With the banking sector faced with recapitalisation in an elevated interest rate environment, analysts expect banks’ earnings to be positively impacted in the second half of 2024.
Last May, the Central Bank of Nigeria raised its benchmark interest rate by 150 basis points to 26.25 percent from 24.75 percent in March, the third straight hike this year, to control the rising prices of goods and services and to ensure the stability of the naira.
“In the second half of 2024, we anticipate that the CBN’s hawkish stance will moderate,” analysts at Meristem Research said in their latest outlook report.
“Despite this, banks are expected to continue recording higher interest income and gains from investment securities, driven by elevated asset yields and increased lending capacity, especially as many banks are in the process of raising additional capital,” they added.
Gloria Fadipe, head of research at CSL, said, “In the second half, banks will declare more profits and some will report further revaluation gains.
She added, “The banks currently raising capital to meet up with the CBN’s stipulated requirement will positively increase the number of shares in issue and reduce earnings per share that is earnings dilution.”
BusinessDay analysis of the latest financial statements of ten Nigerian banks shows that their after-tax profit increased by 271 percent to N1.48 trillion in the first quarter of 2024 from N399 billion in the same period of 2023.
The lenders 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, FBN Holdings, Ecobank Transnational Incorporated and Sterling Financial Holdings Company Plc.
In the same period, these banks’ net interest income calculated using the prevailing interest rate surged to N1.98 trillion from N787 billion.
Read also: Banks recapitalisation: Excluding retained earnings levelled playing field — Cardoso
“Most of the interest rate hikes occurred this year. However, there is every tendency that banks will make more profit in the second quarter compared to first quarter growth was significant,” Omobola Adu, senior economist at BancTrust & Co, said.
The Meristem report further showed that the 2024 recapitalisation plan aims to inject N3.57 trillion ($2.79 billion) into the sector, a significant increase from the $190.8 million infused in 2005.
The need for this reform is pressing, as Nigeria’s banking sector currently has one of the lowest assets-to-GDP ratios at 16.4 percent of the country’s $0.5 trillion Gross Domestic Product (GDP) compared to 47 percent in Kenya, 74 percent in South Africa, and 100 percent in Egypt,” according to Afrinvest data.
The low asset base of Nigerian banks relative to peers makes a compelling case for a recapitalisation exercise, according to Ike Chioke, group managing director, Afrinvest West Africa Limited.
“The figure is also significantly higher than countries around the $1 trillion mark that Nigeria is targeting to achieve in eight years,” Chioke said.
During BusinessDay’s recent CEO forum, Olayemi Cardoso, governor of CBN said the ongoing recapitalisation would strengthen banks further to drive the $1 trillion national economic target and support stable growth in the economy.
He added, “The additional capital would not only provide a substantial buffer for banks against potential economic challenges but enhance Nigeria’s banks’ capability to support massive economic growth and play competitively globally.”
Three banks such as Fidelity Bank, Access Holdings, and GTCO are seeking existing and new shareholders’ support to raise N878.61 billion in fresh capital from the Nigerian Exchange Limited (NGX).
While GTCO is raising its capital through a public offer, Access Holdings opted for a rights issue while the management of Fidelity Bank allows old and existing shareholders to own their shares on NGX.
GTCO on July 15 commenced a move to raise about N400.5 billion new capital by offering nine billion ordinary shares of 50 kobo at an offer price of N44.50 per ordinary shares.
Fidelity Bank is offering a rights issue of 3.2 billion ordinary shares of 50 kobo each at N9.25 per share. The bank is also simultaneously offering 10 billion ordinary shares of 50 kobo each to the general investing public at N9.75 per share.
Market forces had pushed Fidelity Bank’s stock price above N10 per share before the commencement of the exercise and market analysts have expressed that the lender’s two offers would be oversubscribed.
Fidelity Bank currently trading at N10.55 per share as of July 18, 2024. For Access Holding, the management is seeking existing shareholders’ support for 17,772,612,811 ordinary shares of N0.50 each for N19.75 per share through rights Issue offers.
As of July 18, the stock price of Access Holdings closed for trading at N19.4 per share, about N0.30 per share below the offer price.
“With the timeline for completion of the recapitalisation program set in 2026, we still see legroom for inorganic corporate actions capable of driving investment upside in the space,” analysts at CardinalStone Research said in its outlook report.
Recently, President Bola Tinubu sought to amend the Finance Act, of 2023, to impose a 50 percent windfall tax on banks’ foreign exchange profits for 2023. Non-compliant banks will face a 10 percent annual penalty, interest at the Central Bank’s minimum rediscount rate, and up to three years imprisonment for principal officers.
However, Tinubu has asked legislators for an upward review of the 2024 Appropriation Act by N6.2 trillion, thus taking the total proposed expenditure to N34.9 trillion, up from the previous budget estimation of N28.7 trillion. But he also plans to tax banks’ windfall from foreign exchange gains.
Analysts at FBNQuest said the tax on banks implies that the financial institutions will face a significant tax burden.
“This measure may have an impact on their profitability and capital adequacy, especially if they had anticipated using these gains as a counter-cyclical buffer against foreign exchange fluctuations, as directed by the Central Bank of Nigeria,” they said in a note released on Thursday.
According to BusinessDay analysis, in 2023, eight Nigerian banks made N754.8 billion in foreign exchange revaluation gains largely on the back of the liberalisation of the FX regime.
Adu of BancTrust & Co said the windfall tax was an unplanned expense for the banks. Adding that “For banks that have realised the profit, that’s the amount they’ll get the windfall from.”
Another Lagos-based analyst said the 50 percent tax is high and may affect how banks choose to declare their profits.
On the government side, analysts at FBNQuest said that profits from FX revaluation gains are expected to increase revenue for the government.
However, they noted that despite this one-time windfall tax, the revenue generated is unlikely to cover the additional N6.2 trillion needed to fund the government’s expanded spending plans. They urged the Nigerian government to look to other means of financing the plans.
“As a result, the government will need to consider alternative financing options,” they further said.
KPMG, one of the big four in a recent report titled “Nigeria imposes income tax on forex gains of banks”, disclosed that anywhere a windfall tax has been introduced, it makes sense to introduce some form of tax relief, such as investment allowance, to cushion the impact.
“This will encourage the banks to spend and, in turn, accelerate economic growth,” it said.
KPMG disclosed that the proposed law imposes a 50 percent tax on realised forex gains of banks. However, in their 2024 tax returns, these banks would have already paid a 30 percent income tax on such profits.
“This raises a question of whether banks would only need to pay an additional 20 percent on these profits. Clarity is needed to prevent unnecessary disputes and double taxation, as the same income could otherwise be taxed twice,” it said.
