Nigeria's biggest banks grow profits by 260% in H1

Four of Nigeria’s biggest banks have reported a surge in profits in the first half of 2023, with their combined earnings growing by 260 percent year-on-year, according to BusinessDay’s calculations.

Data obtained from the Nigerian Exchange Limited showed FBN Holdings, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA) and Zenith Bank posted a combined profit after tax of N1.13 trillion in H1 2023, compared to N315.9 billion in the same period of 2022.

UBA posted the biggest after-tax profit, accounting for N378.2 billion of the N1.13 trillion. Access Holdings is yet to release its report as of the time of filing this report.

Tochukwu Okafor, a senior lecturer at Baze University, attributed the banks’ financial performance to the devaluation of the naira. He highlighted that most tier-one banks have international affiliations, with a significant portion of their assets denominated in dollars. As a result, the devaluation has led to a substantial increase in their profits, he said.

“In the history of banking, hardly any bank has ever declared profits of up to N400 billion annually, not even in a half-year period. However, due to the devaluation and the transition from a pegged exchange rate to a freely floating one, banks have experienced a significant spike in their declared profits in the first half of 2023,” he said.

He said a substantial portion of this increased profitability is attributed to non-interest income. The devaluation has affected fees, commissions, off-balance sheet transactions, and other non-interest income sources, which now contribute significantly to the banks’ higher profits.

“According to their financial statements, a significant portion of their profits is derived from non-interest income, and this portion has grown in recent periods,” Okafor added.

Gbolohan Ologunro, a portfolio manager at FBNQuest, said a significant portion of the banks’ recent profit gains came from revaluation gains on their net long US dollar income positions. He noted that most tier-one banks have structured their balance sheets to maintain net long US dollar positions, which means that they are able to record gains whenever the currency is adjusted.

“Most tier-one banks currently hold a net long position in USD. This means that their foreign currency assets exceed their currency liabilities. Consequently, whenever there is currency revaluation, it will positively impact their profits,” Ologunro said.

Tajudeen Ibrahim, director of research and strategy analyst at Chapel Hill Denham, however, described this growth as temporary and unsustainable.

“Once the initial impact diminishes, Nigerian banks will return to their core business of lending. At that point, their ability to meet their lending objectives will depend on the risk level in the business environment and the outlook for inflation,” Ibrahim said.

On June 14, 2023, the Central Bank of Nigeria merged all foreign exchange markets into the Investors and Exporters (I&E) window and reintroduced the willing buyer, willing seller model.

As a result, the official exchange rate increased from N463.38/$ to N747.8/$ as of September 11.

However, the reform has only widened the spread between the official and parallel market rates, as the naira has depreciated by 61.4 percent against the dollar since the float.

On Monday, the naira exchanged for 747.87 per dollar at the I&E window, up from 463.38/$ on June 13. Meanwhile, at the parallel market, the naira depreciated by 20.1 percent to 917/$ on September 11 from 762/$ in June.

In terms of market capitalisation as of Thursday, Zenith Bank led with a market cap of N1.104 trillion, followed by GTCO at N766.9 billion, FBN Holdings at N642.5 billion, and UBA at N562.6 billion.

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