The steep increase in foreign exchange revaluation gains recorded by Nigerian banks last year is unlikely to be seen in 2024 following the recent policies by the Central Bank of Nigeria (CBN) coupled with the appreciation of the naira, analysts say.
In recent weeks, the naira has appreciated in the official and parallel markets as a result of the increased dollar inflows spurred by the CBN’s policies.
Last year, the combined FX revaluation gains of eight listed banks rose by 472.3 percent to N754.8 billion from N131.9 billion in 2022.
The lenders are Zenith Bank Plc, United Bank for Africa Plc, Access Holdings Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Fidelity Plc, Guaranty Trust Holding Company Plc and Sterling Financial Holdings Company Plc.
“I don’t think we would see a recurrence in the huge revaluation gains that most of them recorded last year on the back of the improvement in the appreciation of the local currency and the guidelines from the CBN that at all times banks should ensure that they have a net natural position,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.
The FX gains were a major contributing factor to the banks’ profits as it more than tripled to N2.8 trillion from N897.4 billion.
Israel Odubola, a Lagos-based research economist, said even though banks might make a profit, the sources of the earnings may not come from FX gains because the FX environment has changed this year compared to what we witnessed in 2023. “So, they would still make their profit but it might not be massive this year.”
The liberalisation of the FX regime as part of measures to revive the economy led to a large devaluation of the naira. The currency measures are part of bold steps introduced by President Bola Tinubu after he took power in May to end the country’s years of economic stagnation.
The reforms, which included scrapping fuel subsidies, have sent inflation to a record high and fanned a cost-of-living crisis that’s caused severe hardship for ordinary Nigerians.
The naira’s collapse, after many years of having its level artificially supported by the central bank on the official market, contributed significantly to the high inflation. But recent weeks have seen the unit regain some of its poise.
The official exchange rate improved from N1,625.2/$ as of March 8, 2024, to N1,238.7/$ as of April 8. At the parallel market, the naira traded at around 1,250/$ as against 1,590/$.
The naira stands poised to continue its upward trajectory, building upon its status as the best-performing currency globally this month, according to Goldman Sachs Group Inc.
Goldman economists, who predicted in February that the naira would strengthen to 1,200 per dollar during 2024, now see it potentially advancing beyond that level after a raft of measures by the central bank.
“This probably can run further; we would see an extension of the move to 1,000 and maybe even sub-1,000,” Goldman’s Andrew Matheny said in an interview. Since Goldman’s call in February, “six weeks have gone by and they’re continuing to hold the line, so that’s encouraging,” they said.
Bloomberg reported that after losing 43 percent of its value against the dollar in the first two-and-a-half months of the year because of a devaluation, Africa’s largest oil producer’s currency has strengthened 34 percent since mid-March, the most in the world among global currencies.
“The environment might be a little bit tougher now for the banks given that the country has a more stable exchange rate. We don’t have this multiple exchange rates that would make them take advantage of that,” Adeola Adenikinju, president of the Nigerian Economic Society, said.
The CBN last week banned the use of foreign currency-denominated collaterals for naira loans. The apex bank listed two exceptions to the rule as foreign currency collateral which are Eurobonds issued by the Federal Government or guarantees of foreign banks, including standby letters of credit.
“The CBN has observed the prevailing situation where bank customers use Foreign Currency as collaterals for naira loans,” the bank said in a statement.
“Consequently, the current practice of using foreign currency-denominated collaterals for naira loans is hereby prohibited, except, where the foreign currency collateral is: Eurobonds issued by the Federal Government of Nigeria; or “Guarantees of foreign banks, including Standby Letters of Credit,” it added.
It said all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days, failing which such exposures shall be risk-weighted 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.
The apex bank in March also announced a ten-fold jump in minimum capital requirements for banks, nearly two decades since the last exercise. It aims to enhance the resilience of an industry faced with high inflation, naira devaluation, and a weak economy.
Olayemi Cardoso, the CBN governor, set the minimum capital requirements for banks as follows: N500 billion for those with international authorisation, N200 billion for commercial banks with national authorisation, and N50 billion for those with regional authorisation.
Increased paid-in capital requirements for Nigerian banks will spur equity issuance over the next two years, supporting a recovery in the banking sector’s capitalisation, according to a recent note by Fitch Ratings, a global credit rating agency.
“The sharp devaluation of the Nigerian naira since May 2023 has depressed capital ratios via the inflation of foreign-currency-denominated risk-weighted assets. Some small and medium-sized banks may struggle to raise the necessary capital, leading to increased M&A,” it said.
It added that this would result in a more concentrated banking sector, with higher barriers to entry, greater economies of scale, and stronger long-term profitability.
“However, such developments would be unlikely to have significant rating implications, as the Long-Term Issuer Default Ratings (IDRs) of the vast majority of Nigerian banks are constrained by Nigeria’s ‘B-’ Long-Term IDR.”
