Why banks may continue to suffer CBN’s FX intervention in 2017

With the continuous intervention in the Foreign exchange market by the Central Bank of Nigeria (CBN), there are clear indications that most Deposit Money Banks (DMBs) who recorded significant gains from foreign exchange trading and revaluation gains in the first three months of 2017 may not likely have such mouth-watering profits by the second quarter this year.

The first quarter (Q1) financial statements of the commercial banks showed that many of them declared huge forex revaluation regains between January and March, this may soon be halted due to the aggressive interventions of the apex bank in the forex market.

CBN’s intervention in the Forex market since February, has seen it inject $4.4 billion, but with a successful outcome of bringing the parity between the interbank market and parallel market closer.

In view of this, industry analysts have linked the stability that currently pervades the Nigerian Forex market to significant reduction in the margin of forex revaluation gains that banks would record.

For instance, GTBank is one of the banks that benefited the most from forex volatility in the first months of the year, raking in N430.1 million from forex revaluation alone, which was 18.4 percent higher than the N363.4 it realized in Q1 2016. The bank’s forex trading income leaped 200.3 percent to N2.9 billion, pushing its net trading income up 213.8 percent to N3.7 billion.

Revenues from forex alone contributed 6.6 percent of the N50.billion profit before tax that Nigeria’s most capitalized posted in Q1 2017.

The 213.8 percent increase in net trading income to N3.7 billion in Q1 2017played a critical role in the 61.9 percent rise in the bank’s profit after tax to N41.5 billion y-o-y.

Nigeria’s biggest bank in terms of assets, Zenith Bank, declared N238 million from forex trading income at the end of March, from N2.3 billion loss in Q1 2016. But its foreign revaluation gain dropped -1.2 percent to N1.3 billion in Q1 2016.

But the bank upped its profit after tax 41.1 percent to N37.5 billion through trading income which brought in N7.1 billion in Q1 2017 against N1.9 billion loss at this last year.

The 34.9 percent rise in Zenith Bank’s fee and commission income to N21.1 billion in Q1 2017 and 21.4 percent increase net interest income to N70.8 billion impacted the lender’s performance significantly.

Union Bank also enjoyed from the forex spoils in Q1 2017 as it recovered from a N22 million loss from foreign currency translation differences for foreign operations in Q1 2016, to declared N230 million income during this period.

The Nigeria’s second oldest lender also returned from N67 million Foreign exchange revaluation gain loss in March 2016, to post a N43 million gain in Q1 2017.

Its Foreign exchange gain on trading increased 67.2 percent to N219 million during the period under review.

However, decline in -15.6 decline in Union Bank’s net fee and commission income to N2.3 billion and -58.5 percent drop in its net trading income to N1.1 billion, forced the bank’s profit after to decline -4.2 percent to N4.5 billion y-o-y (Q1 2016: N4.7 billion.

Surprisingly, Sterling Bank did not make any forex revaluation gain in Q1, a departure from the N11 million it declared in Q1 2016. Its forex trading income reduced -15.9 percent to N381 million during this period instead of N451 million in the same period last year.

Lower Fee and Commission income and net trading income loss dragged the banks’ profit after tax down 26.2 percent to N1.9 billion at the end of March. This is despite its gross earnings growing 26.3 percent to N25.3 billion (Q1 2016: N20.1).

The bank is battling with increasing impairment provisions which jumped to N2.5 billion in Q 2017, a 74.3 percent rise from N1.4 billion in the corresponding period last year.

But Sterling Bank’s loan and advances declined -0.2 percent to N467.4 billion in Q1 2017 as its Non-Performing Loan ratio widened to 11.98 percent from 4.8 percent in Q1 2016.

“Banks would not be able make as much money they made from FX in the first Quarter of 2017, because CBN FX intervention has blocked the holds they explore to make huge profit,” Dr Adi Bongo, Senior Economics lecturer, Lagos Business School, said in a telephone chat. “CBN is determined to defend the naira with its life.

Although, Mr. Moses Ojo, analyst, Panafrican Capital Plc said he expects forex volatility to continue through the year despite the CBN aggressive intervention.

“The payoff from forex will boost their revenues in Q2 and the rest of the year,” he noted.

Bank investors who are hoping to get better returns at the end of the year may miss the expectations.

15 banks in the country made over N402 billion from forex activities in 2017, but this is expect to reduce significantly this year