Nigeria’s 30 biggest firms’ interest expense doubles on CBN rate hike 

The top 30 firms on Nigeria’s stock exchange recorded a combined 126 per cent surge in interest expense as the naira devaluation and jumbo interest rate by the Central Bank raised the cost of borrowing in Africa’s most populous nation.

Interest expense on these companies’ borrowings jumped to N1.69 trillion in the first quarter of 2024 from N721.1 billion in the same period of 2023.

Access, First Bank, Zenith, UBA, United Capital, Fidelity, FCMB, Dangote Cement, GTCO, and MTNN emerged as the top 10 companies with the highest interest expense of the NGX-30 companies in the first quarter of this year.

They recorded a cumulative interest expense of N1.44 billion in the first quarter of 2024, as against N576 billion in the same period of last year.

Analysts think that the rising interest expense is a result of a higher interest rate environment and tight market liquidity during the period.

“Broadly speaking, it reflects the upward movement in the interest rate environment. Interest income and expenses are sensitive to rate movements, therefore it is expected to see higher interest expense given the elevation in rates in  the first three months of 2024,” Ngozi Odum, financial services analyst at CardinalStone, said.

In the first quarter of this year, the Olayemi Cardoso-led Monetary Policy Committee raised the MPR by 400 basis points to 22.75 per cent from 18.75 per cent.

By March, there was another 200 basis point hike to 24.75 per cent while the cash reserve ratio (CRR) was increased to 45 per cent from 32.75 per cent.

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According to the CBN, the interest rate hike was in consideration of the persistent rise in the inflation rate and fragile growth. Nigeria’s headline inflation accelerated to 33. 69 per cent in April 2024.

Airtel and Ecobank Transnational Incorporated (ETI) were exempted from the analysis of the NGX-30 index as their financials are reported in dollars.

Companies operating in Nigeria are increasingly relying on credit to fund capital projects, acquire equipment, and cope with the soaring prices of raw materials and energy. This shift comes at a time when interest rates are climbing at their fastest pace in decades, adding to the financial strain.

Olumide Sole, a research analyst at Vetiva Capital, an investment bank, said that one of the factors contributing to the surge in interest expense of some of these companies is that some of their borrowings are in foreign-denominated currency.

“Some company’s borrowings, especially FMCG firms, are in foreign exchange and since the liberalisation of the FX market, we’ve seen the naira depreciate to N1500 from N400. That alone more than doubles interest expense,” Sole said.

The naira has suffered a near 30 per cent devaluation this year following a 40 per cent devaluation last June as a result of the FX reform implemented by the Central Bank of Nigeria (CBN) to revive the economy.

Olaolu Boboye, lead economist at CardinalStone, an investment bank, said higher interest rates are fuelling the interest expense of companies.

“If you look at the fact that MPR has increased by almost 750 basis points this year alone and close to maybe 900 basis points in one year, it explains why,”  Boboye said.

He also said that the depreciation of the naira is another factor that is fueling the increase in interest expense especially for companies with dollar-denominated debt.