In July 2004, the new Governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo announced that the new minimum capitalisation for banks in Nigeria is N25billion (approximately $181m). All banks are expected to comply with this directive by December 2005.

This announcement struck the banking sector like a storm on a dark night. And it has left in its wake a heated debate on its appropriateness in relation to Nigerian banks and the current state of the economy. It is undeniable that this announcement brought with it a number of consequences. This discourse will focus on one major aftermath of the N25b requirement - Mergers and Acquisitions.

A major consequence of the CBN directive is that a spate of mergers and acquisitions has suddenly taken over the banking sector. How will the coming together of the financial brands play out? What possible methods of mergers would be considered? What will this portend for brands and branding within the banking sector?

These, plus more will be addressed as we proceed.

On careful consideration of the Nigerian banking sector, the current drive for consolidation and the N25 billion minimum capitalisation requirement, the following scenarios are expected:

a. Peer mergers
This is a situation where banks that cannot raise the required N25b single-handedly come together to form stronger entities. These stronger entities jointly raise the N25b minimum capitalisation and also compete in the ensuing business landscape. This is already happening. The following consortia are examples: First Consolidated, Astrabank and Sterling. This approach is common internationally and it was prevalent during the consolidation of the banking sector in India in the late nineties.


b. Acquisitions/mergers by the strong
In this scenario, banks that have the wherewithal to meet the required capitalisation, such as Firstbank, UBA, Union Bank, Zenith Bank and Guaranty Trust Bank, etc. make use of the situation in the market as an opportunity to acquire or merge with other banks. This will help them further increase market share, expand branch networks and deepen their skill base. For example, UBA and Standard Trust Bank are going this route with the announcement of a merger. Guaranty Trust Bank is exploring this methodology with its planned acquisition of other banks. This move will help it increase its geographical presence. Also, Firstbank may acquire another bank because of its competence in a particular sub-sector e.g. capital markets.


c. Regional mergers
Another possible scenario that could arise is the merger of banks to form regional financial institutions. For example, banks that have their primary market in the Northern part of the country may decide to merge to consolidate their strengths and reduce their liabilities. At the same time, they will be able to increase their capitalisation to the required level more easily.


d. Root mergers
Let us consider yet another possible scenario - a situation where one or more banks agree to merge because they have similar shareholders. We will refer to this as a root merger. For example, consider Devcom Bank and Equitorial Trust Bank. These banks function as stand-alone financial institutions, though they share shareholders. Thus, in order to meet the required minimum capitalisation, a root merger could occur. This merger will of course make competing in the unfolding financial sector easier.


e. Subsidiary acquisitions/mergers
Already, certain banks within the banking sector possess other banks as subsidiaries (e.g. Firstbank and FBN Merchant Bankers). A bank may also be the majority shareholder in another bank (e.g. Intercontinental Bank and Equity Bank). For banks in this category, an option that can be explored is the total acquisition or merger of such subsidiaries. The controlling bank can thus meld itself and its subsidiaries into a singular entity. Let’s consider Intercontinental Bank which has Equity Bank as a subsidiary. It also has shares in Gateway Bank and an interest in Global Bank. Intercontinental Bank is already travelling down this route. It recently signed a Memorandum of Understanding with these banks, with a view to evolving a singular institution.


f. Foreign capital infusion
It has long been rumoured that a number of international financial institutions have been seeking entry into the Nigerian market. This current consolidation process avails serious contenders with a unique opportunity. Foreign financial organisations (think HSBC!) may acquire a share in banks that have prospects, but can’t raise the required capitalisation on their own. Depending on the percentage acquired, the bank may retain its current identity or may have to take up that of the foreign organisation. Another aspect of this methodology will only be open to foreign banks already operating within the sector. For these banks (e.g. NIB/Citibank & Ecobank), the required funds can be gotten from the parent organisation based on a predetermined agreement.


g. Reverse acquisitions
Finally, let us consider the option of a reverse acquisition. In this scenario, a smaller bank with a very strong brand and/or management depth is acquired by a much larger “fish”. Now the difference here is that the new entity bears the name of the smaller bank because of its strong brand and/or the management of the smaller institution takes control of the larger institution. An example of this sort of merger is the Traveller’s Group/Citibank merger in 1988. Although Citibank was the smaller entity, the merged entity was called Citigroup while retail outlets retained the name Citibank. This was because Citibank was the stronger brand. In addition, Sandy Weil, the CEO of Citibank became Chairman/CEO a short while after the merger was completed.