The income tax paid by Dangote Cement Plc, Africa’s leading cement manufacturer in the first quarter of 2021 was almost two times higher than the combined tax remitted by Nigeria’s five biggest banks.
The cement giant paid N40.39 billion income tax in the three months ended March 2021, 50.24 percent higher than the N26.88 billion remitted by Nigeria’s biggest lenders.
The tax remitted by Dangote Cement in the review quarter was 47.03 percent higher than the N27.47 billion it paid the year before.
Explaining the reasons behind its tax increase, Dangote Cement revealed that the pioneer tax exemption for Ibese lines and Obajana line 4, some of its factories with cement plants, ended in 2020 and thus, “an increased Nigeria effective tax rate of 28.3% as compared to the effective tax rate of 20.7% for Q1 2020 when we still had several lines still under pioneer status.”
A note in the cement company’s financials, explained also that the Group’s effective tax rate was higher at 31.0 percent, mainly because of intercompany exchange gains reported in Other Comprehensive Income for the group and Pan-african subsidiaries making losses that reduced the “Group’s profit without direct tax benefits for those losses.”
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Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham believes banks investments in government securities that are not taxed is one of the reasons their combined income tax was lower than one company’s tax.
“Banks invest a lot in government securities that are not taxed,” Ebo said.
Analysis of the financial reports of Nigeria’s five tier-one banks showed that they invested a combined N 5.25 trillion in government securities in the first quarter of 2021.
This was 98.73 percent increase when compared to the N4.15 percent reported in the first quarter of 2020.
The banks’ increased appetite for government securities is likely due to the recent uptick in Treasury Bills rate.
After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to more than 17 month-high, as compiled from Nigerian Treasury bills primary market auction Results for May 14, 2021.
Market analysts link the increase in the stop rates to the hike in CBN’S OMO rates some weeks ago. Investors are bidding at higher rates and the Debt Management Office (DMO) also needs to raise the cut-off rate to fill some of the orders, an analyst noted.
Weeks after the CBN shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed income investors demanded higher rates for T-bills.
While investors bid at a rate as high as 5 percent for the 91-day bill, 7.5 percent and 12.9 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 9.75 percent, respectively.
Stop rates for the 182-day & 364day bills remain unchanged. However, the 91-day bill rose by 50bps to 2.5 percent.
Analysis of the T-bills auction result for May 14, 2021, showed that the CBN raised a total of N138.98 billion from the 91-day, 184-day and 384-day bills, N22.31 billion more than the initial N116.67billion the apex bank offered to raise in this week’s auction.
Investors were less interested in the shorter 91-day and 182-day bills as they attracted a lower interest rate but were willing to subscribe to the longer 364-day bill.
While the 364-day with a much higher interest rate was oversubscribed by N88.51 billion, the 182-day was oversubscribed by N2.91billion but the 91-day bill was undersubscribed by N490 million.
The CBN planned to raise N24 million for the shorter 91-day bill, investors were willing to subscribe with N8.93 billion. The apex bank was eventually able to allot N8.43billion, N8.19 billion more than its initial offer.
Investors were willing to subscribe with N10.89billion for the N10.0 billion offered for the 182-day bill. The apex bank eventually raised the initial 7.98 billion, N2.02 billion lower than what it initial offer.
While the CBN offered to raise N82.89 billion through the longer 364-day Treasury bill, investors said they were willing to invest N211.07 billion. The apex bank later raised N122.56 billion, N39.69 billion more than its initial offer.
Though the recent uptick in Tbills rate to more than one year-high is good news for fixed income investors whose real return appreciated to -8.42 percent in May from -9.33 percent in March, the expected high inflation rate remains a challenge.
Even though a Businessday poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach 14 percent this year, the country’s inflation rate, which is expected to maintain an upward trend, means investors are unlikely to get a real positive return this year.
Ebo said he expects inflation to rise further in the coming months as the downside risk of fuel subsidy removal remained.
“The question is, as annual inflation moves above 18 percent, can one year (364-day) T-bills go as high 18-19 percent?” Yinka Ademuwagun, investment management analyst at Valualliance Asset Mgt asked.
Nigeria’s rising cost of goods and services, which does not have relief in sight, puts the country’s local investors investing in government instrument at a disadvantage when compared with their African peers.
With 9.213 percent T-bill rates in Kenya, fixed-income investors in the country are enjoying a real return of 3.31 percent. March inflation in East Africa’s largest economy stood at 5.9 percent.
While interest rates in Nigeria have always been high due to the monetary system in vogue since 2009, which sought to use FGN bonds/t-bills and OMO bills as a means of attracting US dollars into the country to stabilise the naira, but October 23, 2019, OMO policy by the central bank, which prevents domestic investors from participating in the auction, drove rates to its record low levels.
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auction at both the primary and secondary market. The CBN’S policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
T-bills are short-term sovereign debt securities maturing in one year or less. They are sold at a discount and redeemed at par.
According to the FMDQ, the bills are by nature, the most liquid money market securities and are backed by the guarantee of the Federal Government of a nation.
The Federal Government of Nigeria, through the CBN, issues Nigerian Treasury Bills to provide short-term funding for government budget deficit. The T-bills are usually issued through a competitive bidding process, quoted and traded on FMDQ’S platform.
Analysis of the financials of Nigeria’s biggest lenders revealed that FBN Holdings and Access bank had the most investments in government securities as of the first quarter of 2021. Both lenders revealed that they had N1.79 trillion and N1.78 trillion worth of investments in government securities, respectively.
This was followed by Zenith Bank’s N999.69 billion, GT Bank’s N689 billion, and United Bank for Africa with investment in equity accounted investee at N4.77 billion.
