At the backdrop of economic gloom and general hardship being faced by the populace, banks operating in Nigeria are decaling huge earnings and profits.
Also the surge in their earnings comes amidst a significant decline in banks' credit to the private sector, the engine of growth in an economy.
Financial Vanguard's findings from the operating results of 11 leading deposit money banks, DMBs, in the country for the first half of the year, H1'24, showed that their gross earnings jumped by 131.9 percent to N11.7trillion from N5.5 trillion in the same period of last year, H1'23.
Similarly, their Profit Before Tax, PBT, rose to N3.7trillion, a 101.9 percent increase compared to N1.83 trillion recorded in the corresponding period in 2023.
The key findings in the results is that the banks' have now moved from foreign exchange windfall to interest rate windfall, reaping huge benefits from the two key policies of the Central Bank of Nigeria, CBN, in the past one year.
The policies are liberalization of the foreign exchange market and a hawkish interest rate regime.
The forex policy had given the banks over N10 trillion profit in terms of what the industry calls exchange rate revaluation gains, while the latest windfall is coming from the frequent hike in the Monetary Policy Rate, MPR, by the Monetary Policy Committee, MPC, of the apex bank since last quarter of 2023.
The MPR policy created about 1000 basis points raise in effective interest rate in the money market following CBN's massive application of inflation targeting as strategy to battle inflation which had peaked at 34.2 percent in June 2024.
Currently the MPR stands at 27.25 following the latest raise two weeks ago, a development which has equally skyrocketed lending rates in banks while stifling borrowers who rely on bank loans to sustain their businesses.
MPR is the benchmark interest rate upon which other interest rates in the money market are built.
Following the steady rise in the MPR, deposit money banks have been marking up their lending rates far higher than the raise in their deposit rates.
Consequently, the interest income for the lenders surged to N6.9 trillion, indicating a 141.75% Year-on-Year (YoY) increase from N2.8 trillion in the same period in 2023.
The downside of the markup in the banks' lending rate was, however, higher cost of funds and reduced credit advanced by the lenders during the period with their credit exposure to the private sector declining by 4.2% to N73.2trillion from N76.5trillion in January 2024, according to the CBN's latest credit and money report.
Analysts and experts have opined that while banks are making huge profit and reducing credits to the private sector, the manufacturing companies and other major sub-sectors of the economy are faced with severe challenges like high cost of credit, operating expenses such as imported raw materials and equipment due to the weaker naira, squeezing profit margins and escalating production costs.
The banks analysed in the report are Zenith Bank, Access Bank, Guaranty Trust Company, GTCo, Plc, FBN Holdings, United Bank for Africa, UBA, Plc and Ecobank Transnational Incorporated, ETI, Plc.
Others are Wema Bank Plc, Sterling Bank Plc, Union Bank Plc, FCMB Group Plc and Stanbic IBTC Holdings Plc.
Further breakdown of the banks' H1'24 accounts showed that the foreign exchange revaluation gains are declining with the banks posting a combined revaluation gain of N229.481 billion in H1'24 against over N2.0 trillion in the second half of 2023.
Some of the banks even recorded outright losses in Forex revaluation. But interest income for the banks is surging at the backdrop of the CBN's current interest rate regime.
Banks' profit
Financial Vanguard's findings showed that the tier-1 banks, including Zenith Bank Plc, Access Bank, GTCo, UBA, and First Bank, accounted for 77.7 percent of the combined pre-tax profit, while the tier-2 banks accounted for the remaining 22.3 percent.
GTCO recorded the highest pre-tax profit during the period with the figure rising to N1.004 trillion in H1'24 from N327 billion, representing 207% increase.
Zenith Bank posted N727.03 billion, representing 107.5% increase from N350.36 billion in H1'23, followed by Ecobank with N443.153 billion PBT from N150.32 billion in 2023; FBN Holdings's pre-tax profit rose to N411.97 billion from N204.87 billion, while UBA recorded N401.58 billion PBT in H1'24, 0.5% decline from N403.65 billion in the corresponding period in 2023.
