Despite recent policy changes, including the Central Bank of Nigeria’s (CBN) revised capital requirements and the proposed windfall tax on forex profit, Nigerian banks continue to show strong financial fundamentals.
Concerns over the sector’s stability are countered by data revealing robust earnings growth, with major banks achieving a 101 per cent increase in gross earnings in 2023.
In March, the CBN increased the minimum capital requirements for commercial, merchant, and non-interest banks, posing a significant challenge. Adding to this, on July 17, 2024, the Federal Government proposed a windfall tax on banks’ realized profits from foreign exchange (FX) transactions within the 2023 financial year.
Banks are working to raise over N4 trillion to meet the CBN’s new capital requirements, sparking divided opinions on the impact of the windfall tax. While some fear it could hinder capital-raising efforts, others argue it is a necessary step.
KPMG’s July 2024 report noted concerns about potential double taxation, as banks have already paid a 30 per cent income tax on these profits in their 2024 returns.
A report by US-based Emerging & Frontier Capital warned that the proposed 70 per cent windfall tax on forex profits conflicts with the CBN’s mandate for banks to raise additional capital.
Despite these concerns, bank chairmen like Femi Otedola of FBN Holdings and Tony Elumelu of United Bank for Africa have expressed support for the tax.
The critical question is whether banks can maintain a positive outlook despite the windfall tax. A review of ten major banks—Access Bank, FBN Holdings, FCMB, Fidelity Bank, GTCO, Stanbic IBTC, Sterling Bank, Wema Bank, UBA, and Zenith Bank—reveals strong financial performance.
In 2023, these banks achieved 101 per cent year-on-year growth in gross earnings, reaching N11.603 trillion. Interest income, the core income-generating activity, made up 59% of gross earnings, reflecting an 84 per cent year-over-year increase.
After accounting for interest expenses, net interest income reached N3.94 trillion, constituting 34 per cent of gross earnings. Combined with net fees and commission income, these sources contributed 42.78 per cent of gross earnings, highlighting their importance in the banks’ revenue streams.
Foreign exchange gains contributed N2.831 trillion, or 24.40 per cent, of gross earnings. Although substantial, this portion of the earnings is smaller than core income sources, indicating that banks can absorb some tax liabilities without severely impacting their overall financial health.
Even if the windfall tax applies to both realized and unrealized gains, the banks’ strong performance in core income areas provides a cushion.
With ongoing efforts to raise capital, which will be deployed into loan expansion, ICT investments, and market expansion, banks are likely to see continued growth in interest income and fee-based income.
This strategic deployment of capital is expected to enhance profitability and financial stability, positioning the sector well for future challenges.
Overall, while the windfall tax will impact net income, Nigerian banks’ ability to generate robust revenues from core banking activities, coupled with planned expansions, should enable them to maintain profitability and financial stability.
