The naira has depreciated by about 60 percent against the US dollar in the past few months, and Nigerian banks with substantial net foreign asset positions are cashing in on the development.
Guaranty Trust Holding Company (GTCO), Fidelity Bank, and FCMB Group saw their cumulative FX income surge to N390.55 billion in the first half of the year.
GTCO recorded the highest FX income with a 19,016 percent growth to N357.47 billion, followed by Fidelity Bank with a 2,030 percent growth to N32.16 billion, while that of FCMB grew by 65.2 percent to N921.78 million.
Analysts surveyed by BusinessDay say banks with positive net exposure to the dollar had benefitted from the naira depreciation as they booked exchange rate gains.
“The naira devaluation, which occurred this year, led to the growth in foreign exchange income for Nigerian banks in the first half of 2023,” Tesleemah Lateef, banking analyst at Cordros Securities Limited, said.
Other analysts said most banks have learned their lessons from the 2016 devaluations as banks that had built up large net asset positions in foreign currencies ended up benefitting from the revaluation, and lenders with large foreign currency loans were hit hard.
“The 2016 crisis saw the central bank put in stricter risk management frameworks for banks, which in turn have learned that it makes sense to maintain a net forex asset position at all times,” Ada Ufomadu, senior head of financial institutions at GCR Ratings, said in a note. “Therefore, even if there is a further devaluation, banks won’t be affected as much as was the case then.”
The administration of President Bola Tinubu ended a long-standing complex forex management programme, which had seen shortages of foreign currencies and multiple exchange rates for different sectors, creating significant arbitrage opportunities for those with access to foreign currency.
“The banks with foreign exchange gain most likely have net foreign currency assets while the banks with losses from foreign exchange most likely have net foreign currency liabilities more than foreign currency assets which will result in devaluation loss,” Tajudeen Ibrahim, director of research and strategy of ChapelHill Denham, said.
Wema Bank’s forex income dropped by 73.6 percent to N28.73 million; Sterling Holdings recorded a 19 percent dip to N1.19 billion in H1, while FBN Holdings recorded a forex loss of N98.42 billion, compared to a gain of N16.51 billion in the same period of 2022.
Other banks are yet to file their half-year reports as of the time this report was written.
“The devaluation will have a positive impact on bank balance sheets, with assets expected to inflate by as much as 15 percent on the exchange rate difference alone,” said Joshua Odebisi and Titilayo Lawani, analysts at RMB Nigeria Stockbrokers, in a June research note.
Total assets of the banking industry grew by N14.36 trillion or 24.24 percent to N73.59 trillion in December 2022, from N59.24 trillion in December 2021, driven by balances with the Central Bank of Nigeria (CBN)/banks, investments, and credit expansion to the real sector, according to data from central bank.
“Notably, over 40 percent of Nigerian banks’ risk asset base is dollarised and that means that the risk-weighted asset increases significantly on the back of this depreciation of the naira and that would put pressure on capital adequacy ratios of banks,” Abiola Rasaq, former economist and head of investor relations at United Bank for Africa Plc, said in a note.
Capital adequacy ratio remained unchanged for the banking sector at 13.8 percent last year, while return on equity rose to 20. 2 percent in December 2022 from 18.4 percent in September 2022, according to the latest Banking System Stability Review Report of the CBN.
Despite FX gains, Fitch Rating, a global credit rating agency, predicted Nigerian banks would see a jump in impaired loans as rising inflation and interest rates burden borrowers’ debt servicing capacity.
Fitch considered the implementation of the key reforms implemented by Tinubu to be credit-positive overall for the country.
Fitch Ratings said the devaluation of the naira and the fuel subsidy removal would lead to higher near-term inflation and tighter monetary policy, which would in turn constrain economic growth.
“These developments exert downward pressure on capital ratios and will cause impaired loans ratios to rise higher than previously envisaged,” it said in a recent report.
It, however, said the naira devaluation would lead to the inflation of banks’ foreign-currency (FC)–nominated risk-weighted assets (RWAs) in naira terms, exerting downward pressure on capital ratios.
It will also inflate FC-denominated problem loans, thereby increasing the prudential provisions banks are required to maintain against them, adding to pressure on regulatory capital ratios, it said.
“The impact is mitigated by banks’ generally small FC-denominated RWAs and net long FC positions, which deliver FX revaluation gains that help cushion the impact of inflated RWAs. Nevertheless, we expect widespread declines in banks’ capital ratios at end-1H23,” it added.
Fitch said the deterioration in loan quality should be less severe than that following the last major naira devaluation in 2016, which was preceded by a collapse in oil prices, resulting in oil and gas asset quality problems for banks.