Business
Banks to post worst Q1 results over poor forex prospect, others
Decline in the possibility of striking the usual gold from foreign exchange operations may compound prevailing macroeconomic turbulence to weaken the balance sheet of deposit money banks (DMB) in the country in the first quarter of the year ending March 31, 2024.
Business Hallmark’s analyses showed that the lenders had before now leveraged massive illegitimate opportunities in the highly volatile foreign exchange market to defy rising non-performing loans (NPLs), high Cash Reserve Ratio (CRR), rising operating costs, decreasing customer deposits, among others.
Ideally, as the life-wire of an economy, the banking sector is supposed to be a reflection of the state of an economy, growing profits when the vital economic indicators are pointing in the right direction and struggling when the reverse is the case.
But that did not seem to be the case in Nigeria. Despite domestic and global economic headwinds, nine DMBs in the country declared N346 billion profit after tax in the first quarter (Q1) of 2023, an increase of 29.3 per cent over N267.69billion reported in the first quarter of 2022.
Also, a review of H1 2023 financial disclosures of companies listed on the Nigeria Exchange Ltd show that seven of the top 10 most profitable companies were banks, which collectively accounted for 75 percent of the total declared pre-tax profits, summing up to a whopping N1.7 trillion.
Worried by these startling contradictions, some analysts had recommended implementing stringent measures to stem the tide of foreign exchange manipulations and the activities of speculative traders—practices that many believe are widespread within the banking sector.
They believed that curbing forex manipulations and speculative trading will see the financial sector operate transparently and fairly, contributing positively to the economy, without exploiting system loopholes for disproportionate gain.
Changing the game
Incidentally, in line with its desperate move to stop the naira from further plunging into record lows, the Central Bank of Nigeria (CBN), recently issued a new set of directives that would discourage banks from tampering with the naira’s value through hoarding and speculation of the foreign currency.
In order to guarantee that foreign currency is available to citizens, who require it, the CBN mandated all banks to hold only a maximum of 20 percent of foreign exchange in short-term investments and 0 per cent in long-term investments.
“The Net Open Position (NOP) limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheets should not exceed 20% short or 0 % long-forgotten shareholders funds unimpaired by losses using the Gross Aggregate method,” reads the circular signed by Hassan Mahmud, CBN trade and exchange director.
In the circular released on January 31 and co-signed by Rita Ijeoma Sike, Director for Banking Supervision, the apex bank expressed concern over “the growth in foreign currency exposures of banks through their Net Open Position (NOP).”
“This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks,” the circular noted.
The directive suggests that some commercial and investment banks are guilty of hoarding forex obtained at low rates from CBN for their customers in hopes of selling it at a higher price when the market prices fluctuate.
With the directive, banks can only keep 20 percent of CBN-sourced forex in short-term investment and have also been mandated to use the comprehensive gross aggregate method to calculate the NOP, which would reveal their foreign currency exposure. Banks with NOPs that exceed 20 percent were directed to adjust them to the prudential limit by Thursday, February 1, at the latest.
The apex bank specifically provided all banks in Nigeria with a specific template to calculate and input daily and monthly returns on Net Open Assets and Net Open Positions for majorly U.S. dollars, Great Britain Pounds, Euro and a box for other currencies.
“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.”
The CBN further directed the banks “to borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign risk.”
The apex bank said it would not hesitate to immediately sanction erring banks as they would be suspended from participating in the foreign exchange market.
Without the gold mine
It is widely believed that with the windfall from the foreign exchange segment of banking operations now far from certain, the lenders will need to work extra hard to remain profitable in the face of biting realities.
Last week, the Manufacturers Association of Nigeria (MAN) disclosed that harsh policies of President Bola Tinubu, had led to the shutdown of operations of 767 manufacturers, while also making 335 become distressed in 2023.
MAN stated this in a statement in which it condemned the recently introduced Expatriate Employment Levy by the Federal Government, which it said runs contrary to the President’s Renewed Hope Agenda and the kernel of his Fiscal Policy and Tax Reform initiative. The implication is that the banks have lost a huge number of their potential depositors and borrowers.
Besides, some financial experts have expressed concerns over the hawkish monetary policy stance adopted by the CBN, which recently led to raising the benchmark interest rate by 400 basis points from 18.75 percent to a historic 22.75 percent.
They pointed out that this could prompt banks to adjust their loan pricing, potentially worsening levels of non-performing loans (NPLs) and putting pressure on financial stability indicators.
The apex bank went further to increase the Cash Reserve Ratio to 45% within the Asymmetric Corridor along the upper limit of +200 and the lower limit of -700.
Professor of Capital Market, Uche Uwaleke, said jerking up the MPR by 400 basis points in one fell swoop is simply an overkill. Uwaleke noted that the impact of these policies on the real sectors of the economy is a matter of concern.
“With the CRR now set at 45%, a substantial portion of deposits is effectively locked up, leaving banks with limited resources for lending.
This poses challenges for access to credit, increases the cost of capital for firms, raises the cost of debt service for the government, and affects the asset quality of banks,” he said.
High operating expenses
According to Ayokunle Olubunmi, Head, Financial Institutions Ratings at Agusto &Co, inflationary pressure, naira devaluation and salary reviews are expected to increase operating expenses of Nigerian deposit money banks,
Some of the common components of operating expenses in banks include employee salaries and benefits. These include wages, salaries, bonuses, and benefits paid to bank staff, including tellers, loan officers, customer service representatives, and administrative personnel.
Speaking at the bi-monthly forum of the Finance Correspondents Association of Nigeria (FICAN) in Lagos recently, Olubunmi explained that ”managing operating expenses effectively is essential for banks to maintain profitability and competitiveness in the market while ensuring the delivery of high-quality services to customers.
‘’Banks typically aim to optimize their operating expenses while balancing the need for investment in technology, infrastructure, and employee training to meet evolving customer demands and regulatory standards.
“The Non-Performing Loans of the banks are predicted to rise in 2024 following economic slowdown, according to Olubunmi.
“Addressing these factors typically requires a combination of measures, including improving credit risk management practices, enhancing regulatory oversight, promoting economic stability, and implementing sound corporate governance standards within banks.
