CBN’s New Directive on FX Revaluation Gains: What It Means for Nigerian Banks – The Central Bank of Nigeria (CBN) recently issued a directive that has been a hot topic of discussion among Nigerians. The apex bank has instructed lenders not to use foreign exchange (FX) revaluation gains for paying dividends or covering operational expenses. But what does this mean for the banks and the broader economy?
A Backdrop of Record Profits
Interestingly, many Nigerian banks posted record profits for the first half of the year, largely because of the naira’s devaluation. With the naira’s value fluctuating, the official exchange rate rose significantly, while the parallel market saw a 25.3% depreciation.
This backdrop set the stage for banks like Guaranty Trust Holding Company (GTCO), Fidelity Bank, and FCMB Group to witness a substantial surge in their FX income. Notably, GTCO led the pack with an astounding 19,016% growth in FX income.
Why the Directive?
According to Tajudeen Ibrahim, a respected analyst at Chapel Hill Denham, the CBN’s directive aims to instill prudence in banking operations. He opines that banks will channel a major portion of their revaluation gains towards boosting their retained earnings, thereby reinforcing their capital adequacy ratios.
This is a positive sign, indicating that banks can comfortably reward shareholders using their core earnings without dipping into revaluation gains. Essentially, it underscores the robust financial health of Nigerian banks.
Gbolahan Ologunro, a portfolio manager at FBNQuest, echoes a similar sentiment. He believes that banks will take a cautious route, leveraging revaluation gains to fortify their reserves. Such a strategy will act as a buffer, helping banks navigate potential future economic challenges.
The CBN’s Perspective
The CBN’s directive highlights the need for “utmost prudence.” Banks are encouraged to earmark the FX revaluation gains as a counter-cyclical buffer, preparing for any unforeseen fluctuations in the FX rate. The clear message: these gains shouldn’t be used for dividends or operational expenses.
For banks that accidentally exceed the single obligor limit due to this FX policy, the CBN offers a lifeline – forbearance upon application. The CBN remains vigilant, ready to take necessary regulatory actions as and when vulnerabilities emerge.
Tochukwu Okafor, a senior lecturer at Baze University, provides deeper insight. He believes that the CBN’s directive could be a safeguard against potential future risks. Given the optimism around Tinubu’s office and the anticipated economic gains from his policies, the naira might appreciate. If this happens, banks might witness a dip in profits.
Currently, Nigerian banks are riding high. Their FX income is impressive, and they have multiple revenue streams, placing them in a stable position. The CBN’s latest directive is a strategic move, ensuring that banks remain resilient and prepared for any economic eventualities that the future might hold.
Owning a bank in Nigeria seems to be a wise choice at the moment. But as always, the landscape is dynamic, and only time will tell how these directives shape the financial future of Africa’s giant.