DataPro: Banks face productivity test after N4.65trn recapitalisation

Nigeria’s banking sector enters 2027 with stronger capital buffers but a tougher profitability and credit-growth challenge, as banks face pressure to turn the N4.65 trillion raised through the 2026 recapitalisation into productive assets and sustainable earnings.

According to DataPro’s 2027 Nigeria Banking Risk Outlook, the recapitalisation exercise strengthened the sector’s balance sheet, lifting average Capital Adequacy Ratio (CAR) to 25.5 per cent.

However, the report said the stronger capital position came after a major clean-up of banks’ loan books, with N2.9 trillion in loan write-offs following the unwinding of pandemic-era regulatory forbearance.

The scale of the write-offs means about 63 per cent of the fresh capital raised was effectively absorbed by balance-sheet repair, shifting the industry’s focus in 2027 from simply meeting regulatory capital requirements to generating adequate returns from the enlarged capital base.

DataPro identified capital productivity as the central risk issue for the banking industry in the new year, with regulatory requirements, weak productive-sector credit and macroeconomic volatility expected to shape banks’ performance.

One of the key concerns is the Central Bank of Nigeria’s proposed 20 per cent HoldCo capital buffer, which DataProdaDataPro said could leave significant capital at the non-operating holding-company level and place additional pressure on banks’ return on average equity.

The report estimated that internationally licensed banking groups could face substantial additional capital requirements, putting Access Holdings and United Bank for Africa at estimated incremental requirements of N656 billion and N416 billion respectively.

Beyond regulatory capital, DataPro identified the limited flow of bank funds into the real economy as another major constraint.

The report noted that Nigerian banks hold about N180 trillion in total assets, yet productive-sector lending remains constrained by a combination of high reserve requirements and attractive sovereign yields.

It said the 45 per cent Cash Reserve Ratio (CRR), alongside Treasury bill yields of about 21 per cent, creates an incentive for banks to deploy a significant portion of their liquidity into government securities rather than extending higher-risk loans to businesses.

The effect, according to the report, is particularly significant for micro, small and medium-sized enterprises (MSMEs), which account for about 96 per cent of Nigerian businesses but receive less than five per cent of formal bank credit.

DataPro said this imbalance could become a major test of the recapitalisation exercise, as a larger capital base would have limited economic impact if banks remain unable or unwilling to channel sufficient funds into productive economic activity.

The report also identified election-year macroeconomic volatility as a major risk for 2027, particularly as increased liquidity in the fourth quarter of 2026 interacts with recent monetary policy easing.

The Central Bank of Nigeria has cut the Monetary Policy Rate by 350 basis points to 23 per cent, according to the report, but the CRR remains unchanged.

DataPro argued that the combination could limit the transmission of monetary easing into broader private-sector credit growth, particularly while businesses and financial institutions navigate uncertainty surrounding the 2027 election cycle.

The report therefore expects the banking industry’s key challenge to shift from balance-sheet expansion to balance-sheet efficiency, with institutions under pressure to demonstrate that the capital raised during the recapitalisation exercise can translate into stronger earnings without triggering another deterioration in asset quality.

DataPro said banks would increasingly be assessed on their ability to improve cost efficiency, expand productive lending and maintain credit quality through the election cycle.

It identified a cost-to-income ratio below 50 per cent, a loan-to-deposit ratio above 65 per cent and stronger post-recapitalisation credit underwriting as key indicators of banking-sector performance in 2027.

The report’s central message is that regulatory capital will increasingly become an entry requirement rather than a competitive differentiator, leaving banks to demonstrate how effectively they deploy the additional capital to generate sustainable returns and support economic activity.