In the last few days, Nigerians have been inundated with the staggering sums our banks have declared as profits.
Almost all the big banks, collectively termed FUGAZ, have crossed the N1 trillion mark in top-line revenues, leading them to declare billions in dividends.
While their stakeholders are smiling to the bank, the rest of us are left feeling lost.
It’s so ‘bad’ that even the relatively smaller Ecobank declared profits in excess of N900 billion, making the banking sector the most lucrative in the economy.
The reasons for this ‘anomaly’ are not far-fetched.
Many are raising their eyebrows and wondering why this is happening, especially against the backdrop of a struggling economy and its attendant effects on disposable income, investments, and businesses.
A quick review of these figures shows that these huge revenues are coming from two major sources:
- Above-the-Table Transactions
- Under-the-Table Transactions
Above-the-Table Transactions
These can be broken down into four key areas:
- Digital Banking
- Interest Income
- Fees and Commissions
- Increased Investment in IT
A quick analysis shows that seven major banks generated N109 billion from e-banking in 2023, reflecting a 24% increase from the previous year. As internet penetration deepens, these figures will continue to rise while operational costs, especially human capital expenses, decline due to automation and technological advancements.
Interest income is another major revenue driver. For instance, Access Holdings recorded a rise in interest income from N254 billion to N719 billion, representing a growth of about 189%. Other FUGAZ banks have experienced similar trends.
A discussion with a former treasurer of one of the FUGAZ banks provided deeper insights into how these banks maximize returns.
“Interest income from investments is the real game-changer for GTCO and the rest,” she explained. “GTCO doubled their deposits and managed to neutralize the increased liability costs through high returns on T-bills.”
She continued: “The key is to generate significant cheap liabilities. That has been ZB Plc’s bread and butter! I’m a seasoned treasurer,” she exclaimed gleefully over the phone.
Curious, I asked, “Does Zenith have cheaper funds than GTCO?”
“Zenith used to,” she responded. “They were heavy on demand deposits, but I think GTCO has now found a way to ramp up DDA (Demand Deposit Accounts).”
DDA accounts, essentially current accounts, are the cheapest form of deposits. Having large companies, public sector accounts, and numerous retail accounts allows banks to invest in short-term, risk-free government securities at high yields. Huge retail savings account balances can also be allocated to staggered maturity bonds, carrying minimal risk and high profitability.
With yields between 35% and 45% per annum and the cost of government borrowing hovering around 23%, even with the CRR at 50%, banks are essentially minting money.
Fees and commissions represent another major revenue stream, with some banks recording increases of up to 37.9%. Reports attribute this to technological advancements that have significantly boosted efficiency, market penetration, and turnaround time (TAT), ultimately driving revenue growth. For example, GTCO reportedly increased its IT investments by 115%.
The forex hedging factor
Another area banks would prefer the public not to scrutinize is forex hedging. During the Emefiele era, when regulations were lax and full of loopholes, some banks leveraged these gaps to build substantial foreign currency portfolios.
These portfolios are traded both locally and internationally, generating average returns when benchmarked against global markets but yielding massive margins when compared to the declining naira.
For instance, a portfolio worth $500 million with a modest 5% return would yield astronomical profits when the naira depreciates from N600 to N1,500.
This is why, despite reporting trillions in profits, the banking sector cannot underwrite a single major aviation or oil and gas transaction. Reports even indicate that some banks take up to 24 hours to credit large withdrawal requests. Meanwhile, bank borrowings from the CBN are at an all-time high, despite these astronomical profit declarations.
Below-the-Table Transactions
Increased political activities and stringent international money laundering regulations have positioned banks as quasi-legal conduits for illicit transactions.
Their efficient digital transfer systems play a key role in these murky dealings.
- Some experts estimate that up to 20% of the surge in digital banking revenue stems from political activities and associated transactions at all levels of government.
- The missing N500 million scandal in the Ministry of Humanitarian Affairs serves as a prime example.
- The funds moved back and forth through the banking system, with banks earning fees at every stage of the cycle.
- When extrapolated across all levels of public sector financial activities, the implications become clear.
Impact on the Real Sector
The CBN’s money and credit data report revealed an expansion in credit to the private sector. Bank lending to private businesses and individuals reached N75.96 trillion in November 2024, marking a 27.3% increase from N59.68 trillion in November 2023.
On a month-on-month basis, private sector credit grew by 2.6% from N74.07 trillion in October 2024.
However, this increase pales in comparison to the triple-digit revenue growth recorded by many banks.
With a weak regulatory environment, a compromised judiciary, and a distressed macroeconomic landscape characterized by policy inconsistencies, banks prefer to focus on treasury operations and market speculation rather than financing real-sector growth.
This has led to the rise of expansive bank CEOs who now intervene directly in developmental projects. We see them investing in infrastructure National Theatre, roads, and bridges and funding education, technology, media, and hospitality as a form of corporate atonement.
The Future of Banking in Nigeria
As technology continues to deepen its impact, banks are well-positioned to sustain these unprecedented profit levels.
- Given the regulatory loopholes that persist, we can expect to see trillions more flowing into bank coffers.
- This leaves us with no choice but to exert greater pressure on these financial giants to increase their contributions to Corporate Social Responsibility (CSR), impact-driven projects, and support for vulnerable communities.
- They have become quasi-government institutions, and it’s time they acted like one.
