Business

Windfall Tax Could Overburden Nigerian Banks Amid CBN Recapitalisation Mandate, EFC Report Warns

A new report has warned that implementing a windfall tax amid a Central Bank of Nigeria (CBN) mandated recapitalisation could “break the camel’s back” for banks.

The report by a US based Emerging & Frontier Capital, also revealed that the banking industry was currently under high regulatory costs from Cash Reserve Ration (CRR), AMCON levy, and deposit insurance premium.

It disclosed that top six banks incurred regulatory costs to the tune of $1.8 billion in 2023, and a total of $7.6 billion over the past five years (2018-2023).

The Emerging & Frontier Capital (EFC) report, titled, “More Pain for Longer,” further stated that while Nigerian bank investors understood the government’s need for revenue, the tax could impact the banking sector negatively.

While also questioning the rational for the windfall tax, the report stated that banks’ dividend pay-out ratios had been declining, while their profits had been rising.

Yet, it said aggregate pay-out ratio of the top six banks had declined, from 38 per cent in 2018 to 16 per cent in 2023. 

The report also declared that the proposed tax was in direct conflict with the current consolidation programme in the banking industry.

The EFC further pointed out that since the Global Financial Crisis (GFC) bank shareholders had only known pain, with bank valuations now one-tenth of what they were.

“So, why tax them, when they are being asked to put more money in and receive lower dividends?” the report queried.

The study also noted that with this development, it was time for the central bank to be concerned.

The report, dated August 5, 2024, pointed out that during the Monetary Policy Committee (MPC) briefing on July 23, the CBN governor, Mr. Olayemi Cardoso, had said he would be concerned if market participants were to say that “the CBN and the Nigerian government were not in the right trajectory”. 

It said, “As this briefing happened after the amendment to the 2023 Finance Bill was submitted to the National Assembly on 17 July, we are surprised by the governor’s insistence on a well-coordinated policy directive from both the monetary and fiscal sides. 

“We say this because the proposed windfall tax of 70 per cent on Nigerian banks’ realised profits from all FX transactions from June 2023 to December 2025 is in direct conflict with the CBN’s mandated capital raise by the banks. 

“The reason being that shareholders are being asked to fund the banks (some of which do not need capital) so that their realised profits from FX transactions, which are expected to remain high given the volatility in the exchange rate, are ultimately paid to the government in the form of taxes, as opposed to long awaited dividends for shareholders.

“This explains why banks share prices are now below their public offer prices and domestic investors are buying high yielding and non-taxable FGN bonds.”

The report further stressed the need to put FX gains into proper context, adding that”short-term pain is not long-term gain”.

It said, “While it is true that the top six Nigerian banks collectively booked $3.1 billion of FX trading and revaluation gains in 2023, we estimate that $2.9 billion of these gains were unrealised (non-cash gains).

“Additionally, these figures are gross and do not factor in the high cost of raising USD funding.

“Furthermore, why does the FGN seem to ignore the high regulatory costs (CRR, AMCON levy and deposit insurance premium) of banking in Nigeria?”

It pointed out that in 2023, “We estimate these regulatory costs were $1.8 billion for the top six banks and we believe they totalled $7.6 billion over the past five years (2018-2023).

“Furthermore, why does the FGN seem to ignore the high regulatory costs (CRR, AMCON levy and deposit insurance premium) of banking in Nigeria?”

The EFC said, “How much lower do bank valuations need to go?

“In June 2008, the collective Mcap of the top six banks was $36.8 billion and their trailing year profits (2007) were $786 million. 

“Today, their collective Mcap is $3.1 billion and their trailing year profits are $4.3 billion. These banks have de-rated from a trailing PE of 47x to 0.7x and shareholders are still being mandated to fund them? 

“To add to their pain, bank dividend payout ratios have been declining, while their profits have been rising.

“The aggregate payout ratio of the top six banks has declined from 38 per cent in 2018 to 16 per cent in 2023. 

