Market News

Nigerian banks are at risk of facing profits and capital adequacy declines as the Federal Government plans to tax their 50 percent profits realised from foreign exchange (FX) revaluation in 2023.

President Bola Tinubu has asked legislators for an upward review of the 2024 Appropriation Act by N6.2trn, thus taking the total proposed expenditure to N34.9 trillion, up from the previous budget estimation of N28.7trn. But he also plans to tax banks’ windfall from foreign exchange gains.

In 2023, eight Nigerian banks made N754.8 billion in foreign exchange revaluation gains largely on the back of the liberalisation of the FX regime.

This was a 472.3 percent increase from N131.9 billion FX gains reported in 2022. The banks are: Zenith Bank Plc, United Bank for Africa (UBA) Plc, Access Holdings Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Fidelity Plc, Guaranty Trust Holding Company (GTCO) Plc and Sterling Financial Holdings Company Plc.

Analysts at FBNQuest said that the implication of the tax on banks is that the financial institutions will face a significant tax burden.

“This measure may have an impact on their profitability and capital adequacy, especially if they had anticipated using these gains as a counter cyclical buffer against foreign exchange fluctuations, as directed by the Central Bank of Nigeria,” they said in a note released on Thursday.

Omobola Adu, an analyst at BancTrust, said that this is an unplanned expense for the banks.

Adu said, “For banks that have realised the profit, that’s the amount they’ll get the windfall from.”

Another Lagos-based analyst said that the 50 percent tax is high and may affect how banks choose to declare their profits.

The NGX banking index was in a negative 2.3 percent on Thursday.

On the government side, analysts at FBNQuest said that profits from FX revaluation gains are expected to increase revenue for the government.

However, they noted that despite this one-time windfall tax, the revenue generated is unlikely to cover the additional N6.2 trillion needed to fund the government’s expanded spending plans. They urged the Nigerian government to look to other means of financing the plans.

“As a result, the government will need to consider alternative financing options,” they further said.

Given the underperformance in revenue of the Federal Government, largely due to declining crude oil production, the government will most likely turn to borrowing to meet its funding needs.

Nigeria’s debt profile has been increasing as a result of rising expenditures and poor revenue performance.

In 2024, the sums of N28.78 trillion and N19.67 trillion were approved as expenditure and revenue respectively, creating a budget deficit of N9.1 trillion.

Additional borrowing will exacerbate the trend and could potentially affect the country’s credit ratings and investor confidence, financial analysts say.

“Domestic borrowing will be the preferred option due to the stringent conditions in the international capital market,” the FBNQuest analysts added.