Nigerian banks on track to beat 2023 profit margin outlooks
Nigerian banks are on track to exceed their projected profit margins for the year according to financial reports covering January to September 2023. Nairametrics, tracking the 9M results, indicates that many banks listed on the NGX have achieved a net profit margin higher than their margins for the full year 2022.
One key factor contributing to the substantial gross earnings of Nigerian banks from January to September is the increased interest income resulting from rising interest rates throughout 2023. Tier-1 banks in Nigeria, including Access Bank, GT Bank, First Bank, Zenith Bank, and UBA, reported a cumulative interest income of N3.394 trillion in the nine months ending September 2023, reflecting a significant 70.9% year-on-year growth from the same period in 2022.
Another notable source of income for banks in 2023 has been forex revaluation gains due to the devaluation of the Naira. Tier-1 banks collectively reported a cumulative income of N897.2 billion from forex revaluation gains in the first nine months of 2023. However, it's essential to note that in September 2023, the Central Bank of Nigeria (CBN) restricted banks from using gains from forex revaluation for dividend payments and operational expenditures. This introduces a new dynamic that may impact future financial strategies for these banks.
Nigeria's largest banks have experienced significant windfall profits attributed to foreign-exchange revaluation gains, a consequence of the more than 40% devaluation of the naira against the dollar. Simultaneously, some major corporations in the country have incurred losses due to higher interest rates on dollar-denominated loans. This situation has raised concerns about potential increases in non-performing loans, which averaged 4.1% in June. To address these potential risks, the central bank took action by directing lenders to build capital buffers using their foreign currency revaluation gains. As of June, the average capital adequacy ratio for Nigerian banks stood at 11.2%, with regulatory requirements set at 10% or 15% for lenders with international operations. This move is aimed at enhancing the financial resilience of banks amid the evolving economic landscape, ensuring they are better equipped to navigate challenges arising from currency devaluation and interest rate fluctuations.