Africa’s largest economy, beset by an 18-year high inflation rate and the naira at its lowest level ever against the dollar, now confronts a crisis of growth across key industries where banking, unlike most others, is virtually taking a smooth ride through the storm.
The Central Bank of Nigeria (CBN) has raised rates without break since last May, cumulatively by 7.25 per cent, one big spur for massive profitmaking by many banks last year, a major factor for even stronger performance at half-year 2022 (HY2022).
As lenders turn the central bank’s move against inflation into their own advantage by charging borrowers more, Nigeria’s decision to weaken the naira by about 40 per cent is creating perhaps a much bigger boom for banks.
The devaluation in the second quarter of the year let the exchange rate of the dollar to the naira slide from 471.8 to 760.3 within the three weeks to the end of June. In turn, banks with loans and financial instruments denominated in foreign currencies reported a surge in the value of such assets on conversion to naira.
FUGAZ, Nigeria’s five biggest lenders so named after their initials, alone reaped N1.3 trillion in foreign exchange revaluation gains from their Nigerian operations alone, going by their HY2022 earnings reports. The figure was more than 17 times greater than the N74.1 billion reported a year prior. That all five (First, UBA, Guarantee, Access and Zenith) hold international banking licenses has made them the real heirs of the largesse compared to their peers.
Operations at the banks’ subsidiaries outside Nigeria added a trillion naira in foreign currency (FC) translation gains as the icing on the cake, taking the overall foreign exchange gain to N2.3 trillion by PREMIUM TIMES estimate.
That is not to mention similar gains reported by other banks listed on the Nigerian Exchange and some other lenders that are not publicly listed.
Interestingly, no single bank of the five recorded FC translation gain in the same period of last year before the boom happened, all reporting a combined loss of N146.2 billion, reflecting the sheer scale of the exchange gains recorded by Nigeria’s biggest lenders in just six months.
By the advantage of its expansive African presence in 19 markets (excluding Nigeria) on the continent in addition to the UK, US, UAE and France, United Bank for Africa (UBA) took the fattest slice from the bloom, raking in N701.2 billion (N418.3 billion and N282.9 billion from FX revaluation and FC translation gains respectively).
It cotrasts to 12 months earlier when the pan-African banking behemoth incurred N26.4 billion as loss.
As monetary policy clears the path for lenders to turn the prolonged hawkish stance and the naira devaluation into their advantage, it has heightened the pang for borrowers and, by twist, triggered a boomerang for those banks who are now seeing a steady spike in impairment charges from loan default.
Continuous rate raising automatically translates to higher cost of borrowing which, in pressuring borrowers’ income, often renders many incapable of meeting their credit obligations.
Impairment charges weighed most on Zenith, which was forced to put aside as much as N207.9 billion or 21.5 per cent of its revenue to cover potential loss from problematic assets.
Yet, the drawback is not in any way new; the new figure pointing to the hard time Nigeria’s second-largest lender is facing in keeping its deteriorating assets low having posted just about the same figure in impairment charges in the corresponding period of 2022.
Guaranty Trust Holding Company (GTCO), worst-hit by poor loan quality in percentage times, saw its impairment charge balloon almost 24 times.
Impairment charges for the Big 5, within the one year to 30 June, had soared by 88.6 per cent.
“Loan impairment charges increased significantly in 1H23 due to the weaker macroeconomic setting and the increased provisions needed for FC loans, but they were comfortably absorbed by the FX revaluation gains,” Fitch said.
“Banks with foreign subsidiaries, in particular United Bank for Africa (B-/Stable), also experienced large FC translation gains through other comprehensive income, while the CARs of banks with FC-denominated capital-qualifying debt instruments, notably Access Bank (B-/Stable), benefitted from these instruments inflating in naira terms,” the credit rating agency added.
Were it to be in the West, say in Europe, the big boom from the rate hikes and of course the naira devaluation would have been an invitation to windfall tax.
France, Hungary, Italy, Spain and Sweden have joined the rank of European markets imposing a windfall tax on banks profiting from rate increment, with an economy like Czech going as high as 60 per cent.
Proceeds from levying the tax on the UK’s top four banks alone this year could rise to £20 billion, an estimate shows.
The trend in Nigeria has caught the attention of the central bank, which last month directed lenders to provision the whole of their foreign currency revaluation gains as “a counter-cyclical buffer to cushion any future movements in FX rates.”
“Banks shall not utilise such FX revaluation gains to pay dividend or meet operating expenses,” the industry watchdog said in a circular to lenders.
By the CBN move, Nigeria has missed a big opportunity to grab its own share of the exchange gain boom at a time the government is planning to overhaul its tax system to make those who earn big pay more tax and also increase tax revenue as a share of GDP to 18 per cent from 11 per cent within three years.
That is not to mention the much-needed revenue the government could have earned by taxing the windfall profits that have accrued to banks from interest rate increase proceeds, income that could have been used to fund developmental projects and other initiatives for common good.
Windfall tax receipts is helping Nigeria’s African peer South Africa in 2022 to pay down debt and repair public sector infrastructures. The government hopes it could help cut public debt as a share of GDP to 69 per cent by 2024/2025 from 71.4 per cent in 2022/2023.
Banks by Revenue
The banks generally saw a monumental surge in top line, riding on the twin factors of exchange gains and Nigeria’s longest cycle of interest rate hikes in years. Gross earnings more than doubled to N4.2 trillion from N2 billion a year ago, with UBA and GTCO leading in value terms and percentage terms in that order.
Access Holdings, whose after-tax profit grew at the slowest pace, still recorded a nearly 60 per cent jump in revenue.
Banks by Profit After Tax
The post-tax profit of the Big Five banks increased by more than three times from N404.3 billion a year ago to N1.3 trillion. The biggest leap was recorded by UBA, which grew net profit by well over fivefold N378.3 billion compared to N70 billion a year earlier. Access Holdings, the runt of the litter, posted a 52.3 per cent increase.
Banks by Net Profit Margin
GTCO reported the biggest net profit margin, the metric that measures how much of revenue has turned into profit, followed by UBA. The weakest was recorded by Access Holdings. UBA was the most improved lender, recording 38.5 per cent compared to 18.8 per cent one year prior.
Foreign Exchange Revaluation Gains
Gains from FX revaluation contributed about N1.3 trillion to the revenue pool of the banks, the lenders having posted just N74.1 billion a year earlier. UBA accounted for the largest sum, N418.3 billion.
Foreign Currency Translation Gains
The banks earned over N1 trillion from FC translation gains in contrast to HY2022, when they reported a combined loss of N146.2 billion. Access Holdings, the biggest beneficiary of this income, posted N340 billion compared to -N31.5 billion in the same period of last year.
Share Price Appreciation
Access Holdings was the best-performing stock of the five, adding 95.3 per cent within the six months to June, followed by GTCO which appreciated by 52.2 per cent. Zenith Bank, which recorded the slowest price movement, still improved by more than two-fifths.
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