The naira’s weakening against the dollar has increased the value of the loan books of eight Nigerian banks to N30 trillion in the first half of 2023, according to a report by Vetiva Capital Management Limited. The report analysed the financial performance of AccessCorp, Zenith Bank, United Bank for Africa, Fidelity Bank, Guaranty Trust Holding Company (GTCO), FBN Holdings, Stanbic IBTC Holdings and First City Monument Bank (FCMB).
Loan growth driven by foreign currency translation
The report stated that the strong growth in loan books was due to the translation of the foreign currency (FCY) components of bank loans. The naira depreciated by 18.5 per cent against the dollar in the first half of 2023, from N410.25/������������31,2022���486.25/ as of June 30, 2023. This resulted in a significant increase in the naira value of FCY loans, which accounted for an average of 40 per cent of total loans for the eight banks.
The report listed AccessCorp, FBN Holdings and United Bank for Africa as the biggest contributors to the improvement in the loan books during the period. AccessCorp’s loan book grew by 37 per cent year-on-year to N6.9 trillion, FBN Holdings’ by 36 per cent to N5.4 trillion and UBA’s by 34 per cent to N4.8 trillion.
Forex revaluation gains boost non-interest income
The report also noted that the banks reported material forex revaluation gains, which boosted non-interest revenue performance. Forex revaluation gains were still positive for all the coverage banks after netting forex-related losses from liabilities with GTCO, Zenith and UBA recording the largest gain to the tune of N355 billion, N354 billion and N348 billion respectively.
The report attributed the forex revaluation gains to the Central Bank of Nigeria’s (CBN) policy of maintaining a stable exchange rate at the official window, while allowing a gradual depreciation at the parallel market. This created a wide gap between the official and parallel market rates, which benefited the banks with FCY assets.
Customer deposits also rise to N58 trillion
The report further stated that customer deposits also rose to N58 trillion, representing 33 per cent higher than the figure reported in the full year, 2022 with AccessCorp, UBA and Zenith recording the largest increases. According to the firm, customer deposits rose significantly primarily due to the translation of the FCY components of customer deposits, thereby pressuring interest expenses.
“Subsequently, Net Interest Margin (NIM) rose year on year for most of our coverage banks (Fidelity, Zenith, UBA and FBN Holdings) and declined for some banks (AccessCorp, FCMB, Stanbic IBTC) as the growth in access yield surpassed the corresponding increase in funding cost in Q2 while the reverse occurred on banks with slimmer NIM,” it added.
Implications for the banking sector
The report concluded that the naira depreciation had a mixed impact on the banking sector, as it enhanced loan growth and non-interest income, but also increased funding costs and asset quality risks. The report advised that banks should adopt prudent risk management practices and diversify their income sources to mitigate these risks.
The report also suggested that the CBN should adopt a more flexible exchange rate policy to reduce market distortions and enhance transparency. It said that this would help to narrow the gap between the official and parallel market rates and reduce speculative activities in the forex market.
