The CBN caveat on banks’ profits carries implications

A seemingly innocuous memo from the Central Bank of Nigeria (CBN) to all banks regarding their audited financial results in the first-half, 2023, has turned controversial. The memo has in fact become a cause for serious concern to the generality of bank shareholders, investors and, indeed, the general public. The memo focuses on the unprecedented quantum leap in the incomes and profits of most banks vis-à-vis the past years’ levels of their performance. Specifically, the memo signed by the CBN’s director, banking supervision department, Haruna B. Mustafa, puts what amounts to a caveat on the incomes and profits of the banks.

According to the memo dated September 11, 2023: “banks shall not utilise their forex revaluation gains to pay dividend or meet operating expenses.” This, the memo says, is because “the CBN has reviewed the impact of the recent foreign exchange (FX) rate regime change on the banking system and observed its potential to significantly increase Naira values of banks’ foreign currency (FCY) assets and liabilities, resulting in varying levels of FX revaluation gains or losses across the industry.” And truly, most banks, following the impact of the Naira floatation or exchange rates unification in June, recorded three-to-four hundred percent jump in practically all their performance indicators, compared to figures of first-half of last year.

As it were, in compliance with the apex bank’s directive, many of the banks with an established culture of paying half-year interim dividend to their shareholders, have opted to declare none (a few did, however). But in their normal cash flow (or income) expectations, bank shareholders (up until the CBN memo) have been counting on their usual interim dividend pay-out from the banks. So, to these millions of (individual) shareholders, the import of the CBN memo is a shocker — an unprecedented vicarious punishment for the fallouts of an impetuous FX policy. Half-yearly interim dividend payment by most banks has remained part of their competitive edge over the years; and their shareholders always eagerly look forward to such inflow. Even if the banks at year-end 2023 declare dividends that capture the already reported first-half of this year, the shareholders would have lost much, considering the time value of money in a hyper-inflationary environment that Nigeria is. The worth of 100 Naira in January this year is no longer the same today: devaluation and inflation is ravaging everything!

Unwittingly, too, the CBN caveat is de-marketing the banks as far as potential investors are concerned. No discerning investor would be moved to acquire interest in business entities whose financial results are snidely taken as bubbles or mere windfall. Indeed, as we have not seen the last of what becomes of the Naira owing to its full floatation, who knows what ‘fiat’ the CBN or the powers that be could come up with, by year-end. The CBN’s memo has gone viral; and is available to the entire world. The memo therefore serves as an alarm and alert to the global village as to the volatility that rules Nigeria’s banking system — and, by extension, the entire economy.

If the body called Bankers’ Committee (comprising all bank chief executives, top officials of the CBN and headed by the apex bank’s boss) were relevant and effective, wouldn’t whatever are the likely implications of the FX policy be discussed by this August body? And consequently, these bank chiefs would then discretely manage the identified headwinds. Now, by a stroke of the pen, literally, the CBN has put a huge question mark on the performances of the banks. As it is, international financial analysts and rating agencies will certainly factor-in the reservations and opinions of the CBN in assessing and ranking Nigerian banks, going forward. The CBN memo also serves as a strong warning to stockbrokers to beware of over-pricing of the assets (stocks) of the ‘performing’ banks.

On the other hand, most banks ‘favoured’ by the FX regime change (as the CBN calls it) have practically rolled out drums for the celebration of their astounding performances. In a highly competitive industry which banking is, the ‘favoured’ ones are already riding on their latest figures to outdo the competition, and further expand even their market shares. The chief executive of one of them in his euphoria said: “the Group recorded strong double-digit growth in revenues and profits from its operations; the results also reflect the effect of sizeable revaluation gains, arising from the harmonisation of currency exchange rates in Nigeria.” He continued: “Our reporting currency found a new exchange level at about N756 to US$1 as of 30 June 2023, compared to N465 at the beginning of the year. The results again demonstrate the benefits of our long-held diversification strategy across Africa and globally.”

As these banks celebrate the ‘windfall’, who knows what awaits them in the rest of the year, and beyond, given the policy somersaulting proclivity and indiscretion of the Tinubu administration, so far? Unfortunately, the ‘sterling’ financial performances of the banks, courtesy of the ruinous new FX regime, is also a direct indictment on them for making “paper profits” just merely from exchange rates manipulations. This shows clearly how largely ‘de-linked’ the banks are from the real sector of the economy: as most operators in the real sectors are practically being asphyxiated, the banks are reporting triple-figure increases in all performance indicators. This irony exposes the outlandishness of the Nigerian economy, and why the banks usually fail on their part in the transmission mechanism.

Unfortunately, due to motley structural and environmental challenges of the Nigerian economy, as the banks focus more on managing their risk assets, their ‘little’ credit exposure still makes them vulnerable to some headwinds. For instance, as the FX revaluation gains are rising, banks’ non-performing loans (NPLs) have begun to grow. This is in part due to the scorching effects of recent monetary and fiscal policies of the current administration that have sent the Naira on a tailspin and pushed inflation to runaway levels. Petrol or diesel, raw materials, machineries and many critical inputs are no longer affordable to most manufacturing concerns, especially the small and medium-scale enterprises (SMEs). Not a few have closed shop; yet, others are faced with bankruptcy prospects — with the exchange rate at near N1000/$ and inflation rate at almost 26 percent!

These beleaguered business entities hit by economic policy fallouts, are customers and debtors to the banks. As they are hard hit unexpectedly by the rash economic policies, their tendency to default in loan servicing increases — all reflecting, with time, as NPLs in the books of the banks. This reality of the Nigerian business ecosystem compels the banks to pander to the credit needs of blue chips, multinationals and ‘big names’ in the oil and gas, telecoms and a few other sub-sectors. This leaves the start-ups, SMEs and MSMEs to be scorched by environmental, policy and internal factors — including little or no access to credit.

In the final analysis, as the new FX regime and kindred policies have heightened uncertainty in Nigeria’s business environment, the CBN has alerted the whole world that banks’ performances are a bubble; and unsustainable. Indeed, the apex bank has warned of impending prudential guidelines, and insists that they (banks) should “increase their resilience against potential volatility and/or economic shocks.”