- CBN stops use of foreign currencies as collateral for naira loans
Zenith Bank Plc released its 2023FY results on Monday, which showed that the bank maintained its strong performance throughout the year to record a stellar financial performance.
Accordingly, profitability spiked as the group’s profit before tax increased by 202.3 percent y/y to N795.96 billion. Likewise, PAT settled 202.3 percent y/y higher at N676.91 billion after accounting for a rise in income tax expense (+96.0% y/y).
The bank recorded a 125.4 percent y/y growth in gross earnings.
The performance was supported by balanced growth across income lines as funded and non-funded income surged by 111.9 percent y/y and 141.2 percent y/y, respectively.
In addition, the board proposed a final dividend of N3.50/s (2022FY: N2.90/s), which equates to a dividend yield of 7.6 percent (ex-WHT) based on the last closing price of N41.55/s (8 April).
Interest income grew to NGN1.14 trillion in 2023FY, driven by a combination of significant growth in earning assets (+50.8% y/y) – primarily supported by loans and advances to customers expansion by 63.4 percent y/y to N6.56 trillion – and improved yield-on-assets (7.6% vs 2022FY: 5.4%).
Consequently, the bank recorded significant growth in income from loans and advances to customers (+81.4% y/y to N671.92 billion), while the increase in income from investment securities (+148.3%y/y to N390.93 billion) was also supportive of funded income generation.
Following the rising cost of borrowing, the bank recorded a significant increase in interest expense by 135.4 percent y/y to N408.49 billion.
Analysts highlight notable increases in expense across all lines, with the expense on deposits from customers (+150.0% y/y to N306.75 billion) impacting most significantly.
Also, expense on interest-bearing borrowings (+103.4% y/y to N99.17 billion) and financial liabilities held for trading (+23.8% y/y to N2.58 billion) contributed to the deterioration of cost of funding to 2.4 percent (2022FY: 1.7%).
Consequently, net interest income (ex-LLE) settled only 34.2 percent higher, amid significantly higher credit impairment charges (+232.3% y/y to N409.62 billion) taken for 2023FY, reflecting views about risk in the macro environment – cost of risk settled at 6.3 percent relative to 3.1 percent in the prior year.
Similar to interest income, non-interest income advanced significantly by 141.2 percent y/y to N918.87 billion, as the sturdy net gains from investment securities trading (+166.6% y/y to N566.97 billion) and net FX revaluation gains (+804.9% y/y to NGN228.98 billion) were enough to offset decline in income generated from fees and commissions (-17.7% y/y to N109.31 billion).
“We also note that the bank recorded lower income from FX revaluation (-39.4% q/q) on a quarter-on-quarter basis in Q4-23,” Cordros noted.
Due to the accelerating inflation and higher regulatory charges, operating expenses increased by 32.3 percent y/y to N449.5 billion in 2023FY.
For clarity, the group incurred higher personnel expenses (+44.0% y/y to N124.42 billion), deposit insurance premium (+44.9% y/y to N31.52 billion), AMCON levy (+30.4% y/y to N57.38 billion), while other expenses expanded by 25.9 percent y/y to N236.16 billion.
Notably, the bank’s cost-to-income ratio (after accounting for LLEs) improved to 36.1% (2022FY: 54.4%), driven by the faster growth in operating income (+99.5% y/y) relative to expenses (+32.3% y/y).
CBN stops use of foreign currencies as collateral for naira loans
Meanwhile, the Central Bank of Nigeria has written to all banks in Nigeria to stop the use of foreign currencies as collateral for naira loans.
It disclosed this in a circular titled “The use of foreign-currency-denominated collaterals for naira loans” with ref number: BSD/DIR/PUB/LAB/017/004.
The circular was signed by the apex bank’s acting Director, Banking Supervision Department, Adetona Adedeji, and uploaded to its website on Monday.
The apex bank said it had observed the use of FCY by bank customers as collateral for naira loans and, therefore, prohibits it with immediate effect.
It, therefore, directed banks to trim all existing loans with foreign currency collaterals to 90 days or attract a 150 per cent capital adequacy ratio computation as part of the bank’s risk.
“The Central Bank of Nigeria has observed the prevailing situation where bank customers use foreign currency (FCY) as collateral for Naira loans.
“Consequently, the current practice of using foreign currency-denominated collaterals for Naira loans is hereby prohibited except where the foreign currency collateral is Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including standby letters of credit.
“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days, failing which such exposures shall be risk-weighted 150% for Capital Adequacy Ratio computation, in addition to other regulatory sanctions,” the circular read.
The CBN maintained that it is on a mission to ensure that there is adequate foreign exchange in the market even as the naira is being strengthened.
Eurobonds, according to the Hong Kong and Shanghai Banking Corporation, are bonds issued offshore by governments or corporates denominated in a currency other than that of the issuer’s country.
Eurobonds are usually long-term debt instruments and are typically denominated in US dollars.
Letters of Credit, according to the International Trade Administration, are contractual commitments by the foreign buyer’s bank to pay once the exporter ships the goods and presents the required documentation to the exporter’s bank as proof.
As a trade finance tool, Letters of Credit are designed to protect both exporters and importers.
