Nigerian banks’ dollar earnings under pressure as investments shrink

The juicy foreign exchange earnings of Nigerian banks have come under intense pressure due to low dollar economic activities, BusinessDay’s analysis and expert opinions have said.

Available data gleaned from the Nigerian Exchange Group (NGX) showed five banks- Stanbic IBTC Holdings, FBN Holdings, Wema Bank, Guaranty Trust Holding Company, and Union Bank, recorded a decline in foreign exchange earnings while two others – Fidelity Bank and Zenith Bank, recorded foreign exchange loss in the first quarter of 2023.

“There were FX shortages during the period reviewed which reveals that banks were unable to engage in more foreign exchange transactions,” said Tesleemah Lateef, banking analyst at Cordros Securities Limited.

Stanbic IBTC Holdings saw its foreign exchange earnings drop 38 percent to N14.22 billion in the first quarter of 2023 from N22.95 billion in the first quarter of 2022.

FBN Holdings foreign exchange earnings stood at N3.03 billion in the first quarter of 2023, a 47.3 percent decline from N5.75 billion in the first quarter of 2022.

Banks in Nigeria are particularly at risk because of “the constrained availability of foreign currency liquidity in the country as a result of constraints on domestic oil production and capital outflows, coupled with US dollar strengthening,” said Mik Kabeya, vice president for emerging markets banks at Moody’s.

Wema Bank’s foreign exchange earnings stood at N0.48 billion in the first quarter of 2023, a 12.7 percent drop from N0.55 billion in the first quarter of 2022.

Guaranty Trust Holding Company’s foreign exchange earnings dipped to N0.19 billion in the first quarter of 2023, 94.3 percent decrease from N3.33 billion in the first quarter of 2022.

Union Bank’s foreign exchange earnings dipped 93 percent to N0.14 billion in the first quarter of 2023 from N1.98 billion in the first quarter of 2022.

“There has been a consistent decline in FX because there is no inflow as a result of low foreign investors in the Nigerian market,” Lateef said.

Fidelity Bank recorded a foreign exchange loss of N0.32 billion in the first quarter of 2023 from N0.86 billion foreign exchange loss in the first quarter of 2022.

Zenith Bank recorded a foreign exchange loss of N1.21 billion in the first quarter of 2023 from foreign exchange earnings of N10.48 billion in the first quarter of 2022.

“Declining foreign reserves, lower oil production and Nigeria’s rising import compared to export are also contributing factors.” Lateef said.

Two banks recorded foreign exchange gains in the period under review.

Access Holdings’ foreign exchange earnings stood at N112 billion in the first quarter of 2023, up 30.5 percent from N85.83 billion in the first quarter of 2022.

UBA’s foreign exchange earnings arrived at N26.11 billion in the first quarter of 2023, a 74.5 percent increase from N14.96 billion in the first quarter of 2022.

“The banks with foreign exchange gain most likely have net foreign currency assets while the banks with losses from foreign exchange most likely have net foreign currency liability more than foreign currency assets which will result in devaluation loss,” Tajudeen Ibrahim, director of research and strategy of ChapelHill Denham said.

“Not all banks have a strong balance sheet to be in a position of net foreign currency asset, hence it is a disadvantage to banks that have foreign currency liabilities,” Ibrahim added.

Other analysts say problems that worry investors in doing business in Nigeria include multiple exchange rates, widespread insecurity and low oil production due to massive crude theft. Another focus is high fuel subsidy costs that devour government revenues and drive up debt.

“Reform of the foreign exchange market is the number one concern for international equity investors,” said Steve Pollicino of the US brokerage Auerbach Grayson, adding that uncertainty over how long it takes to get money out of Nigeria is a big deterrent.

“No investor is going to want to buy into a market where you can’t sell stock and get your money out,” he said.

Foreign investors held 16 percent of shares on Nigeria’s stock exchange last year, down sharply from 58 percent in 2014, NGX data showed.

“The importance of capital inflows in a country where foreign exchange is in high demand to stimulate economic activity is very clear,” KPMG Nigeria said in a note on April 6.

It said the continued decline in foreign capital inflows in the presence of dwindling crude oil sales and generally poor and unstable export earnings has slowed down foreign reserves accretion and widened the forex supply gap, thereby putting pressure on the exchange rate.

The professional services firm said inadequate access to forex has constrained inputs for production, leading to higher production costs, lower revenues and slower economic growth.

KPMG said investor confidence, especially portfolio investors, has weakened amid “what foreign investors consider an ambiguous forex regime characterised by multiple exchange rates, inadequate access to forex, and high forex volatility.”

“Investors may also be finding it difficult to make certain investment decisions in a year of political transition, which has remained tense, and typically will adopt a wait-and-see approach to investing into the country until new administrations have settled in and they can understand the direction and priorities of the new government,” it said.

The firm said the country would struggle to attract increasing foreign capital for most of 2023.

Source: Norvanreports