The Central Bank of Nigeria (CBN) recently adjusted the rate in the Investors and Exporters Foreign exchange window to N380/USD from the N364 to N370 range it had been trading for some time now, as portfolio outflows increased depreciation pressure on the currency given the material reduction in oil prices.
The currency was also trading at the N377 to N379 range in the parallel market, after reaching a high of N410 – N415 levels at the parallel market. Overall, moving forward, the FX devaluation of the naira will broadly be positive for some Nigerian banks assuming it does not result in further deterioration in the macros fundamentals of the Nigerian economy.
Top tier 1 banks like Zenith Bank and Guaranty Trust Bank are likely to benefit the most from the recent development.
What it means to banks: Currency adjustment net-positive will likely earn foreign currency revaluation gains for Zenith Bank with its N698 billion net positive foreign currency balance sheet position.
Guaranty Trust Bank too with its N532 billion net positive foreign currency balance sheet position, First Bank of Nigeria’s N166 billion net positive foreign currency balance sheet position, and FCMB with N79 billion net positive foreign currency balance sheet position. These banks have more assets than liabilities in their foreign currency book.
The numbers also suggest that we are likely to see foreign currency losses in Access bank with N1.2 trillion net negative balance sheet position followed by UBA with N281 billion net negative balance sheet position and finally Fidelity Bank with N30 billion net negative balance sheet position.
Before now, GTBank and First Bank made the most foreign currency revaluation gains of N87.3 billion and N80.2 billion during the last currency devaluation in 2016, accounting for 59% and 48% of non-interest revenues respectively, and 21% and 14% of gross earnings respectively. At that time too, no bank reported FX revaluation losses.
From a balance sheet growth perspective, It’s observed that the highest adjustment in net loans and advances are GTB (3.2%), FBNH (3.2%), FCMB (3.2%) and Zenith (2.4%) when adjusting the foreign currency net loans to N380/USD from N360/USD based on their latest audited financial records released.
While on the customer deposit side, records show the highest adjustment in Zenith (4%), FCMB (4%), FBNH (3.9%) and Access (3.8%).
Consequently, asset quality deterioration concerns could be minimal for now: while awaiting disclosure from banks on the foreign currency components of non-performing loans, it’s expected that 5.6% devaluation of the naira will result to a 5.6% deterioration in non-performing loans at a worst-case scenario, assuming that all the non-performing loans are in foreign currency.
Furthermore, the continuous spread of COVID-19, its impact on the global economy and Nigeria remains a key risk to the banks currently, as company-specific issues take a back burner.
Nevertheless, Nigerian banks with resilient and robust balance sheet and high efficiency as it places them in a better position to weather the storm. Hence Guaranty Trust Bank and Zenith Bank remain on top as most likely to gain from the recent devaluation of the naira.
However a weaker naira also increases Nigerian banks’ risk-weighted assets related to their foreign currency loans, putting negative pressure on their capital metrics, but, the banks hold good capital buffers.