Are Nigerian Banks Truly Worth Huge Profits they Declare?

Nigerian banksFollowing the conclusion of most banks’ Annual General Meeting (AGM) with almost all the banks showing a sign of good profit in their financial account report, Nigerians have expressed fear over this sudden rise in profits of these banks. NIYI JACOBS however, writes on the possibility of achieving this huge success.


Some months ago, the Central Bank of Nigeria (CBN) gave an instruction to all banks operating in the country, to immediately set machinery in motion to implement a uniform banking accounting year.

The apex bank which ordered for prompt action on this development, explained that the new measure was designed to tackle fraud within the banking industry and furthermore, to enhance discipline on banks’ whose financial reports come so late

With this development, most banks in the country organised their Annual General Meeting (AGM) between the second and third quarter of every year, in order to update their shareholders on their investment in their different banks. Most often at these meetings, shareholders are usually been loaded with the bank’s lack of profit runs and different financial difficulties.

However, the reverse seems to be the case for most banks this year, as almost all of them which released their 2012 year end reports, have declared a good gain and some have reported rising profits in their 2012 year end books.

Access, GTB, First Bank, Stanbic IBTC, Fidelity and Zenith Banks all declared profits in their 2012 year end reports, with Diamond Bank, FCMB recovering from outright losses.

Surprisingly, FCMB reported a profit, recovering from an outright loss in 2011.  In fact, Mr. Ladi Balogun, FCMB managing director, while presenting the bank’s 2012 year end numbers, said the bank is pleased to be returning to profitability.

This sudden trend has however, made some Nigerians express fears on these amazing profits, this is not to discountenance a similar situations before when Lamido Sanusi Lamido governor of Central Bank Nigeria (CBN), revealed that the banks were not as healthy as they claimed in their reports.

Many wonder on what would have caused the suddenly shift, considering the unhealthy business environment within the country.


Experts’ View

Some financial experts have come to say that the reported 2012 year-end profits in their billions of Naira by banks should not raise credibility concerns, as a number of factors could have combined to put the banks in a better light in 2012.

According to Adesoji Solanke, an analyst, (Sub Saharan Africa) Equity Research, at Renaissance Capital, an investment bank, no fewer than three major factors could have accounted for the banks reported profits in 2012, when compared to 2011 and prior years.

He noted that, one of the major factors was that the interest rate was high and banks made plenty of money through this.

Solanke also added that post Asset Management Company of Nigeria (Amcon) charges is falling; hence banks are making much money than they did in previous years. He said tax rate has crashed as it were, as the banks are enjoying tax concessions on corporate bonds and other investments as well as the 10 year tax waiver.

“A combination of these factors goes to show that the banks made much more money last year than previously, and these factors are major reasons why the banks have higher Profits After Tax (PAT) in their 2012 year end books than in previous years,” he said.

Moreover, a report by the investment bank has highlighted tax as the banks’ saviour.

According to the report “It is not very often that the taxman can be described as a friend, but for some of the banks, he was more than benevolent last year. Most of the banks delivered better Year on Year PAT performance versus their PBT results. To some extent, all banks were helped by the tax exemption on interest earned on their short-term securities and bonds; some had additional tax credits. Zenith and Access Banks were the clear winners with the taxman, recording tax rates of 1 per cent and 5 per cent respectively. Diamond and Skye Banks had the highest rates at 20 per cent. 1Q13 tax rates show a more normalised level from 14 per cent-28 per cent.”

Edo Ayodeji, analyst at Afrinvest West Africa Limited, a securities firm involved in investment banking and others, said the profits are real.

In his words; “Interest rates were high last year and the banks invested in treasury bills, bonds and securities, which yielded them high income. These investments in fixed income securities helped them make more money.”

According to him, Zenith Bank for instance, invested in investment securities and Federal Government Bonds. Tax was reduced to the barest minimum for the banks as they were asked to pay minimum tax.

He also highlighted that reporting under the International Financial Reporting Standards (IFRS), the banks are not required to pay the 1 per cent on their total assets, as they would under the previous GAAP reporting requirement.

“Furthermore we cannot leave out Amcon, while highlighting the reasons for rising profits. Amcon has been doing what it came to do; they came to clean up their balance sheets, to put them in a position where they would be able to make more profits,” he said.

“To cap it all, the banks have been more careful, First Bank, Stanbic IBTC and so on; they have learnt their lessons. They have been cautious. With all these factors, we cannot say these profits are not true,” he added.

So far, almost all the Nigerian banks which released their 2012 year end reports, have declared profits, raising credibility concerns to investors and the general public.

In his words: “We are pleased to have returned to profitability after the challenges of 2011. Doing so, whilst also successfully executing the recent merger, makes the years performance all the more remarkable”.

He added that the trend has continued this year, as the bank reported N4.2bn profit after tax for 2013′s first quarter (up 3 per cent the prior year).

Banks 2013 first quarter reports revealed they are getting over their fragile situations as the banks claim profits are already setting in.

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