“Lastly, the vast bulk of bank shareholders are Nigerian (+90 per cent), so, these poor policy decisions are shrinking their net worth. 

“How is this good for Nigeria in the long-term?”

 James Emejo

Follow us on:

AriseNews

View Comments

  • O--8--0--67__39-_90--90Delivery can be made to any LOCATION in Nigeria::::::::Some cars LISTED BELOW
    Pprove by the INTERNAL ofNG,, opportunities to get a car of your choice at a minimum price E-Auction Vehicles/Cars For Sale of Rice...Motor
    Mama Africa #17,000 •Tomatoes Rice # *15,000* •Cap Rice #15,000 •My Food #17,000 •Mama Gold #17,500 •Ade Brazil #15,000 •Elephant Gold #15,000 •Royal Umbrella #15,000 Etc.
    Golf3= 400,000
    ((07071867893) (+234_707__1867_893)
    Toyota Exterra=850,000
    Toyota Camry big daddy=650,000
    Toyota Venza= 1.7million
    Toyota Avalon=850,000
    Toyota Rav4=950,000
    Toyota Prado=1.3million
    TOYOTA HILUX=2million
    Toyota Sienna=850,000
    TOYOTA 4-RUNNER=950,000
    Toyota Corolla=650,000
    Toyota Matrix= 700,000
    Toyota Highlander=950,000
    Toyota Picnic=500,000
    Tacoma 1.850,000
    Toyota Hiace Bus=950,000
    Toyota Tundra=1.5million
    Toyota Sequola=900,000
    BMW 5-series=1.960,000
    BMW 3-series=1.640,000
    BMW X6=2.670,000
    Ford Edge=700,000
    Ford Escape=600,000
    Honda Elantra=600,000
    Honda Baby-Boy=700,000
    Dyna Truck 900k
    TIPPER Head 6mill
    Honda Accord=550,000
    Honda CRV=650,000
    HONDA CIVIC=500,000
    HONDA EVIL-SPIRIT=750,000
    HONDA ODYSSEY=500,000
    Honda Pilot=850,000
    Nissan pathfinder=800,000
    Nissan Amanda=750,000
    Infinity=950,000
    Benz C250=N1.300,000
    Benz C300=1.6MILLION
    Benz ML350=2 million
    Benz ML300=1.5 million
    Benz ML550=2.6million
    Mercedes-Benz C-Class ₦1.3Million
    Mercedes-Benz E-Class ₦1.8Million
    Mercedes-Benz GLK ₦3.Million
    Es330 1.6
    Lexus C5 350=950,000
    IS250 1m
    Lexus Rx300=1.2 million
    Lexus Rx330=1.5 million
    Is350 2mill
    Gx470 1.8mill
    Lexus Rx350= 2 million
    ES350 2mill
    (08O 6739 9O9O )) ((_-_)

Recent Posts

IGP Orders Investigation into Death of Ilorin Detainee Jimoh Abdulquadri in Police Custody

IGP Egbetokun has ordered an investigation into Jimoh Abdulquadri’s death in police custody, promising justice…

2 hours ago

Trump Dismisses Claims That Elon Musk Holds Real Power Behind US President-Elect

Donald Trump has rejected suggestions that Elon Musk is the true influence behind the newly…

2 hours ago

Tiger Woods’ 15-Year-Old Son Charlie Achieves His First Hole-in-One

Tiger Woods' son Charlie has achieved his first golf hole-in-one during the final round of…

2 hours ago

New Zealand Rejects Cook Islands’ Bid For A Separate Passport

New Zealand has rejected the Cook Islands’ proposal for a separate passport, requiring full independence…

3 hours ago

Honda, Nissan Eye Major Merger, Aim to Finalise Deal by 2025

Honda and Nissan plan a merger to create the world’s third-largest automaker, aiming to finalise…

3 hours ago

Trump Chooses Ex-Bank President As Latin America Envoy Despite Alleged Affair Scandal

Trump has selected ex-bank president Mauricio Claver-Carone as Latin America envoy, despite past misconduct allegations…

3 hours ago