The ultimate paradox is unravelling in Nigeria as banks declare record profits at a time when several businesses are reporting rare and substantial losses.
Zenith Bank and GTCO Holdings, for instance, have both reported profits exceeding N1 trillion, with Zenith at N1.03 trillion and GTCO at N1.02 trillion for the fiscal year 2024. The combined profit-after-tax of five of Nigeria’s largest banks stood at an impressive N3.55 trillion last year.
This stark contrast in financial performance has sparked public debate, with many questioning why the banking sector continues to rake in enormous profits while other sectors struggle with losses.
Critics argue that the banks’ profits stem from exploitative practices, including hefty charges on customer deposits and a failure to provide loans to small and medium-sized enterprises (SMEs). That’s not entirely true.
How do banks make their money?
Unlike companies in other industries that typically generate revenue from a few key products or services, banks have a more diversified earnings base, which includes fees, commissions, interest income from loans, government securities, and trading activities.
Gbolahan Ologunro, portfolio manager at FBNQuest, explains that banking industry players enjoy a more diversified revenue stream compared to businesses in other sectors.
In 2024, the top four tier-one banks saw a 77 percent increase in fees and commissions, reaching N1.47 trillion, up from N330.5 billion in 2023. However, this increase pales in comparison to the 137 percent rise in interest income, which surged to N8.81 trillion from N3.68 trillion during the same period.
The high-inflationary environment, with interest rates peaking at 27.25 percent in 2024, has been particularly advantageous for banks. Instead of lending to businesses, many banks have opted to invest their excess liquidity in government securities, such as treasury bills, where yields have hovered around 20 percent for over a year.
For instance, GTB made N331.4 billion in 2024 from securities investments, a dramatic increase from N69.62 billion in 2023.
Banks’ profits in 2024 were primarily driven by operational growth, elevated lending rates, wider interest margins, and off-balance-sheet investments, reflected in both interest and commission income. Unlike in 2023, when forex revaluation gains boosted the bottom line, the performance this year was more tied to sustainable operational factors.
Why FX devaluation hit other sectors but not banks
The reason why banks have been insulated from the negative effects of foreign exchange (FX) devaluation while other sectors have been severely impacted lies in their foreign currency exposure.
Banks hold more foreign currency assets than foreign currency liabilities, meaning that when the naira devalues, their dollar-denominated assets increase in value. In 2023, as the naira lost significant value, banks benefited from the revaluation of these assets, which contributed significantly to their profits.
Conversely, manufacturers and other sectors typically carry foreign debts, including trade payables, Letters of Credit, and dollar-denominated loans. These obligations, when revalued, became far more costly as the naira depreciated.
MTN Nigeria, for example, suffered a massive N925.36 billion loss in 2024 from foreign exchange-related factors, a 25 percent increase from the previous year’s N740.43 billion loss. This was largely due to the revaluation of its foreign currency-denominated obligations.
Similarly, Nigerian Breweries reported a N157.59 billion loss, up from N153.33 billion in 2023, driven by the rise in interest rates and the effects of the naira’s devaluation. BUA Cement also reported a loss of N92.10 billion in 2024, compared to N69.96 billion the previous year.
The financial performance of Nigerian banks in 2024 highlights a stark contrast to other sectors, where forex-related losses have taken a heavy toll.
While banks have capitalised on their foreign currency assets and benefited from higher interest rates, manufacturers and other businesses have struggled with the rising cost of dollar-denominated debts.(BusinessDay)
