EFC Report: Windfall Tax Amid Industry Recapitalisation Will Break Banks

•Says poor policy decisions shrinking shareholders’ net worth  

•Declares CBN should be worried over development as banks’ shares are impacted  

•Industry under high regulatory costs as six banks paid $1.8 billion in 2023, $7.6bn in 5 years

James Emejo in Abuja

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?”