In the wake of the significant devaluation of the Nigerian Naira following the Federal Government’s exchange rate reform in the second quarter of 2023, banks in Nigeria have reported substantial forex asset revaluation gains totaling ₦1.913 trillion in the first half of 2023 (H1’23). This surge in profits is in stark contrast to the forex revaluation losses incurred by many large manufacturing and other firms due to the devaluation.
The Naira devaluation had adverse effects on manufacturing firms and other key sectors that contribute to Nigerians’ living standards and the Gross Domestic Product (GDP) of the country. However, the banking sector has seen substantial gains from the forex revaluation.
Financial Vanguard’s investigation revealed that the top 12 banks listed on the Nigerian Exchange Limited (NGX) recorded only ₦70.3 billion in forex profits in the same period of 2022 (H1’22), indicating a remarkable 2,621.2% growth in forex profit during H1’23.
According to the financial reports of these banks released by NGX, they collectively achieved a Profit Before Tax (PBT) of ₦1.787 trillion compared to ₦666.038 billion in H1’22. This significant increase in profits was primarily attributed to forex gains.
Among these banks, Tier-1 banks, including Ecobank, led the way with substantial profit windfalls. Notable figures include UBA with ₦418.3 billion, GTB with ₦357.5 billion, Ecobank with ₦329.5 billion, Access Bank with ₦244 billion, Zenith Bank with ₦212.3 billion, and First Bank with ₦98.4 billion.
Tier-2 banks also reported higher profits during this period, with Stanbic IBTC recording ₦129.2 billion, FCMB ₦52.2 billion, Unity Bank ₦35.8 billion, and Fidelity Bank ₦32.2 billion.
In contrast, approximately 20 major manufacturing and other companies listed on the exchange reported a combined forex liability revaluation loss of ₦656.1 billion, mainly due to the same forex market dynamics that benefited the banks. These companies recorded ₦81.1 billion in profits during the corresponding period in 2022.
The Central Bank of Nigeria (CBN) has issued warnings to banks regarding their forex gains. The CBN approved the banks’ financial results after initial delays due to audit concerns related to the revaluation but imposed restrictions. The banks are required to isolate and save the forex revaluation gains as a buffer against potential economic shocks, preventing them from using these gains to pay dividends or cover operating expenses.
Economic experts and analysts have weighed in on the implications of these forex gains for the economy. They note that while banks benefited significantly from the devaluation, there remains a disconnect between the financial sector and the real sectors of the economy. The profitability of banks has surged, while other critical sectors such as agriculture and manufacturing have experienced weak growth. The CBN’s directive to prevent banks from using forex revaluation gains for dividends is seen as a positive step.
Additionally, the deregulation of the foreign exchange market has unlocked potential income streams for banks and deepened the financial market. However, analysts caution that the extraordinary income from forex gains may not continue as the forex market adjusts to new price levels, potentially reducing margins.
In contrast, multinational manufacturing companies have faced significant foreign exchange losses during the first half of the year due to the depreciation of the Naira. As they continue to service their foreign currency obligations, their profit levels are expected to weaken.
Overall, the economic activity level is anticipated to remain subdued, with individuals and businesses grappling with higher costs of living and operations. Until the economy becomes more business-friendly in terms of policy statements and a lower interest rate regime, muted growth is expected across economic activities.