Lenders in Africa’s largest economy won’t make money from foreign exchange revaluation gains this time around even as central bank (CBN) weakened the currency to protect the external reserve from the vagaries of global macroeconomic uncertainties.
Banks make money from foreign exchange either by using the capital to buy and sell foreign exchange in the inter-bank market or by helping their customers buy foreign exchange from the CBN.
A foreign exchange revaluation gain, which is part of other income in the profit and loss account, is an exceptional item that adds impetus to profitability.
But lenders no longer have dollar-denominated assets in their balance sheet like they used to a few years ago, and the regulator has said that assets must match liabilities.
“This time people cannot take money from the official market to carry out such transactions anymore. There was foreign exchange rush four years ago so lenders made money,” said Ayodele Akinwunmi, head of corporate banking at FSDH Merchant Bank Limited.
The 10 largest banks by market capitalisation made a foreign exchange loss of N4.23 billion in December 2019 from a gain of N176.94 billion the previous year.
The loss in 2019 was majorly driven by N83.37 billion negative figure incurred by Access Bank.
Foreign exchange gains reached an all-time high of N269.33 billion in 2016, when the central bank resorted to defending the local currency by trying to meet all demand for dollars as foreign investors were exiting the country due to uncertainties brought by the precipitous drop in crude oil price of mid-2014.
“When you are holding assets in foreign currency than liability, you tend to make money during devaluation,” Johnson Chukwu, CEO and managing director of Cowry Asset Management Limited, said.
The Abuja-based central bank weakened the official exchange rate on its website by 15 percent to N360 per dollar from N307. The rate for foreign portfolio investors was also altered to N380 per dollar from N366.
Nigerian banks still trying to recover from an economic contraction in 2016 and stringent rules put in place by the regulator now face a triple whammy of coronavirus, plunging oil prices and volatile markets that could further delay progress.
Analysts are of the view that the current macroeconomic uncertainties pose downside risk to the profitability of banks given the likely impact on asset quality and loan growth.
Last week, the central bank announced N3.50 trillion stimulus packages among a range of measures to buffer the economy against the impact of the coronavirus and falling oil prices arising from dispute between Saudi Arabia and Russia over output cut.
If oil prices remain at current levels for the next two quarters, Nigerian banks’ problem-loan ratios could rise beyond the initial expectation of 6 percent-8 percent, according to Moody’s Investors Service.
The banking industry’s non-performing loans as a percentage of total credit dropped to 9.3 percent as at mid-2019 from 12.5 percent a year earlier. The regulator wants it below 5 percent.
Banks’ earnings have been growing sluggishly on the back of low-yield environment as they are no longer parking money in government bonds as they used to.
Also, stringent rules such as the hike in Loans to Deposit Ratio (LDR) to 65 percent and an increase in cash reserve ratio by 500 basis point to 27.50 percent could undermine future earnings growth.
