• Tuesday, October 03, 2023
businessday logo


Explainer: What will banks do with revaluation gains after CBN’s directive?

Banks risk N6.24trn over USSD impasse

The recent directive by the Central Bank of Nigeria (CBN) on banks’ foreign exchange revaluation gains has elicited reactions from Nigerians.

The apex bank last Monday told lenders not to use FX revaluation gains to pay dividends or for other operational expenses.

Several banks have reported record profits for the first half of the year on the back of the devaluation of the naira.

Tajudeen Ibrahim, director of research and strategy analyst at Chapel Hill Denham, said the directive of the CBN was meant to make the banks prudent in their activities.

“I think they (banks) will likely pass the bulk of their revaluation gains to increase their retained earnings, which will further strengthen their capital adequacy ratio,” he said.

“I believe that their core earnings will be sufficient to pay shareholders without using any of their revaluation gains. This shows that the banks are in good financial health and are still making sound investments.”

Following the floating of the naira, the official exchange rate increased from N463.38/$ on June 9 to N756.91/$ as of Friday. At the parallel market, the naira depreciated by 25.3 percent to 917/$ from 762/$.

Read also:Bonus for shareholders as banks post bumper profits

Guaranty Trust Holding Company (GTCO), Fidelity Bank, and FCMB Group saw their cumulative FX income surge to N390.6 billion in the first half of the year.

GTCO recorded the highest FX income with a 19,016 percent growth to N357.5 billion, followed by Fidelity Bank with a 2,030 percent growth to N32.2 billion, while FCMB grew by 65.2 percent to N921.8 million.

“I believe that banks will adopt a conservative approach and use their revaluation gains to strengthen their reserves. This will provide them with a much-needed buffer to withstand the adverse effects of macroeconomic conditions in coming times,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.

The CBN said last week that “banks are required to exercise utmost prudence and set aside the foreign currency revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate in this regard”.

“Banks shall not utilise such FX revaluation gains to pay dividend or meet operating expenses,” it added.

According to the regulator, banks that inadvertently breach the single obligor limit due to the FX policy will be granted forbearance upon application to the CBN.

“The CBN will continue to monitor emerging vulnerabilities and take appropriate regulatory action,” it said.

The CBN is concerned about unforeseen contingencies that may arise in the future, according to Tochukwu Okafor, a senior lecturer at Baze University.

“Investors were happy when Tinubu came into office because they believed that his policies would lead to significant gains,” he said.

Okafor noted that if the Tinubu reforms are successful and the naira appreciates, banks will begin to see a decline in their profits.

He said: “The benefits of the directive help banks to hedge against future risks and declare higher profits. However, if Tinubu’s policies are successful and the naira begins to appreciate, then banks will begin to record a decline in their profits; it is also possible that the CBN is trying to help protect banks against unforeseen circumstances by directing them to hold on to their revaluation gains,” he added.

“Banks are currently doing very well, and this is a good time to own a bank in Nigeria. Their foreign exchange income is significant, and they have other sources of revenue as well. They are in a stable position.”