Against the backdrop of foreign exchange, Forex, revaluation losses recorded by many big manufacturing and other firms, banks have recorded a whopping forex assets revaluation gains amounting to N1.913 trillion just in the first half of 2023, H1’23, following the exchange rate reform introduced by the Federal Government in the second quarter of 2023 which drastically devalued the Naira.
The Naira devaluation had impacted negatively on the manufacturing firms and other companies that Nigerians rely on to boost their living standard as well as the Gross Domestic Product, GDP, of the country.
Financial Vanguard findings showed that top 12 banks in the country which are listed on the Nigerian Exchange Limited, NGX, recorded just N70.3 billion in their forex businesses in the corresponding period of 2022, H1’22, indicating that the H1’23 forex profit growth rate was 2,621.2%.
According to the details of the financial reports of the 12 banks released by the NGX, they recorded a combined Profit Before Tax, PBT, of N1.787 trillion as against N666.038 billion recorded in H1’22, an indication that most of the profits made by these banks were from the forex gain.
Banks’ profit details
Tier-1 banks, including Ecobank, were disproportionately responsible for the large chunk of the profit windfall.
Details of the profit figures recorded by banks include UBA which recorded N418.3 billion, GTB with N357.5 billion, Ecobank N329.5billion, Access Bank N244 billion, Zenith Bank N212.3 billion, and First Bank N98.4 billion.
Tier-2 banks with significantly higher profit during the period includes are Stanbic IBTC which recorded N129.2 billion, FCMB with N52.2billion, Unity Bank with N35.8 billion and Fidelity Bank with N32.2billion.
Meanwhile, Financial Vanguard had earlier reported that about 20 big manufacturing and other companies listed on the Exchange had recorded an all time high of N656.1 billion forex liability revaluation loss due to the same development in the forex market that saw a sprawling profit in banks.
The manufacturers had recorded N81.1billion profit in the corresponding period of 2022.
At the backdrop of the windfall the Central Bank of Nigeria, CBN, had delayed approval of the banks’ financial results due to audit issues around the revaluation but eventually approved with a caveat to the effect that the banks should isolate and save the forex revaluation gains as buffer against economic shocks.
Consequently, the CBN stopped the banks from using FX revaluation gains to pay dividends or meet operating expenses.
The CBN disclosed this in a letter to all banks titled, “Impact of recent FX policy reforms: Prudential guidance to the banking sector.”
The letter signed by the Director Banking Supervision Department, CBN, Mr. Haruna Mustafa, stated: “The CBN has reviewed the impact of the recent foreign exchange (FX) rate regime change on the banking system and observed its potential to significantly increase naira values of banks’ foreign currency (FCY) assets and liabilities, resulting in varying levels of FX revaluation gains or losses across the industry.”
Analysts/Experts react.
Reacting to the forex gain by banks, Prof Uche Uwaleke, President of Association of Capital Market Academics of Nigeria, ACMAN, said: “The implication is a widening gulf between the financial sector and the real sectors of the economy. This disparity can be seen in the positive real GDP growth for the financial sector dominated by banks while the agric and manufacturing sectors are experiencing weak growth. Against this backdrop, the recent directive by the CBN to banks not to use forex revaluation gains for payment of dividends is welcome.”
On his part, David Adonri, Analysts and Vice Executive Chairman at HIGHCAP Securities Limited, said: “Deregulation of the foreign exchange market recently, has opened the door for more forex trading opportunity to banks. Banks can now buy and sell hard currencies without any restriction as means of income rather than being mere channels for administrative allocation of FX. They all enjoyed immediate gains from their stocks of FX which were earlier secured at official rate but appreciated massively when Naira was floated. That was as an extraordinary income which may not continue henceforth because the forex market is expected to adjust to the new price level which will trim down margins.
“Deregulation of the foreign exchange market has unlocked a big potential for income generation in the financial services industry which can deepen the financial market in general. Out of all the markets in the financial services industry, only the foreign exchange market was not deregulated. It constituted a drag to the smooth running of the other markets and suppressed the profitability and performance of the entire industry. It also distorted the allocative efficiency of forex to the economy in general.”
Continuing, he said: “On the other side of the divide, multinational manufacturing companies suffered heavy foreign exchange losses during first half of the year. Most of them have credit arrangements with their overseas parent companies and partners denominated in foreign currency. With the sudden depreciation of the Naira, their outstanding obligations multiplied in Naira, leading to exchange rate losses. That was an extraordinary loss which may not continue in second half of the year. With deregulation of the forex market, FX users will have better access to hard currencies. They can re-strategize their business models to be less import dependent or hedge their foreign currency risk with derivatives. As the economy also adjusts to the new price level, their costs recovery will be enhanced.”
Reacting also, Victor Chiazor, Analyst and Head of Research & Investment at FSL Securities Limited, said: “The revaluation gains recorded by the banks was simply because they held dollar positions at the time of the floating of the Naira which translated to significant revaluation gains given the level of devaluation which took place at the time. However, the consumer goods and manufacturing sector especially those with dollar exposure were negatively impacted as their loan exposure immediately ballooned given the new exchange rate. These companies required more Naira to convert to the dollar compared to the old rate and this triggered significant FX losses.
“ For the manufacturing companies, we expect the FX loses to continue to remain elevated as they continue to service thier FX obligations which will weaken their profit levels but do not expect the banks to report a similar jump in FX revaluation gains into the third and fourth quarter of 2023, except we see significant devaluation of the Naira at the same level witnessed in the second quarter of 2023.”
Continuing he said: “With regards to the economy at large, economic activity level is expected to remain muted as individuals and businesses continue to struggle with higher cost of living and operations. This is evident in the significant rise in impairment charge for most banks like Wema, FBNH, FCMB, Fidelity, GTCO, UBA and Zenith all of which reported over a 100 percent rise in impairment charge for the half year period. Until the economy becomes business friendly in the area of policy statements and a low interest rate regime amongst others, we may continue to see muted growth around economic activities.”
Commenting to the forex gain, Analyst and Managing Director, APT Securities & Funds Limited, said: “The Banks that made FX capital gains as a result of devaluation of naira were likely to make more as the naira keep up devaluation, but also those Bank that have exposure in the FX or EURO Bonds will likely experience some negative returns except if they have to expand their funds in EURO or Dollar Loans.”
On the implication to the economy, he said: “ The implications to the economy is uncertainty which negate all our future plans since there is no stable Exchange rate and that discourage, Foreign Direct Investment, FDI flow into the country especially in the Capital market.”
In his own reaction, Tajudeen Olayinka, CEO, Wyoming Capital and Partners .said: “I think banking sector benefited immensely from exchange rate unification which forced Naira to depreciate massively against US dollar. This was so because the sector is known to be well positioned when it comes to net dollar asset accumulation, as against manufacturing or real sector companies that usually experience net dollar liability, as a result of their continuous use of banking facilities for international trade and importation of inputs.
On the way forward, he said: “So long we continue to have dollar liquidity challenge, so long we shall continue to see Naira depreciation and asset/liability revaluation difficulties among Nigerian businesses. But I believe government will eventually be able to work through possible solutions to restoring external sector equilibrium and dollar liquidity. That is why they must step up activities around ongoing reforms, in a way to stabilizing value of the Naira. Central Bank should allow exchange rates to converge by removing the well known source of divergence, which remains the 43 items on FX restriction list. Doing so will bring back liquidity to the official FX market.”
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