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Nigerian banks are mostly destroying value for their shareholders as they are generating returns lower than the cost of equity capital.
The cost of equity reflects compensation investors demand for the risk of holding bank equity, factoring in country risk, market volatility, regulatory environment, and bank-specific fundamentals.
Analysis by MoneyCentral shows the return on average equity (ROE) of the five Tier 1 lenders except Guaranty Trust Holdings or GTCO are lower than their cost of equity (COE), which means they are not generating sufficient returns to cover the expected compensation demanded by equity investors for the risks they bear.
Zenith Bank’s ROE of 23.30 percent as at September 2025 is lower than its COE of 26.71 percent, according to MoneyCentral calculations.
Access Bank, United Bank for Africa, and FirstHoldCo recorded ROEs of 15.40 percent, 18.60 percent and 20.20 percent as at 9M, 2025, which are below their cost of equity of 28.45 percent, 27.47 percent, and 24.72 percent respectively.
However, GTCO is the only Tier 1 lender that created shareholder value as its ROE of 30.70 percent is higher than the COE of 25.93 percent, which is why it has the highest valuation of 0.94x book value compared to others that are trading at huge discounts to their book value.
The disappearance of foreign exchange (FX) revaluation gains, cut in the interest rates by the central bank as well as stiff competition from financial technology (Fintech) firms have dealt a blow to banks’ profit.
For instance, the average ROE for Access Holdings, Zenith Bank, Guaranty Trust Holdings, United Bank for Africa (UBA), and FirstHoldCo Plc reduced to 21.64 percent in September 2025 from 36.55 percent as at September 2024, according to data from Chapel Hill Denham Limited.
The combined profit after tax (PAT) of the five banks fell by 15.54 percent to N2.89 trillion in September 2025 from N3.42 trillion as at September 2024, according to data gathered by MoneyCentral.
Perhaps more worrisome is that these lenders are reeling from high cost to income ratio or efficiency ratio as operating expenses are growing faster than operating income in the face of inflationary pressures that forced many of them to hike workers’ salaries.
Regulatory induced costs such as the Asset Management Corporation of Nigeria (AMCON) and Deposit Insurance or NDIC charges have been bloating expenses.
Lower yields from a Central Bank easing cycle, combined with slow growth in fees and commission income could erode banks net interest margin.
“We expect the lower policy rate to drive a decline in yields on loans and government securities that will outpace the related decrease in the cost of deposits,” said analysts at Moody’s Global ratings, noting that deposit costs adjust more slowly than lending rates.
Bottom-line:
The cost of equity is the return that a company must offer investors to compensate them for the risk of owning its shares. It represents the compensation the financial markets require for the risk of ownership in the company.
Return on equity (ROE) is a financial metric that measures how efficiently a company generates net profit from the equity invested by its shareholders. It is calculated by dividing the company’s net income by the average shareholders’ equity during a specific period.
When a company’s ROE exceeds its COE, it indicates the firm is generating returns higher than the investors’ required rate, thereby creating shareholder value.
Conversely, if ROE is less than COE, the firm is not meeting the investors’ expectations, implying it is destroying shareholder value or not using equity capital efficiently.
When ROE equals COE, the company is just meeting investors’ requirements, often signaling no growth opportunities and distribution of all earnings as dividends.
In summary, COE is a forward-looking measure of investor expectations and risk compensation, while ROE is a backward-looking measure of actual financial performance. The comparison of these two metrics is crucial in investment decision-making and evaluating whether the company is effectively generating value for shareholders.
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