[Analysis] CBN post 84% drop in profits for FY 2014

The Central Bank of Nigeria has released its 2014 FY results showing Net Income dropped 84% to N33.6 billion (2013: N213.5 billion).

Summary

• Profits dropped 84% year on year due to increased cost of subsidising lending via its various intervention funds.
• The CBN technically posted a N150.4 billion loss as the N33.6 billion in net income includes an unrealised gain of over N184billion.
• The CBN had N5.8 trillion in external reserves with the US dollar representing 84% of the total. However, Chinese Renminbi rose 165% to N368 billion during the year

Key Highlights of the results

Income Statement

• Net interest income was N38.4 billion compared to a N63 billion loss in 2013.
• Interest margin was however 8.8%. Commercial Banks post between 65% to 75%.
• Income from fees and commission was N142 billion (2013: N111 billion) which mostly (N137 billion) came from commission and fees from sale of foreign currency and other related transactions.
• The bank made N261 billion in Foreign Exchange Revaluation gains compared to N17 billion a year earlier. The gains are however, unrealised as it hasn’t been cashed in (or sold). So basically, it is a notional gain.
• The rise in revaluation gain is basically in line with most commercial banks which posted similarly high foreign exchange gains during the year.
• The reason for the 84% drop in earnings when compared to the year before was basically down to three things.
• First was personnel expenses which rose by 28% to N101.4 billion. The bank spent more money on allowances for its staff during the year.
• Secondly, the bank incurred a 218% increase to N136.9 billion in intervention expenses during the year.
• The CBN explains that “The financial sector intervention expenses represent the amortisation of prepaid intervention expenses arising from the fair valuation of below market interest rate loans to financial institutions for the purposes of onward lending to the agricultural sector, the AMCON notes and the long-term loans to AMCON and other Banks.
• So basically, this is the cost of lending at cheap interest rates to certain sectors of the economy at a rate below market rate.
• The third reason for the drop in profits was a one time impairment reversal of N283 billion which the bank earned in 2013. It didn’t occur in 2014
• Without the Foreign Exchange Revaluation gains, the CBN may well have posted a loss of about N150 billion 2014
• Based on this the bank did not provide for dividends to the Federal Government in 2014

Balance Sheet

• The CBN also said it had about N5.8 trillion in external reserves during the period and had loans and advances of about N5 trillion outstanding.
• Of the N5.8 trillion held in external reserves, N4.9trillion of that was held in the United States dollar and represents a 17% drop from 2013.
• It also represents 84% of Nigeria’s foreign currency holdings as against 89% the year before.
• Nigeria’s Renminbi (Chinese currency) holdings jumped 165% to N368.4 billion compared to N138.5 billion a year earlier.
• All currencies though denominated in naira for reporting sake as they are held in their respective foreign currencies.
• Out of the N5 trillion in loans and advances N3 trillion of that amount was borrowed by AMCON. It was N2.7 trillion in 2013.
• Bank of Industry also owes the CBN N535 billion. N300b from it represents CBN contribution to the power projects and another N200b for SME lending and N35 billion to the Manufacturing sector.

Cash flow

• The CBN generated a negative operating cash flow of N971.1billion during the year (2013: -472.6 billion)
• Operating cash flows before changes in working capital was (N107billion) suggesting the business of the CBN did not generate positive cash flows despite posting a modest profit before tax of N40 billion
• This was mainly due to the unrealised gain of N182.4 billion mentioned above. Netting it off from the Bank’s net profit suggest a negative cash flow
• The CBN generated a negative net change in cash and cash equivalent of N1 trillion. Cash at the end of the year was N4.5trillion.

Get the CBN 2014 Annual report