The combined foreign exchange revaluation gains of eight Nigerian banks rose by 472.3 percent last year largely on the back of the liberalisation of the FX regime.
BusinessDay analysis of the lenders’ latest full-year financial statements show that their total FX revaluation gain grew to N754.8 billion from N131.9 billion in 2022.
The firms are Zenith Bank Plc, United Bank for Africa (UBA) Plc, Access Holdings Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Fidelity Plc, Guaranty Trust Holding Company (GTCO) Plc and Sterling Financial Holdings Company Plc.
“For most of the banks, their foreign currency assets were more than their FX liabilities which translated into foreign exchange revaluation gains,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.
He added the reverse would be the case if their foreign liabilities exceeded their assets.
The data shows that Sterling Financial Holdings recorded the highest growth in FX gain of 2,588 percent to N4.57 billion in 2023 from N0.17 billion in 2022, followed by FCMB Group with 1,863 percent to N84.2 billion.
Stanbic IBTC Holdings, Fidelity Bank, GTCO, UBA, and Zenith had 1,607 percent, 1,546 percent, 663 percent, 346 percent, and 342.3 percent respectively.
Access Holdings recorded a 50 percent decline in FX gain while the FX loss of FBN Holdings narrowed to N253.7 billion from N350.3 billion.
The FX gains were a major contributing factor to the banks’ total profit, which more than tripled to N2.8 trillion in 2023 from N897.4 billion.
Access Holdings, UBA, and GTCO were the three banks that recorded the highest growth in after-tax profit last year with 305 percent, 256.8 percent, and 219 percent respectively.
FCMB Group recorded 207.1 percent growth followed by Zenith Bank (202.3 percent), Fidelity Bank (116.9 percent), Stanbic IBTC Holdings (74.2 percent), and Sterling Financial Holdings Company (11.4 percent).
“The FX depreciation contributed to the substantial profits that the banks declared. Last year, they held more foreign currency assets and when the naira was devalued, the currency value of those foreign currency assets would have increased,” Israel Odubola, a Lagos-based research economist, said.
He said banks report in naira not dollars so the big gains they made from the FX depreciation contributed to their jumbo profit.
The Central Bank of Nigeria (CBN) last June merged all foreign exchange markets into the Investors and Exporters (I&E) window, and reintroduced the willing buyer, willing seller model.
The official exchange rate fell from N463.38/$ to N1,230.6/$ as of April 8, 2024. At the parallel market, the naira is being traded at around 1,240/$ as against 762/$ before the FX reform.
Last year, the CBN 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 dividends or meet operating expenses,” CBN said in a statement.
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 Nigerian 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.”
The global agency, had earlier predicted Nigerian banks would see a jump in impaired loans as rising inflation and interest rates burdened borrowers’ debt servicing capacity.
It 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 loan ratios to rise higher than previously envisaged.”
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