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.
Read also: Seven banks’ customer loans hit N23trn in H1
“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.
“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.
Here are the profits reported by the banks.
The bank reported N105.2 billion as its profit after tax in H1 2023, up from N77.31 billion in the same period of last year. Its profit before tax rose by 40 percent to N150.3 billion.
Its cash and cash equivalent rose to N2.3 trillion from N1.54 trillion. Earnings per share increased to N319.3 from N220.9.
Stanbic IBTC Holdings
Stanbic IBTC reported a profit after tax of N67.9 billion, up from N30.7 billion. Its profit before tax rose to N82.9 billion from N39.9 billion.
Its cash and cash equivalent was N702.8 billion, up from N313.7 billion. Earnings per share increased to N512 from N226.
Its profit after tax increased to N61.9 billion from N23.3 billion. Its profit before tax rose to N76.3 billion from N25.1 billion.
Gross earnings increased by 59.6 percent to N247.1 billion, driven by a 39.4 percent growth in interest income and a 207.2 percent increase in non-interest income.
Its cash and cash equivalent surged to N490.2 billion from N296.5 billion. Earnings per share rose to N193.7 from N80.47.
The group’s profit after tax soared to N35.4 billion from N13.7 billion. Its profit before tax increased to N38.2 billion from N15.4 billion.
Its cash and cash equivalent rose to N384 billion from N257.8 billion. Earnings per share jumped to N3.58 from N1.38.
Wema Bank’s profit after tax rose to N10.5 billion from N5.2 billion. Its profit before tax jumped to N12.1 billion from N6.1 billion.
Its cash and cash equivalent increased to N187.3 billion from N82.4 billion.
Earnings per share rose to N163.2 per share from N82.0.