For some time now, the proposed windfall tax on Nigerian banks gains from foreign exchange (FX) transactions has stirred considerable debate.
The Bola Tinubu-led government wants a new 70 percent tax on banks’ foreign exchange gains, and has urged the National Assembly to amend the Finance Act of 2023 to include a one-time windfall tax on these gains. The windfall tax targeting banks’ foreign exchange gains was initially set at 50 percent but now increased to 70 percent following amendments by the Senate.
While analysts believe that the windfall levy on banks is exceptional in nature, they also see Nigeria’s foreign exchange reforms and orthodox monetary policies favouring banks now and into the future.
“While there are ongoing debates over the legality of a retrospective application of the proposed initiative, our view is that the impact may be relatively minimal since it is to be treated as a one-off tax on FY’23 numbers versus the potential impact if it is applied on a going-forward basis, given the forced realisation of FX gains in FY’24 occasioned by CBN’s new Net Open Position (NOP) rule,” said CardinalStone research analysts in their July 22 Model Equity Portfolio (MEP).
“The government proposed a windfall tax on the 2023 foreign exchange gains of banks. Coming in the midst of a sector-wide recapitalisation by Nigeria’s banks, this came as a surprise. It is true that Nigerian banks made several trillions of Naira in pre-tax profits in 2023, but we doubt that this tax will be easy to apply, nor that its impact on public coffers, or banks themselves will be very large,” Lagos-base Coronation research analysts said in their July 22 note to investors.
Windfall tax is on banks realised gains/profits…not unrealised gains/profits
“This view is premised on the fact that the ratio of realised gains to unrealised gains is much smaller in FY’23, as the CBN’s directive on NOP came into effect in 2024. That said, we expect higher tax expenses on FY’24 earnings to reflect the impact of the windfall levy – a view that may be consistent with continued mixed sentiments in banking names in the near term,” CardinalStone research analysts further noted.
Read also: Bankers see 70% windfall tax derailing recapitalisation, reforms
“What financial impact will this windfall tax have on the banks, and on the government’s finances? To answer this, we have assessed the six large banks under our coverage. We can begin with the question of whether the proposal refers to realised or unrealised foreign exchanges gains (or losses). If they are realised then there is likely to be cash with which to pay tax: but if they are unrealised, as most of them are, then the cash is not so ready. Most of the 2023 gains, in our view, arose from booking US dollar loans at the prevailing Naira/US dollar exchange rate, creating paper profits in Naira. (The Naira fell from N460.8/US$1 to N911.7/US$1 last year),” Coronation research analysts further said.
Nigeria has since committed to achieving price/microeconomic stability which no doubt favours investors. In late March, the Central Bank of Nigeria (CBN) directed Deposit Money Banks to recapitalise.
Going by the CBN recapitalisation circular, commercial banks with international authorisation are to increase their capital base to N500billion and national banks to N200billion while those with regional authorisation are expected to achieve an N50billion capital floor. Similarly, non-interest banks with national and regional authorisations will need to increase their capital to N20billion and N10billion, respectively.
Despite than banking stocks have taken a dip recently (NGX Banking -9.13 percent YtD as at August 2) as debate intensifies on the impact of the windfall tax on their earnings, analysts believe that investors in bank stocks are still better off with the sector recapitalisation and reforms that ignite economic growth.
“It is worth noting that at the onset of the recapitalisation exercise, the CBN mandated fresh capital raises, prohibiting the use of retained earnings. This suggests that the windfall tax may be a deliberate attempt to capture the benefits of the revaluation gains. From a valuation and earnings perspective, we expect a muted impact, as we had previously factored out revaluation gains from our projections following the CBN’s earlier directive.
“However, the extension may affect Nigerian banks’ capital adequacy, as they had earlier set aside windfall profits to bolster their capital bases. Fortunately, the recent capital raise exercise is expected to offset this effect,” according to Meristem research analysts in their July 27 note titled “Banking Sector Update: Taxing Times, Windfall Worries”.
Banks recapitalisation exercise has intensified as the early birds are currently in the market seeking additional funds from their existing shareholders and new equity capital from the investing public through their public offering. A rights issue occurs when a company offers its existing shareholders the chance to buy additional shares at a reduced price. A public offer is the sale of equity shares to the public in order to raise capital.
Read also: Otedola urges banks to embrace windfall tax, cut lavish spending
CBN wants banks to meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026, using the options of raising additional capital, mergers and acquisitions, and licence change.
In realisation that the proposed windfall tax on banks will rather boost investors’ confidence in the banking sector and address their fears and concerns at least in the past weeks, three bank chiefs had expressed support for the move by the Federal Government to impose a 70 percent windfall tax on the foreign exchange earnings of banks from 2023 to 2025.
