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BusinessDay

Sterling, FCMB, Stanbic see biggest jump in FX gain

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The big banks may have stolen the headlines for foreign exchange gains made last year but it was the tier-two lenders that saw the biggest growth compared to the previous year.

Sterling Financial Holdings Plc, FCMB Group Plc and Stanbic IBTC Holdings Plc recorded the highest growth in foreign exchange gains among listed commercial banks last year, data compiled by BusinessDay shows.

Sterling Financial Holdings saw the most increase, with a 2,588 percent jump to N4.57 billion, followed by FCMB Group with 1,863 percent to N84.2 billion, and Stanbic IBTC Holdings with 1,607 percent to N25.6 billion, according to their latest financial statements.

Fidelity Bank Plc, Guaranty Trust Holding Company (GTCO) Plc, United Bank for Africa (UBA), and Zenith Bank Plc recorded increases of 1,546 percent, 663 percent, 346 percent, and 342.3 percent respectively.

Access Holdings saw a 50 percent decline in FX gain while FBN Holdings’ FX loss narrowed to N253.7 billion from N350.3 billion.

Further analysis shows that the combined FX revaluation gains of the seven banks that recorded an increase rose by 765.4 percent last year largely on the back of the liberalisation of the FX regime. Their total FX revaluation gain grew to N625.7 billion from N72.3 billion in 2022.

“For most of the banks, their foreign currency assets were more than their FX liabilities which translated into foreign exchange revaluation gains,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.

He added the reverse would be the case if their foreign liabilities exceeded their assets.

The FX gains were a major contributing factor to the banks’ combined profits, which more than tripled to N2.8 trillion in 2023 from N897.4 billion.

Access Holdings, UBA, and GTCO were the three banks that recorded the highest growth in after-tax profit last year with 305 percent, 256.8 percent, and 219 percent respectively.

FCMB Group recorded 207.1 percent growth, followed by Zenith Bank (202.3 percent), Fidelity Bank (116.9 percent), Stanbic IBTC Holdings (74.2 percent), and Sterling Financial Holdings Company (11.4 percent).

“The FX depreciation contributed to the substantial profits that the banks declared. Last year, they held more foreign currency assets and when the naira was devalued, the currency value of those foreign currency assets would have increased,” Israel Odubola, a Lagos-based research economist, said.

Last June, the Central Bank of Nigeria (CBN) reintroduced the willing buyer, willing seller model in the foreign exchange market.

The official exchange rate has fallen from N463.38/$ at the time to N1,169.9/$ as of April 19, 2024. At the parallel market, the naira is being traded at around 1,230/$ as against 762/$ before the FX reform.

Last year, the CBN 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 dividends or meet operating expenses,” CBN said in a statement.

The apex bank last month also announced a ten-fold jump in minimum capital requirements for banks, nearly two decades since the last exercise. It aims to enhance the resilience of an industry faced with high inflation, naira devaluation, and a weak economy.

Olayemi Cardoso, the CBN governor, set the minimum capital requirements for Nigerian banks as follows: N500 billion for those with international authorisation, N200 billion for commercial banks with national authorisation, and N50 billion for those with regional authorisation.

Increased paid-in capital requirements for Nigerian banks will spur equity issuance over the next two years, supporting a recovery in the banking sector’s capitalisation, according to a recent note by Fitch Ratings, a global credit rating agency.

“The sharp devaluation of the Nigerian naira since May 2023 has depressed capital ratios via the inflation of foreign-currency-denominated risk-weighted assets. Some small and medium-sized banks may struggle to raise the necessary capital, leading to increased M&A,” it said.

It added that this would result in a more concentrated banking sector, with higher barriers to entry, greater economies of scale, and stronger long-term profitability.

“However, such developments would be unlikely to have significant rating implications, as the Long-Term Issuer Default Ratings (IDRs) of the vast majority of Nigerian banks are constrained by Nigeria’s ‘B-’ Long-Term IDR.”

The global agency, had earlier predicted Nigerian banks would see a jump in impaired loans as rising inflation and interest rates burdened borrowers’ debt servicing capacity.

It 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 loan ratios to rise higher than previously envisaged.”

Additional reporting by Folake Balogun