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Monday, March 27, 2023

Banks Realize N175.45 bn FX Gains on CBN Devaluation

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The constant devaluation of the currency by the central bank to protect the external reserve from the vagaries of crude oil price is a boon for Nigerian banks with dollar denominated trading assets.

This is because analysts are projecting a boost in profit due to a widening gap between the spot and forward rate in 2021  as the regulator continually used its monetary policy tools to stabilize an economy reeling from the devastation caused by the coronavirus pandemic.

The largest lenders in Africa’s largest economy collectively realized N175.43 billion in foreign currency revaluation gains in 2020, according to data gathered by MoneyCentral.

“If they carry foreign currency trading assets, they will have more foreign currency gains. But it depends on how well they gaped their balance sheet,” said Johnson Chukuwu, managing director and CEO of Cowry Assets Management Limited.

Gbolahan Ologunro, equity research analysts with Cordros Capital said the devaluation of the naira against global currencies will impact negatively on foreign currency loans and weaken the capital base for the lenders.

“If those foreign currency loans go bad, they will be carried at higher value in the book. They will have to write them off as and that will have a negative impact on shareholders’ funds,” Ologunro.

In the last six years, lenders made  combined N867.64 billion in foreign currency revaluation gains.

Foreign currency revaluation gain represents gains realised from the revaluation of foreign currency-denominated assets and liabilities held in the non-trading books.

A trend analysis shows they earned N234.36 billion in foreign currency gains in 2017, a period that was concomitant to the apex bank adopting the new Importers’ and Exporters’ Window that saw the Naira depreciated as a sharp drop in oil price of mid-2014 tipped the country in it first recession in 25 years in 2016. That same year combined net income was up 26.28 percent to N645.63 billion.

In 2016, the largest financial institutions collectively raked in N264.13 billion in FX gains, which helped juice up the bottom line.

Guaranty Trust Bank, the largest lender by market capitalization, realized N56.36 billion in foreign currency revaluation gains or FX gains, and that is 230.36 percent higher than 2019’s N17.06 billion. In short, it raked in N87.25 billion in 2016, while over the past six years it raked in N222.23 billion.

Zenith Bank’s FX gains surged by 276.42 percent to N43.11 billion in the period under review from N11.54 billion the previous year.

United Bank for Africa (UBA)’s FX gains were up 58.02 percent to N59.45 billion in the period as against N37.62 billion the previous year.    In the last six years, the pan African lender has realized N222.80 billion.

While FirstBank Holdings Plc generated N1.46 billion in FX gains in 2020, the lender made N176.01 billion in the last six years.

First City Monument Bank (FCMB) saw gains more than double to N10.01 billion in the period under review as it realized N73.12 billion in the last six years.

The Body of Bank Chief Executive Officers (CEOs) released a statement last week projecting that Naira exchange rate to the dollar is expected to recover to at least N423, after its spike to above N500 per dollar, following the Central Bank of Nigeria’s (CBN’s) recent directive to stop forex sales to Bureau De Change (BDCs).

The currency weakened by 8 percent to N410.25/$1 after the regulator officially adopted the Nigerian autonomous foreign exchange (NAFEX) rate. It was quoted at N412.50, according to FMDQ website.

The naira was quoted at N510 per dollar in the parallel market in weekend trading, MoneyCentral’s survey shows.

Across the globe, the regulators’ policies are either advantageous or inimical to banks. Lenders in the United States benefit from rate hike by the Federal Reserve as their assets such as loans and securities will reprice higher than their liabilities such as deposit and borrowing.

It will be recalled that the central banks’ decisions to bar individuals and local corporates from its Open Market Operations (OMO) sent net treasury yields crashing and banks were hard hit because income from investment securities dwindled while net interest margins were pressured.

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