Access Bank recorded N370.18 billion profit before tax during the review period compared to N177.47 billion.
Others are Stanbic IBTC Holdings (N147.002bn from N82.99bn); Wema Bank (N30.57bn from N12.06bn); Sterling Bank (N17.35bn vs N11.46bn in 2023); FCMB (N64.21bn vs N38.23bn)and Union Bank with N79.8 billion as against N66.5bn in H1'23.
Gross Earnings
Access Bank grew its gross earnings by 131.66% to N2.166 trillion from N935.261 billion in H1'23; FBN Holdings followed with 118.76 percent increase in gross earnings to N1.41 trillion from N641.1billion. Zenith Bank's earnings grew by 117 percent to N2.101 trillion from N967.261 billion; GTCO recorded N1.393 trillion in gross earnings, representing a 106.98 percent growth compared to N672.603 billion in the same period in 2023.
Others are UBA with 39.6% increase to N1.371 trillion from N981.775 billion. Stanbic IBTC Holdings Plc (N378.548bn from N213.334bn); Sterling Bank (152.202bn from N99.06bn); FCMB Group (374.47bn from N238.182bn); Union Bank (N333bn from N210.5bn); Ecobank (N1.864trn from N668.58bn) and Wema Bank which posted N179 billion as against N89.36 billion in H1'23
FX revaluation gain/loss
Zenith Bank recorded FX loss of N219.4 bn; UBA (N326.2bn), Access Bank (N253.9bn), FBN (-N165bn), GTCO (N35.2bn), Sterling (-N5.3bn), FCMB (N35.19bn), ETI (-N21.1bn) and Wema Bank N6.2 bn.
Analysts' insight
Reacting to the banks performance, Olatunde Amolegbe, former president, Chartered Institute of Stockbrokers, CIS, attributed the huge profits recorded by banks primarily to the elevated interest rate environment, adding, however, that the currency devaluations and depreciation favored them given their short and long positions in FX.
"So, you will see that the growth in profit is as a result of increase in both interest and non-interest margins. This is good for the banks but the implications for other sectors is typically negative as we've seen lots of other companies recording huge finance cost as well as huge currency revaluation losses in their books.
"It means most of them will close down, downsize or shelve expansion plans in order to remain in business," he added.
On reduction in banks' credit, he said: "The reduction in banks' credit to the private sector can also be attributed to the hawkish stance of the CBN, particularly the decision to increase the Cash Reserve Ratios of banks which now stands at 50%.This means that banks only lend about half of their capital available for lending to the private sector.
"This will, of course, limit their ability to create loans. This is likely to ultimately impact economic growth negatively if companies can't even access loans to finance their business plans."
Continuing, Amolegbe said: "It's probably left to the CBN to soften its monetary policy stance in order to reduce the cost of borrowing and also make more liquidity available to the banks in other to increase loan creation, otherwise it will continue to be more expedient for the banks to put money in risk free financial instruments that deliver good returns rather than create expensive loans that goes into default. So it's all about the actions of the monetary authorities."
Speaking in the same vein, Mercy Okon, Investment Research Specialist at Parthian Securities, said that reduction in banks credit to the private sector was a reflection of the repeated interest rate hike, which has shot up the cost of borrowing.
She emphasized the need for a balance between interest rates and economic growth, saying that rate hikes are capable of stifling economic growth.
She warned that the trend could exacerbate unemployment level.
She stated: "The huge profit seen in the banks were due to the huge unrealized FX gains like in the case of GT Bank, an increase in interest income (due to high interest rates by the CBN, from loans and advances and net fees and commissions "The growth in fees and commissions were mainly as a result of increased transactions volume across their digital platforms, as well as higher credit-related fees and card payments.
"The significant increase in interest rates where the CBN raised the MPR by 800 basis points this year alone has made borrowing more expensive, leading to reduced aggregate lending to the private sector.
