn much less on loans and authorities bonds, however they might not have the ability to rapidly decrease the curiosity they pay on deposits or different money owed. The money reserve necessities are nonetheless elevated, which doesn’t earn curiosity; banks can’t simply improve or develop lending investments to make up for decrease returns. The implications are important. Internet curiosity margin, the distinction between what banks earn on loans and investments and what they pay on deposits, is poised to contract. Deposit competitors is intensifying as lenders struggle to shore up liquidity forward of recapitalisation deadlines, pushing up funding prices. On the identical time, yields on treasury payments and bonds, lengthy a protected and profitable haven for banks are anticipated to melt in a lower-rate atmosphere. The result’s a narrowing revenue cushion simply as banks are being requested to hold far bigger fairness bases.

Compounding this problem is the fading of FX revaluation windfalls. With the naira comparatively extra steady in early 2026, the non-cash positive aspects that after flattered financial institution earnings have largely evaporated. What stays is the much less glamorous actuality of core banking operations: credit score threat administration, value effectivity, and real mortgage development in a sluggish economic system. On this new atmosphere, sustaining headline earnings shall be far more durable, even earlier than accounting for the dilutive impression of recapitalisation.

That dilution is one other underappreciated consequence of the capital rush. Huge share issuances imply that even when banks handle to maintain absolute revenue ranges, earnings per share and return on fairness are more likely to decline. Zenith, Entry, UBA, and others are dramatically growing their share counts. The identical earnings pie is now being divided amongst many extra shareholders, making particular person returns leaner than throughout the pre-recapitalisation growth. For traders, the optics of sturdy earnings might quickly give strategy to the truth of weaker per-share efficiency.

But banks have pressed forward, not solely out of regulatory necessity but in addition strategic calculation.

Throughout this era of recapitalization, traders have an interest within the inventory market with optimism, particularly about financial institution shares, as banks are elevating contemporary capital, and this makes it simpler to draw investments. This has turn out to be a season for the administration groups to grab the second to boost funds at comparatively engaging valuations, strengthen possession positions, and place themselves for post-recapitalisation dominance. In a number of circumstances, main shareholders and insiders have elevated their stakes, as projected within the media, signalling confidence in long-term prospects at the same time as near-term returns face strain.

There may be additionally a broader structural ambition at play. Effectively-capitalised banks can tackle bigger single obligor exposures, finance infrastructure initiatives, develop regionally, and compete extra credibly with pan-African and world friends. From this attitude, recapitalisation is just not merely about compliance however about reshaping the aggressive hierarchy of Nigerian banking. What shall be witnessed within the trade is that those that succeed will emerge bigger, fewer, and extra highly effective. Those who fail shall be compelled into consolidation, retreat, or irrelevance.

For the broader economic system, the result is ambiguous. Stronger banks with deeper capital buffers might enhance systemic stability and improve Nigeria’s capability to fund long-term growth. The purpose is that whereas merging or consolidating banks might make them safer, it might additionally hurt the market and the economic system as a result of it would cut back competitors, let a number of banks dominate, and encourage them to earn simple cash from bonds and costs as an alternative of funding actual companies. The reality be instructed, injecting extra capital into the banks with out complementary reforms in credit score infrastructure, risk-sharing mechanisms, and monetary self-discipline, isn’t sufficient because the aforementioned reforms are additionally wanted.

The frenzy as uncovered on this interval, is that the second Nigerian banks began elevating new capital, the obvious actuality behind their reported earnings turned clearer, that earnings weren’t purely from good administration, whereas the monetary trade is just not as sound and robust as its headline figures. The truth that trillion-naira revenue banks should return repeatedly to shareholders for contemporary capital is just not an indication of extra energy, however of structural imbalance.

With the deadline for banks to boost new capital coming quickly, by 31 March 2026, the main target has shifted from simply elevating N500 billion. N200 billion or N50 billion to consider the long run form and high quality of Nigeria’s monetary trade, or what it would really appear like afterward. Will recapitalisation mark a turning level towards deeper intermediation, decrease dependence on speculative positive aspects, and stronger help for financial development? Or will it merely reset the numbers whereas leaving underlying incentives unchanged?

The reply will outline the subsequent chapter of Nigerian banking lengthy after the capital market roadshows have ended and the revenue headlines have pale.

Blaise, a journalist and PR skilled, writes from Lagos and might be reached through: blaise.udunze@gmail.com