“These gains, accrued by banks due to forex rate fluctuations, would help support capital infrastructure development, education, healthcare, and public welfare initiatives under the Renewed Hope Agenda.
Top Nigerian banks made significant profits from forex revaluation gains in 2023, amounting to N3.3 trillion. This includes N2.48 trillion by the top 7 banks and N882.9 billion in the first quarter of 2024,” Comercio Partners analysts said in their July 19 weekly markets round-up.
While other banks are finalising the process of shoring up their equity capital base, the early birds have already approached the market for additional capital. For instance, Guaranty Trust Holding Company Plc (GTCO Plc) is in the market for its offer for subscription of 9billion Ordinary Shares of 50 kobo each at N44.50 per Ordinary Share.
While investors await half year (H1) scorecards, GTCO in its Unaudited Consolidated and Separate Financial Statements for the period ended March 31, 2024 reported Group profit before tax of N509.3billion, representing an increase of 587.5 percent over N74.1billion recorded in the corresponding period ended March 2023. The Group’s loan book (net) increased by 21.9 percent from N2.48trillion recorded as at December 2023 to N3.02trillion in March 2024, while deposit liabilities increased by 26 percent from N7.55trillion in December 2023 to N9.51trillion in March 2024.
The Group’s balance sheet remained well structured, diversified, and resilient with total assets and shareholders’ funds closing at N13.0trillion and N2.0trillion, respectively. Full Impact Capital Adequacy Ratio (CAR) remained very strong, closing at 24.9 percent, while asset quality was sustained as IFRS 9 stage 3 loans improved to 3.1percent in March 2024 from 4.2percent December 2023 and cost of risk (COR) closed at 0.4percent from 4.5percent in December 2023.
Read also: Bank directors to announce position on windfall tax by August 12
Net proceeds of the ongoing Offer will be applied toward the recapitalisation of GTCO Plc principal banking subsidiary, Guaranty Trust Bank Limited (GTBank Nigeria) as well as support Group-wide growth and expansion initiatives. Application List for the Offer opened on Monday, July 15, 2024, and closes on Monday, August 12, 2024.
“Our first quarter results reflect the unfolding value of what we have created in all our business verticals through the Holding Company Structure – from Banking and Payments to Funds Management and Pension, we are positioned to compete effectively on all fronts and fulfil all our customers’ needs under a unified, thriving financial ecosystem. Despite the challenging operating environment, we delivered a solid performance, recording significant growth across all financial and non-financial metrics, and we remain on track to meeting our full year guidance,” said Segun Agbaje, Group Chief Executive Officer, Guaranty Trust Holding Company Plc.
“This equity capital raise is timely and marks a significant milestone in our strategic plan to pivot the organisation for transformational growth across the Banking businesses in and outside Nigeria, and the non-banking businesses; differentiating it as a leading Financial Services Group in Africa. Over the last three years, we have diversified the earnings of the Group beyond pure banking play, through the creation of a Payments subsidiary and selective acquisitions in the Funds Management and Pension Fund Administration sectors; delivering exceptional value to our stakeholders whilst also enriching the lives of people in every community where we operate,” Agbaje, said during the launch of GTCO public offer.
Zenith Bank Plc targets to raise N290 billion through a combination of a rights issue and a public offer. The rights issue offers 5,232,748,964 ordinary shares of 50 Kobo each at N36 per share, while the public offer for subscription presents 2,767,251,036 ordinary shares of 50 Kobo each at N36.50 per share. The Offer opened on Thursday, August 1, 2024, and closes on Monday, September 9, 2024.
Access Holdings Plc is in the market to raise a total of N351.009 billion by way of rights issue to existing shareholders. Under the rights issue, 17,772,612,811 ordinary shares of N0.50 each will be offered to existing shareholders at N19.75 per share on the basis of one new ordinary share for every two shares held as of Friday, June 7, 2024. The Acceptance and Application Lists for the rights issue opened on Monday, July 8, 2024, and will close on Thursday, August 8, 2024.
Fidelity Bank is currently in the market raising a total of up to N127.100 billion by way of a rights issue to existing shareholders and a public offer (the combined offer). Under the rights issue, 3.2 billion ordinary shares of 50 kobo each are offered in the ratio of 1 new ordinary share for every 10 ordinary shares held as of January 5, 2024, at N9.25 per share. For the public offer, 10 billion ordinary shares of 50 kobo each are offered to the general investing public at N9.75 per share.
FCMB Group has also commenced its public offer of N110 billion at N7.30 kobo per share to meet the capital requirements placed on banks by the Central Bank of Nigeria (CBN). FCMB Group is issuing 15,197,282,219 ordinary shares of 50 kobo each at N7.30 per share.
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