Five midsize banks see half-year profits jump to N281bn

Five midsize Nigerian banks saw their combined profit jump by 87.1 percent in the first half of 2023 largely on the back of foreign exchange gains occasioned by the recent naira devaluation.

The total profits of the five lenders rose to N281 billion in H1 2023 from N150.2 billion in the same period of last year, according to their latest unaudited financial statements analysed by BusinessDay.

The lenders are Fidelity Bank, Ecobank Nigeria, Wema Bank, FCMB Group and Stanbic IBTC Bank. Unity Bank reported a loss of N38.7 billion, compared to a profit of N1.69 billion.

“One significant factor contributing to this growth is the revaluation gain resulting from the currency devaluation, which translated into profits for companies with substantial foreign exchange assets,” James Ola-Adisa, a research analyst at Chapel Hill Denham, said.

Among the banks, Ecobank accounted for the largest share (37.4 percent) of the combined profit.

Gbolahan Ologunro, a portfolio analyst at FBNQuest, said the bank’s performance has been improving over the past two years due to a combination of factors including better yields and ongoing recovery efforts.

“This has led to an increase in their return on equity in Nigeria, relative to other markets,” he said. “These improvements have positively impacted their return on equity in Nigeria compared to other markets.”

BusinessDay reported last week that Nigeria’s biggest banks reported a surge in profits in H1, with their combined earnings growing by 260 percent year-on-year.

The banks are FBN Holdings, Guaranty Trust Holding Company, United Bank for Africa and Zenith Bank.

“This difference is primarily attributed to the size of their balance sheets, with tier-one banks having larger foreign currency assets, enabling them to book higher revaluation gains; tier-two banks have relatively smaller balance sheets, resulting in lower foreign currency assets compared to tier-one banks,” Ologunro said.

He said the banks also have stronger asset bases, allowing them to record higher foreign exchange revaluation gains.

On June 14, 2023, the Central Bank of Nigeria (CBN) merged all segments of the foreign exchange market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model. This led to a large devaluation of the naira.

The banks benefitted from the high yields in the fixed-income market, which boosted their gross earnings and overall profit, according to Ola-Adisa of Chapel Hill Denham.

“Another reason for the banks’ increased profits is the high yields in fixed-income markets. This has allowed the banks to earn more interest on their fixed-income investments, which has trickled down to their gross earnings and profits,” he said.

Ola-Adisa noted the banks face risks in sustaining their performance if there are fluctuations in yields due to the government’s intention to reduce borrowing and the possibility of revaluation gains not being managed prudently.

“These risks could affect their future profits if not managed carefully,” he said. “The risk involved is fluctuation in yields, given the stand of the government to reduce borrowings; if they do so, possibly, it means there will shortage of paper in the market, i.e., fixed income instruments and if there is scarcity, it means people will be buying a lot and yields may possibly go down from the level that they currently are.”

The CBN recently 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,” the 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.

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.