Against the backdrop of huge profits declared by banks in their 2023 half year financials ocassioned by the unification of exchange rate windows, the Central Bank of Nigeria (CBN) has issued a new circular stopping the deposit financial institutions from recklessly spending the gains made from forex revaluation.
The September 11, circular, tagged, Letter To All Banks On the ‘ Impact Of Recent FX Policy Reforms:Prudential Guidance To The Banking Sector, signed by Haruna B. Mustafa, director, banking supervision department, also urged the banks to build capital buffers to increase resilient against potential volatility and/or economic shocks, promising to continue to monitor emerging vulnerabilities and take appropriate regulatory sanctions against any defaulting financial institution.
The move, according to some analysts is aimed at bolstering the Nigerian banking sector amid volatile foreign exchange (FX) rates and dwindling confidence in the industry.
The industry, according to some analysts witnessed some unprecedented policies and actions by CBN, some of which are being unraveled by the federal government’s appointed investigators and alleged confessions of the suspended former Governor, Godwin Emefiele.
While the analysts commend CBN for being proactive, they warn that the new measures will be meaningful and benefitial to the economy so long as CBN itself or the federal government does not also have access to the funds without the permission of shareholders of the affected banks.
They cited recent happening of the unprecedented over N20 trillion Ways and Means by CBN to the immediate past administration, for which the country is still suffering from some of the devastating effects of the policy, among others.
Specifically, some of the banks with offshore subsidiaries and high net open positions, (NOP), raked in huge profits when denominated in the local currency that has continued to reduce the purchasing power of consumers even as prices of goods and services continue to soar.
This is because the depreciation notionally increased the balance sheet of the banks in naira based on their forex holdings.
For instance, GTCO 2023 half year pre-tax profits jumped 217 percent on the back of forex.
The growth was as a result of higher net interest income and substantial gains from unrealized foreign exchange revaluation.
CBN, in its efforts to nip another round of crisis in the industry as the banks, as usual, could become reckless and indulge in insider dealings like, unsecured loans to directors and highnetworth individuals and Corporate customers, decided to issue the circular.
The apex bank fears also that banks could be tempted to spend the profits making them vulnerable if the exchange rate strengthens.
The CBN feels also that when these gains are conserved, could serve as counter-cyclical buffers and cannot be utilized for dividend payouts or operating expenses.
Regulatory Forbearance On Limits:
According to Nairametrics, the CBN has taken into account that the recent FX policy changes could lead to regulatory breaches such as exceeding Single Obligor Limits (SOL) and Net Open Position (NOP) limits.
As a mitigating measure, the central bank will grant forbearance to banks that surpass these limits due to the policy change, provided they apply for it.
This forbearance will be restricted to existing facilities as of the effective date of the new guidelines. See excerpts of the guidelines
The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
1. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses.
2. Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor
– Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
3. Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.
4. Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.
In practical terms, according to Nairametrics, CBN is urging the DMBs not use the extra money they make from FCY revaluation to pay dividends or expenses. Instead, they should save it for future losses if the exchange rate goes down. This is called a counter-cyclical buffer.
Banks that have lent more than the allowed limit to one borrower because of the FCY policy can ask the Bank for permission to keep the loan. This is called forbearance.
The Bank will not penalize them for breaking the limit, but only for loans that existed before the policy.
Banks that have more FCY assets or liabilities than the allowed limit because of the FCY revaluation can also ask the Bank for forbearance.
The Bank will not penalize them for breaking the limit either.
Banks should still follow the existing rules on how much capital they need, how much dividends they can pay, and how much FCY they can borrow.
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GTCO Half Year Pre-Tax Profits Jump 217% On Back Of Forex
GTCO reported its 2023 Half-year results showing pre-tax profits grew by 217.09% year on year, reaching N327.398 billion.
Key highlights H1 2023 vs. H1 2022:
Gross earning; N672.603 billion +181.08% YoY
Interest Income; N225.946 billion +53.50% YoY
Interest Expense; N48.487 billion +84% YoY
Net interest income; N177.459 billion +46.84% YoY
Loan impairment charges; N82.962 billion +2,257.52% YoY
Net interest income after loan impairment charges; N94.497 -19.46% YoY
Net income on fees and commission N51.548 billion +8.83% YoY
Net trading gains on financial Assets; N16.018 billion -32.12%
Other income; N372.224 billion +2,482.47% YoY
Net impairment charge on other Financial Assets N81.313
Profit for the period N280.482 billion +261.65% YoY
Earnings per share 994 kobo +268.15% YoY
Loans and advances to customers N2.315 trillion +22.78%.
Cash and Bank balances N2.295 trillion +41.59%
Total Assets N8.51 trillion +32.01%.
Customers’ deposits N6.239 trillion +39.10%.
Insights: The significant pre-tax profit growth is attributed to substantial growth in gross earnings.
This growth stems from higher net interest income and substantial gains from unrealized foreign exchange revaluation.
Rising interest rates because of an increase in MPR and a 22.78% rise in loans and advances to customers drove interest income. The Monetary Policy Rate (MPR) increased by 5.5 basis points from 13% (June 2022) to 18.5% (June 2023).
Additionally, other income surged due to a 19,033.34% YoY growth in unrealized gains from foreign exchange revaluation.
