Nigeria’s banking sector will enter 2027 with stronger capital buffers but face a tougher test of how effectively banks deploy the funds raised during the 2026 recapitalisation exercise, according to DataPro.
The rating agency, in its Monthly Rating Brief for October, said the recapitalisation had structurally strengthened the banking industry but warned that the next challenge would be turning the additional capital into productive lending and sustainable earnings.
The exercise injected ₦4.65 trillion into the banking system and pushed the average Capital Adequacy Ratio (CAR) to 25.5 per cent.
CAR measures a bank’s capital cushion against the risks it takes in its lending and other operations.
However, DataPro said the stronger capital position came alongside a major cleanup of banks’ loan books as pandemic-era regulatory reliefs were unwound.
Banks wrote off ₦2.9 trillion in loans, equivalent to 63 per cent of the capital raised during the recapitalisation exercise.
“The recapitalisation era ends; the productivity test begins,” DataPro said in its outlook for 2027.
The agency said the key risk for the sector would therefore shift from whether banks have enough capital to whether they can use that capital efficiently to generate sustainable returns.
Proposed capital buffer raises pressure
DataPro identified a proposed 20 per cent holding-company, or HoldCo, capital buffer by the Central Bank of Nigeria as one of the major challenges facing banks in 2027.
A HoldCo is a parent company that owns and controls other companies, including banking subsidiaries. DataPro said the proposed requirement could leave more capital at the parent-company level instead of allowing it to be deployed directly by operating banks.
The agency said this could reduce banks’ return on average equity, a measure of how efficiently shareholders’ funds are used to generate profit.
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The impact would be particularly significant for internationally licensed banking groups, with DataPro estimating additional capital requirements of ₦656 billion for Access Holdings and ₦416 billion for UBA.
Banks face pressure to increase lending
DataPro also warned that stronger bank balance sheets may not automatically translate into increased lending to businesses and other productive sectors of the economy.
The banking industry holds about ₦180 trillion in total assets, but DataPro said lending to the real economy remains constrained by monetary policy conditions.
It identified the 45 per cent Cash Reserve Ratio (CRR) and Treasury bill yields of about 21 per cent as factors encouraging banks to hold funds in relatively low-risk government securities instead of extending more credit to businesses.
The CRR is the proportion of deposits banks are required to keep with the central bank rather than lend or invest.
DataPro described the resulting situation as a “liquidity gravity” effect, where attractive returns on government securities draw funds away from private-sector lending.
The agency said the problem is particularly significant for micro, small and medium-sized enterprises, which account for 96 per cent of Nigerian businesses but receive less than five per cent of formal bank credit.
2027 election cycle adds uncertainty
DataPro also expects election-year economic volatility to complicate banks’ lending decisions in 2027.
It said the expected liquidity increase during the fourth quarter of 2026, ahead of the election cycle, would coincide with the CBN’s recent 350-basis-point reduction in the Monetary Policy Rate (MPR) to 23 per cent.
The MPR is the benchmark interest rate used by the central bank to influence borrowing and lending conditions across the economy.
While DataPro said the rate cut signals a change in monetary policy direction, it noted that the unchanged 45 per cent CRR could continue to restrict meaningful growth in private-sector credit.
The agency expects these constraints to persist until election-related uncertainties ease in early 2027.
Capital size no longer enough
For DataPro, the industry’s performance in 2027 will increasingly depend on what banks do with the capital they have raised rather than simply meeting regulatory minimums.
“Meeting minimum capital thresholds is now an entry condition, not a differentiator,” the agency said.It said banks that perform strongly would need to turn their larger balance sheets into sustainable earnings while maintaining credit quality.
DataPro said banks should target cost-to-income ratios below 50 per cent and loan-to-deposit ratios above 65 per cent.
The cost-to-income ratio measures how much a bank spends to generate each unit of income, while the loan-to-deposit ratio shows how much of customers’ deposits a bank has converted into loans.
The agency also said banks would need to demonstrate that their lending standards can withstand the 2027 election cycle without triggering another significant increase in bad loans.
Alex is a business journalist cum data enthusiast with the Pinnacle Daily. He can be reached via ealex@thepinnacleng.com, @ehime_alex on X