"This will lead to reduced economic activities and growth, increased unemployment and this is because reduced lending can lead to business closures and job losses.
"Also, increased interest rates make borrowing more expensive, affecting consumers and businesses alike.
"The growth in interest income when the real sector is struggling to survive is quite intriguing. It is shocking. This substantial increase suggests that banks are generating substantial revenue from interest payments, likely due to the high interest rates implemented by the Central Bank of Nigeria to combat inflation.
"However, this growth in interest income comes with a downside. The high interest rates that are driving this growth are also making borrowing more expensive for businesses and individuals in the real sector and this can hinder economic growth, increase unemployment, and exacerbate the challenges faced by the real sector
"It's essential to strike a balance between interest rates and economic growth. While high interest rates can attract foreign investment and combat inflation, they can also stifle domestic economic activity.
"The banking sector's growth should be aligned with the needs of the real sector to ensure sustainable economic development."
In his own response, Tajudeen Olayinka, Investment Banker & Stockbroker, said: "Firms generally are expected to adjust to the variability of cost and cost pressure in the short-run to be able to stay afloat in a period of persistent inflation. This they do by repricing their earning assets in the immediate to near term, to enable them recover costs partially or fully, without any significant trade-off to their preferred or acceptable gross margin. "Ability to do this depends on the nature of services they render or goods they sell. "Companies that are trading in necessaries will be able to recover cost fully without any compromise or trade-off to their preferred or acceptable gross margin. This is the reason for the superlative performances by some of the banks in the first half of the year, in spite high inflation. Banks trade in portfolios of profitable moments, irrespective of economic conditions.
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"In a period of high interest rate, not many businesses or projects are bankable. And so, banks will only grant loans and advances to businesses which can survive the difficult operating environment in a period of persistent inflation. This is more like cherry-picking from available bankable opportunities. It is not a good development for the economy, as it is capable of slowing down growth. It is also a sign of a trying time for the Nigerian economy".
On the more acceptable option, Olayinka stated: "It is for the economic managers to come up with policies, programs and structures that can speed up the recovery process, in a way to stimulate long term interest in the economy by all economic agents. Banks do not provide long term capital, and cannot alone restore desirable growth to the economy."
Commenting as well, David Adonri, Analyst/ Vice Executive Chairman at Highcap Securities Limited, said: "The rising profit of banks is due to further FX gains and investment in high yielding public debt with their huge retained earnings. Their rising income will benefit their shareholders who will enjoy higher dividends.
"As a result of higher yield on risk free investment, there is no incentive for banks to expose themselves to higher risks arising from lending to the private sector. The decline in bank credit to the private sector will affect the adequacy of their working capital and may slow down the productive economy and fuel inflation.
"Banks are profit making enterprises that adjust to changes in the macroeconomic environment. Consequently, their credit will flow to borrowers in the sector of the economy with least risk and higher returns. Appropriate monetary and fiscal policies will dictate this direction."
Also, FitchRatings had earlier this year said that Nigerian banks' profitability will benefit from a marked increase in net interest margins (NIMs) driven by recent increases in the monetary policy rate.
The global rating agency, in a recent report titled: "Nigerian Banks to Benefit from Monetary Policy Rate Increases", said: "The rate rise accompanies a sharp increase in fixed-income yields since the large naira devaluation at the end of January. A high proportion of fixed-income securities held by the banking sector is short-term, so the increased yields will quickly feed through to higher asset yields. Asset yields will also benefit from most loans being variable-rate, enabling upward repricing in response to rising interest rates.
"However, we expect banks to exercise caution in fully passing on higher rates to certain customers in view of potentially burdensome debt servicing costs, particularly given the challenging macroeconomic conditions.
"Funding costs will be less responsive to higher interest rates as a high proportion of customer deposits at most banks is in current and savings accounts. As a result, NIMs will widen markedly in 2024."
