High interest rate environment, FX depreciation boost bank earnings

Nigerian banks have remained financially strong and profitable as seen in the first quarter financial results, despite regulatory headwinds, according to Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest.

Nigerian banks have faced various regulatory headwinds, especially the Cash Reserve Ratio (CRR) hike from 32.5 percent to 45.0 percent as well as the ongoing bank recapitalization programme. However, the high-interest rate environment and foreign exchange (FX) depreciation have bolstered their earnings,” he said.

Amidst these challenges, he said the banks have remained financially strong and profitable. The banks’ gross earnings and Profit After Tax (PAT) grew by an average of 154 percent and 236 percent year-on-year (YoY), respectively, in the first quarter (Q1) 2024.

Speaking recently during a business and investment tips program, a production of RCCG Christchurch radio, Ebo, an investment professional, said, Access Bank continued its remarkable trend with a 140 percent YoY increase in gross earnings to N974 billion in Q1:2024 from N406 billion in Q1:2023. This can be attributed to the giant leap in interest income on the back of the repricing of loans and advances to customers due to the elevated increase in the interest rate environment as well as FX revaluation gains of N215 billion. As a result, profit after tax increased by 166 percent. YoY to N143 billion in Q1:2024.

GTBank, Zenith, and UBA followed similar remarkable trends with 337 percent, 189 percent, and 109 percent YoY growth in gross earnings to N676bn, N780bn and N519bn in Q1:2024. Also, PAT grew by 685 percent, 291 percent and 166 percent YoY to N457bn, N258bn and N142bn, respectively. The impressive performances can also be linked to improvement in interest income on customers’ loans and advances, higher income on fixed-income instruments, as well as FX and fixed-income trading gains.

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The Tier-2 banks followed a similar strong financial performance pattern in Q1:2024. Fidelity, FCMB, Stanbic, and Wema recorded notable growth in their gross earnings with a YoY growth of 90 percent, 105 percent, 86 percent and 106 percent to N97bn, N40bn, N101bn and N87bn in Q1:2024. Similarly, PAT grew by 101 percent, 209 percent, 58 percent and 80 percent YoY to N31bn, N29bn, N46bn and N10bn in Q1:2024, respectively.

The impressive performances recorded by the banks in the first three months of 2024 have supported the banks’ share prices, dousing the anticipated negative sentiment from the proposed bank recapitalization. The banking sector recapitalization is expected to have a dilutive effect on the banks, that is increasing the shares available for trading.

“We expected the banks’ performance to sustain this positive form due to the high-interest rate environment and FX depreciation. However, the performance of their share price will remain volatile due to policy headwinds but this presents long-term opportunities for investors.

“Hence, we recommend gradual positioning ahead of the release of half-year financial performance as the top banks are set to declare interim dividends given their sterling outing in Q1:2024.

“Remember that investment in stocks may not guarantee capital preservation, but it can offer a higher return than fixed income. You can allocate a portion of your portfolio to stocks based on your risk appetite and age,” he said.

During the last Monetary Policy Committee (MPC) meeting last week, the Committee noted with satisfaction that the banking system remains safe, sound, and stable, despite the headwinds confronting the economy.

Oluyemi Cardoso, who said this during the press briefing after the two-days MPC meeting in Abuja, said the committee commended the recent recapitalization initiative and urged the management to sustain its regulatory oversight to ensure the continued stability of the banking system.