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Naira Devaluation Boosts Banks as Foreign Exchange Gains Surge

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The central bank’s incessant currency devaluation of the Nigerian currency the Naira with a view to protecting the external reserve from the vagaries of global macroeconomic uncertainties has ballooned foreign exchange gains in the books of the largest lenders.

A foreign exchange revaluation gain, which is part of other income in the profit and loss account, is an exceptional item that has the capacity to add impetus to profitability.

The ‘big five’ otherwise referred to as Tier 1 lenders because of their strong capital buffers and balance sheet collectively grew foreign exchange revaluations gains by 114.20 percent to N159.17 billion as at September 2021, according to data gathered by MoneyCentral.

A number of the banks have long positions on the dollar, which means they have more dollar-denominated (broadly used to mean foreign currency) assets than dollar-denominated liabilities,” said an analyst who doesn’t want his name mentioned.

“The implication of that is that in the event of a Naira devaluation, these banks would report revaluation gains on their foreign currency balance sheet positions. I think there may be modest devaluation in the parallel market, which may filter into the I&E window where there may be mild depreciation as well. Hence, the impact should be positive for banks with long positions on the dollar but the impact may not be as much as we had in 2020 when the devaluation was significant,” said the analyst.

Interestingly, the widening gap between the spot rate and forward rate has prompted the central bank to devalue the currency, especially amid the coronavirus crisis that stoked dollar scarcity.

Investors are taken aback that the foreign exchange scarcity has become rocket science to the policy makers who have been unable to stem the tide since 2015, even as the International Monetary Funds and The World Bank have several times advised the central to adopt a unified foreign exchange system that will ease the flow of foreign direct investment.

The Nigerian naira has weakened to N570 per dollar at the parallel market during the festive period.

On the official market side, the naira now trades at between N413.83 and N430, according to data on FMDQ OTC Securities Exchange, a platform that oversees official foreign-exchange trading in Nigeria.

“The government’s exchange rate management policies continue to discourage investment and fuel inflation,” said the Bretton Wood Institution.

“Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.

“Pressure on the naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 percent in March 2020, five percent in August 2020, and seven percent in May 2021), FX management remains too rigid to respond to external shocks,” it said.

Foreign exchange gains will help banks to augment profit as earnings have come under pressure due to the punitive rules of the central bank such as the continuous clinging to a high cash reserve ratio and the hike in loans to deposit ratio.

Access Bank’s foreign exchange revaluation gains surged by 586.91 percent to N86.80 billion as at September 2021 from N12.63 billion as at September 2020.

United Bank for Africa (UBA)’s foreign exchange gains spiked by 78.83 percent to N35.55 billion in September 2021 from N19.88 billion as at September 2020.

“When you are holding assets in foreign currency rather than liability, you tend to make money during devaluation,” said Johnson Chukwu, CEO and managing director of Cowry Asset Management Limited.

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