Bonus for shareholders as banks post bumper profits

Shareholders of Nigerian banks that reported huge half-year profits have seen a jump in their interim dividends, a BusinessDay analysis of data from their financial statements show.

The profits of eight lenders more than tripled to N1.31 trillion in the first half of 2023 largely on the back of foreign exchange gains occasioned by the recent naira devaluation.

Their combined profit after tax rose by 237.8 percent to N1.31 trillion in H1, the highest in at least four years, from N388.8 billion in the same period of last year, according to their latest unaudited financial statements analysed by BusinessDay.

The banks are Zenith Bank, United Bank for Africa (UBA), FCMB Group, Wema, Stanbic IBTC, FBN Holdings, Fidelity and Guaranty Trust Holding Company (GTCO).

UBA declared an interim dividend of 50 kobo per share in H1 2023, up from 20 kobo per share in the same period of 2022.

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GTCO increased its interim dividend to 50 kobo per share from 30 kobo per share, while that of Fidelity Bank surged to 25 kobo per share from 10 kobo per share.

Zenith Bank declared an interim dividend of 50 kobo per share in H1 2023, up from 30 kobo per share in the same period of 2022.

Analysts say banks with substantial net foreign asset positions cashed in on the large devaluation of the naira following the floating of the currency in mid-June.

“The devaluation gain is the reason for the increase in PAT for the banks. The driver of non-interest income is the devaluation gain,” Tesleemah Lateef, banking analyst at Cordros Securities Limited, said.

Israel Odubola, a Lagos-based research economist, said banks have massive foreign currency assets.

“Banks report their financials in naira and by the time the naira is devalued, the naira value of their foreign assets will jump; that is why we are seeing the foreign currency revaluation gains,” he added.

A breakdown of the data shows that UBA recorded the largest growth in profit of 437.8 percent to N378.2 billion from N70.3 billion. GTCO’s profit jumped by 261.6 percent to N280.5 billion from N77.6 billion; FBN Holdings’ profit grew by 230.8 percent to N187.2 billion and Fidelity’s increased by 165.9 percent to N62 billion.

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Others are Zenith, whose profit surged by 161.9 percent; FCMB, 159.2 percent; Stanbic IBTC, 121.5 percent; and Wema, 98.7 percent.

“UBA Group’s H1-23 result mirrored the earnings growth across its tier 1 peers, supported primarily by the FX liberalisation implemented during the period,” analysts at Cordros Securities said in a note last week.

“We envisage this strong earnings growth to remain by year-end, driven by the combined impact of the elevated interest rates and naira devaluation in the period,” they added.

Four banks reported a foreign exchange gain while three suffered foreign exchange losses during the period reviewed.

UBA reported a foreign exchange gain of N418.3 billion in H1 2023, up from N9.15 billion in the same period of last year. GTCO’s foreign exchange gain rose to N357.5 billion from N1.87 billion.

Fidelity Bank’s foreign exchange gain stood at N32.1 billion, compared to a loss of N1.51 billion. Wema Bank’s foreign exchange gain fell to N28.7 million from N108.9 million.

Zenith Bank recorded a foreign exchange loss of N212.3, compared to a gain of N3.35 billion. FCMB recorded a foreign exchange loss of N50.9 billion, compared to a gain of N1.34 billion.

FBN Holdings reported a foreign exchange loss of N98.4 billion, compared to a gain of N16.51 billion.

On June 14, 2023, the Central Bank of Nigeria (CBN) merged all foreign exchange markets into the Investors and Exporters (I&E) window, and reintroduced the willing buyer, willing seller model.

As a result, the official exchange rate increased from N463.38/$ to N 756.91/$ as of Friday. At the parallel market, the naira depreciated by 25.3 percent to 917/$ from 762/$.

“We have not seen the magnitude of adjustment before. And banks’ profits have to be the highest achieved in a half-year period,” Gbolahan Ologunro, portfolio manager at FBNQuest, said of the devaluation of the naira.

According to Ologunro, the higher profits mean increased dividends for shareholders.

“But banks have to be very conscious if the adjustment of the currency goes downwards or the macroeconomic conditions in the country worsens.”

The CBN last week instructed banks to not utilise the FX revaluation gains to pay dividends or for other operational expenses. It instead advised them to save the money to hedge against any future volatility.

“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 utilize such FX revaluation gains to pay dividend or meet operating expenses,” CBN said in a statement.

Fitch Ratings, a global credit rating agency, had earlier predicted Nigerian banks would see a jump in impaired loans as rising inflation and interest rates burdened borrowers’ debt servicing capacity.

Fitch considered the implementation of the key reforms implemented by President Bola Tinubu to be credit-positive overall for the country.

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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 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.