Banks to report FX revaluation gains than losses in FY’23 —Report

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A fresh report by a full-service investment banking firm and financial services company, Cardinal Stone, has revealed that some banks are more likely to report revaluation gains than losses in 2023 Financial Yeah (FY’23) due to the huge naira devaluation stoked by the Foreign Exchange (FX) policy changes.

In the report titled, ‘Nigerian Banking Sector 2023 Mid-Year Outlook: Unearthing Potential Passthrough of Policy Rejigs,’ the firm said H1’23 witnessed numerous twists critical to the banking sector outlook.

These twists include the abolition of FX market segmentation and the entrenchment of a two-way quote system premised on the willing buyer-seller mode and plans to normalise the use of the Cash Reserve Ratio (CRR) as a monetary policy tool.

The FX-linked reforms resulted in a devaluation of the naira to N769.25/$ in June 2023 from its 2022 closing rate of N461.50/$, essentially reducing the parallel market premium.

“In our view, these reforms have opened up a seismic shift in the Nigerian banking sector outlook, with banks reassessing their operational capabilities to capture opportunities whilst repealing existential threats.

“In this report, we examine the intricacies of the banking sector as it relates to the impact of a free-float FX system vis-à-vis banks’ balance sheet exposures, asset portfolio and associated loss provisioning, statutory requirements via capital adequacy and NPL ratios and the return of orthodox monetary policies.

“Our assessment of assets and liabilities revealed that coverage banks are more likely to report revaluation gains than losses in FY’23 due to the huge naira devaluation stoked by the FX policy changes,” the report read in part.

Specifically, given the net open position suggested by its last full-year financials, Cardinal Stone said First Bank of Nigeria Holdings (FBNH) is positioned to register the highest revaluation gain among its tier-1 peers, followed by Zenith Bank and GTCO.

“For our Tier-2 lenders, FCMB holds the premier position on the net-open USD-denominated exposure front, with Fidelity Bank closely trailing. Notably, Stanbic IBTC has a net short dollar position as at FY’22. However, conversations with management reveal that the bank is likely to report a net-long open position in H1’23,” it stated.

In a similar development, analysts said FX shortage has adversely affected the foreign exchange positions of most banks including FBN Holdings.

The Financial Holdco’s foreign exchange income stumbled from N32.92 billion in 2018 to N1.46 billion in FY 2020. Lower FX transactions due to stringent FX application requirements have encouraged customers to pivot towards the parallel market, thereby hurting banks’ FX income.

Nevertheless, FBNH’s foreign exchange income has recently improved but remains below its 2018 income, as FX income for 2022 settled at N22.39 billion.

Analysts believe that exchange rate unification should improve the size and number of official FX transactions for banks as the CBN recently revised the daily transaction limit to $10,000.

Proshare market intelligence indicates that FBNH has traded over N200 billion worth of FX since the policy implementation, indicating a larger FX income for 2023.

The rise in income would reverse the -47.35 percent drop recorded in first quarter (Q1) 2023.

The positive adjustment should increase gross earnings, thereby potentially improving dividend payout. The Holdco’s dividend payout ratio fell from 19 percent in 2019 to 13 percent in 2022.

Analysts see the group’s gross earnings rising to between N925.90 billion and N1 trillion, pushing earnings per share and dividend per share to N4.44k (up from N3.74K in 2022) and N0.65k (up from N0.50k), respectively, in FY 2023.

The Holdco’s recent price of N19.35k implies a forward p/e of 4.35X or a few basis points below the industry average of 5X.

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