Nigeria’s central bank instructed the nation’s lenders to divert windfall currency revaluation gains into buffers against future losses, following the devaluation of the naira earlier this year.
(Bloomberg) — Nigeria’s central bank instructed the nation’s lenders to divert windfall currency revaluation gains into buffers against future losses, following the devaluation of the naira earlier this year.
“Banks are required to exercise utmost prudence and set aside the foreign currency revaluation gains as a counter-cyclical buffer to cushion any future movements in FX rates,” the Abuja-based Central Bank of Nigeria said in a circular to lenders. “Banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses,” it said.
Nigerian lenders recorded significant foreign-exchange gains after Africa’s most populous nation allowed the naira to weaken 40% against the dollar in June, as part of currency reforms to attract overseas investment and help revive the struggling economy.
Those earnings are now showing up as banks report their half-year results. Zenith Bank Plc, Nigeria’s biggest lender, booked 355.6 billion naira ($471.6 million) of foreign-exchange gains, more than doubling profits and allowing it to declare an interim dividend of 50 kobo, its biggest such payout per share in at least a decade.
While the revaluation has been a boon for banks who held dollars, its hurt some of their customers, leading to losses among manufacturers with foreign-currency liabilities that could in turn threaten banks if it saps the quality of their loan books.
Zenith Bank increased provisions by almost eight times to 207.9 billion naira in the first half to reflect the challenging lending environment caused by the currency devaluation.
The central bank warned that the currency reforms could lead to a “possible increase in asset quality risks and pressure on industry capital adequacy,” adding that it may also result in breaches of regulations on lending to a single customer as well as dollar holding limits by banks.
The NGX Banking index, which measures the country’s biggest lenders, closed 2.5% lower in Lagos after repairing earlier losses. Zenith Bank declined by 3.5%.
“Investor expectation was that dividends will increase alongside the increase in profit; now the regulation has put that to an end,” said Damilola Olupona, banking analyst at Chapel Hill Denham in Lagos. “By setting the gains aside, the bank is able to take care of future economic shocks, which will make it stronger but it doesn’t really affect earnings.”
(Updates with shares and analyst comments in penultimate, final paragraphs)
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