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A 10-year tax break on bond investments which expired at the beginning of the year 2022 could push the effective tax rate (ETR) of lenders higher by 2 – 3 percentage points adding to the misery of Nigerian Banks and their shareholders.
On 9 December 2011, the former president of Nigeria – Dr Goodluck Ebele Jonathan – signed the Companies Income Tax Exemption Order 2011 which decreed tax exemption on T-bills and promissory notes, government and corporate bonds, and the interest earned on these instruments for a period of 10 years, starting 2 January 2012.
Except for federal government bonds, the tax exemptions on these instruments expired on 2 January 2022, implying that from this year, the banks will start to pay tax on income earned on these instruments.
“The banks’ effective tax rate (ETR) is expected to increase, which could adversely affect their net income growth and returns,” said Adesoji Solanke, a bank analyst at Renaissance Capital.
“We have increased our ETR forecasts by c. 2-3 ppts across the board.”
Treasury bills and federal government bonds accounted for 19 % and 7% of 9M 2021 assets at the banks in Renaissance Capital’s coverage universe, respectively.
“Speaking to the management teams of various banks, we have received mixed feedback; some feel that the impact on their existing ETR will be negligible, while others argue that it will be more sizable,” Solanke said.
Nigerian banks have one of the lowest effective tax rates among major firms operating in the country.
Zenith Bank, one of Nigeria’s largest and most profitable banks, had an effective tax rate of just 10 percent in the nine – months period to September 2020.
MoneyCentral’s analysis of financial data of 21 large firms comprising 10 manufacturers and 11 banks shows the trend of much lower effective tax rates for financials compared to the real sector operators.
For instance, a comparison between the largest manufacturing firm in Nigeria today Dangote Cement and the largest bank by profits Zenith Bank, shows some stark differences.
While Dangote Cement has an effective tax rate of 26 percent and paid N97.24 billion in taxes in the 2020 financial year, Zenith Bank’s effective tax rate was equivalent to 9.89 percent, and the bank paid taxes of N25.29 billion for 2020.
Nigerian Banks facing a tougher regulatory environment in 2022 and increased competition from FinTech’s may see their bottom-lines pressured by the higher taxes, which is a further negative on the sector.