The Central Bank of Nigeria (CBN) has booked an interest expense of N1.3 trillion for the year ended December 2017. This was contained in the Apexbank’s 2017 annual report.
The Central Bank of Nigeria released its 2017 draft annual report during the week, revealing a profit after tax of N107.3 billion for the year. The Apex bank’s profits were lower than the N124.4 billion it reported in recession-stricken year of 2016.
Rate subsidy?
A closer look at the bank’s income statement, however, reveals that the CBN booked an interest expense of about N1.34 trillion for the year ended December 2017 against an interest income of N685.6 billion. In 2016, the CBN reported an interest income of N754 billion and N459.3 billion in interest expenses posting a net interest income of N294.7 billion. CBN reported a net interest loss of N659.2 billion in 2017.
Analysts who spoke to Nairametrics believe this is somewhat of an anomaly as financial institutions typically report net interest incomes and not losses. They suggests that the bank could only have booked such as astronomically high-interest expenses because of the higher rates it has paid on treasury bills and other CBN security instruments sold to banks in 2017.
Nigerian banks recorded massive profits in 2017 on the back of risk-free government securities obtained at rates as high as 20%. Bank profits from treasury bills and other government securities topped N600 billion in 2017 alone. The debt bonanza was thought to have been part of the CBN’s tactics at keeping interest rates high to ensure exchange rate stability.
The Central Bank did not release notes to its accounts which may have provided a better explanation of the components of the interest expense. The CBN has since 2015 refused to provide detailed notes to the accounts for its annual report. Data frequently reported on the bank’s website are also hardly updated.
The high-interest expense appears to be a form of rate subsidy for the economy with commercial banks gaining massively at the expense of exchange rate stability, high-interest rates for the private sector, and crowding out of loans for the private sector borrowers.
An article in Nairametrics last year referred to this form of interest rate subsidy as Shashe banking. In other words, Shashe Banking is a process whereby the government borrows trillions of naira from Nigerian banks and pays them billions of naira in interest for the privilege.
Loan impairments rise astronomically
While the CBN grappled with higher interest rates, it also booked a whopping N370 billion as loan impairment charge for the period. We believe that this charge relates to the bank’s credit advances to intervention funds such as the Commercial Agriculture Credit Scheme, Power intervention funds, AMCON debts instruments etc. Compared to a loan impairment of about N74 billion in 2017, this is one of the highest loan impairments we have seen by any institution in the country.
FX to the rescue
Despite the huge loan losses and high-interest expense, the CBN still posted a profit for the year. This was only possible via an income line classified as “Other operating income” in the financial statements. Other operating income amounted to a whopping N1.4 trillion during the year compared to N898 billion as at December 2016.
A review of the classifications suggests this may be related to higher forex exchange gain on FX translation from dollar to Naira.
The CBN reported that it forex reserves rose from about $12.36 billion in December 2016 to about $39.35 billion a year later. The 46% rise in forex reserves largely contributed to the profitability posted during the period under review. Without it, the CBN may not have posted a profit for the year.
Rate tightening versus profitability.
The CBN’s annual report indicates the bank may have no choice but to cut interest rates on government securities and may need to liquidate some of its loans rather than roll them over. If it continues to lend at high-interest rates then it will likely book more interest expenses exposing the bank to a higher probability of reporting a loss during the year.
Analysts who spoke to Nairametrics believe that a repeat of the 46% rise in forex reserves recorded in 2017 may not occur again in the nearest future, so the CBN may not be able to rely on fx reserves to boost naira profits.
The bank was only able to cover the huge cost of borrowing at such a high interest rate because of its earnings from higher external reserve balances during the year.
Nigerian banks have also taken a decision to increase their loan book during the year as treasury bills and other government security yields drop. They also claim the positive economic outlook indicates it is time that they focus on increasing private sector lending.
