The yet-to-be-signed one-time 70% windfall tax on the realised FX gains of banks in 2023 has been a source of significant controversy in the Nigerian banking space in recent weeks. However, no bank has released any statement on the issue, to date.
Nigeria’s leading commercial banks recorded significant forex revaluation gains, estimated at a combined total of N3.37 trillion in 2023 and Q1 2024.
Commercial banks earned as much as N2.4 trillion in 2023 and N883 billion in the first quarter of 2024.
The announcement of the tax coincides with a bearish sentiment about banking stocks in the NGX. The statement seems to have impacted the value of eight Nigerian banks, causing a depreciation of N198 billion Week-on-Week (WoW) as investors trade banking stocks with caution.
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The Nigerian Exchange Limited Banking Index (NGX Banking Index) dropped by 2.94 per cent or 24.79 basis points WoW to close at 819.20 basis points last Friday from the 843.99 basis points it opened for trading.
The windfall tax is not a new form of tax in the context of fiscal measures used by the governments to redistribute income and/or generate funds to finance needed government expenditure.
In some countries, like United Kingdom, it’s the standard for more than two decades for the assessable profits of utilities, oil and gas and other private entities to be taxed for income that they do not generate as a result of their actions rather arising from economic reforms, expansions and other systemic events outside of the operation of the companies.
In places like Canada, the windfall tax is not limited to oil & gas companies or other corporations, even a generous gift or inheritance or lottery winnings can be assessed for windfall tax.
However, the move has generated conversation around the timing and legality of the proposal with major tax and advisory bodies wading into the amendment.
Some analysts have faulted the federal government’s move to amend the Finance Act 2023, saying the exercise is illegal, ill-timed and could undermine investor confidence and negatively impact Nigeria’s investment climate.
Only 10% of our 2023 FX gains are realised – FCMB Group CEO
Speaking to the exact portion of these gains subject to the windfall tax, the Group CEO of FCMB, Ladi Balogun, has stated that only about 10% of the bank’s foreign exchange gains recorded in 2023 were realised.
Balogun said: “I must stress that it is realised gains and not unrealised gains, and barely 10% of our gains are actually realised, so the impact on our capital or our earnings is relatively muted.”
In 2023, FCMB Group posted FX revaluation gains of N84 billion, a significant improvement from the N4.3 billion gains recorded in 2022. However, during the period, the group posted net impairment losses of N59.5 billion, thus leading to a net FX gain of N24.5 billion.
In the first half of 2024, FCMB’s revaluation gains were about N35.2 billion, with its net impairment at about N33.0 billion, thus translating to a net FX gain of N1.8 billion.
Based on the statement of the group’s CEO, its realised net FX gains for 2023 translate to about N2.5 billion, with a 70% windfall tax further amounting to N1.75 billion.
Elemelu, Otedola throw weight behind tax
The Chairman of FBN Holdings and acclaimed strongman of the financial and capital markets, Femi Otedola, has thrown his weight behind the implementation of a windfall tax, emphasising its importance in creating a more equitable economic environment.
He said: “Windfall taxes, which are levies on companies or individuals who receive substantial, unexpected profits, ensure a fairer distribution of wealth.
“This allows those who benefit disproportionately to contribute more significantly to the broader societal good.”
Following in the same footsteps, the chairman of the United Bank for Africa (UBA), Mr Tony Elumelu, also supported the recently passed windfall tax.
He said, “We believe in prosperity. We believe in creating jobs and employment for our people. We believe in making sure that we democratise prosperity and that Nigerians have access to good life. So, today we spoke about the windfall tax. We support the government.
“We believe that where there is extraordinary income, it should go towards helping to alleviate poverty in the country, which is what the government intends to do.”
Concerns about impact of windfall tax will keep valuation of banks’ shares muted for some time – Rasaq
Abiola Rasaq, an economist and former Head, Investor Relations at UBA Plc, in his intervention said; “First, I think it’s important to put the proposed tax in context before we consider what it’s burden will be on the taxpayers (i.e banks and by extension, the shareholders) and how it affects investment flows into the banking sector.
“Windfall tax is often a non-recurring special levy or tax on a segment of the economy that is presumed to have benefited from economic expansion, market events or other systemic factors, with the objective of compensating or alleviating economic burden/pains of other segments of the economy which may have suffered some erosion to their purchasing power/standard of living as a result of same or other macro events.
“I think what we possibly need to discuss is how the funds generated would be spent and how transparent and accountable would the government be in generating and expensing the windfall tax.
“As regards the burden on banks, it’s absolutely negative and no shareholder would be excited at such news of a tax burden that undermines dividend payment and internal capital formation arising from the windfall income, especially as the naira devaluation as well as subsequent depreciation also leaves some negative positions in banks, especially as regards the pressure on asset quality and capital ratios, which are negatively impacted on the back of naira depreciation.
“So the government needs to put these in perspective in assessing the taxable portion of the windfall earnings. And yes, it is concerning at this time when banks are out in the market to raise equity to shore up their capital levels in line with new regulatory policy on banks capitalisation.
“Hence the news is negative for banks share price and ability to attract capital from both local and foreign investors. Whilst the valuation of banks is at significantly discounted levels, either from a time series or peer perspective, concerns about the impact of the windfall tax will keep valuation of banks’ shares muted for some time and undermine the attractiveness of the sector to both local and foreign investors, especially as the high yield environment also subdues appetite for equities in favour of fixed income investments.
Windfall levy will have no adverse impact on banks’ quest to attract foreign investors – Prof Uwaleke
Professor of Finance and Capital Market at the Nasarawa State University, Keffi, Uche Uwalake, in his reaction to the development said: “I do not think the windfall levy will have any significant adverse impact on banks’ quest to attract foreign investors.
“The levy is on the banks’ realised forex gain. It is also a one-off levy arising from the devaluation of the naira by the CBN in the wake of exchange rates unification. To the extent that it is not a normal feature of the banking sector in Nigeria, I do not see it as one that will discourage foreign investors.
“Recall that the share prices of banking stocks were already on the decline before the National Assembly amended the Finance Act, which birthed the windfall levy. This was chiefly the result of increased supply of shares as many listed banks launched public offers and Rights issues in a bid to meet the new minimum capital requirements stipulated by the CBN.
“I think foreign investors will be more interested in the healthy state of the banking industry in Nigeria in view of the low non-performing loans ratio and other financial soundness indicators. They will also be considering the relatively high growth of the sector as well as its potential in a one trillion-dollar target economy.”
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