There is no gainsaying in the fact that Nigeria’s economic landscape has been marked by significant turbulence in recent years, with inflation soaring to record levels, currency devaluation threatening businesses, and consumer spending power dramatically shrinking, driven by the negative knock-on effects of multiple reforms (amidst weak fiscal buffer to ease the burden), legacy structural challenges, and spillovers from the pressured external environment.
Yet, amidst this challenging environment, Nigerian Deposit Money Banks (DMBs) have posted record-breaking profits. The paradox raises an intriguing question: How are Nigerian banks achieving such growth in the face of a struggling economy, especially the sky-rocketing inflationary pressure to be referenced in this piece as “value thief”, and can they continue to outpace these challenges?
Record-breaking profits: The numbers behind the growth
GTCO reported N1.003 trillion profit before tax (PBT) in H1, 2024, about a 207 per cent increase from the N327.4 billion it declared in H1,2023, While the Zenith Bank reported N727.03 billion PBT in H1, 2024, representing a 108 percent increase from the N350.36 billion the bank reported in H1, 2023, Ecobank declared N443.5 billion PBT in H1,2024, representing about 195 percent increase over the N150.3 billion it reported in H1,2023.
FBN Holdings posted N411.99 PBT in H1 2024, an increase of 100.9 per cent from the N205.05 billion reported in H1, 2023.
Access Bank announced N348.9 billion PBT in H1 2024, a growth of 108.2 per cent from the N167.6 billion reported in H1 2023.Fidelity Bank closed the period at N200.87 billion PBT, a significant increase of 163 per cent from the N76.33 billion declared in the corresponding period of 2023, just as Stanbic IBTC Holdings posted N147 billion PBT in H1 2024, about 77 percent increase from the N82.99billion reported in H1 2023.
These numbers have stunned observers, given Nigeria’s current economic malaise. Inflation in the country in August 2024 reached 32.15% driven by rising fuel prices and food costs. Also food inflation was 37.52% in the same month. Additionally, the Naira’s exchange rate against the US dollar dropped to N1653/$1 in the NAFEM market in September 2024, triggering severe import-related challenges and raising the cost of business operations.
Yet, Nigeria DMBs have weathered the storm. The key to this financial resilience lies in several factors—ranging from their diversification strategies to their ability to capitalise on economic policies—allowing them to grow amidst adversity.
Key drivers of bank profitability
- Higher interest rates and net interest margins
One of the primary factors driving profits for Nigerian banks is the Central Bank of Nigeria’s (CBN) tight monetary policy. To combat inflation, the CBN has repeatedly raised its benchmark interest rate, which reached 27.25 per cent in September 2024. These higher interest rates benefit banks by widening their net interest margins—the difference between the interest income they generate from loans and the interest they pay on deposits.
As a result, banks can charge more for loans while keeping their deposit costs relatively low, boosting their overall profitability. This dynamic has allowed banks to cushion their balance sheets despite economic headwinds.
Diversification into non-interest revenue streams
Nigerian banks have increasingly diversified their revenue streams, relying more on non-interest income to drive growth. Fees and commissions from digital banking, asset management, and corporate finance have become significant contributors to revenue.
For instance, the growth of mobile and online banking in Nigeria has provided banks with a steady flow of transaction fees. Seven Nigerian banks generated a cumulative N132. 45 billion from e-business operations in the first half of 2024, reflecting a significant uptick in digital banking adoption across the country driven by the expansion of mobile wallets, payments, and transfers. These digital banking services, relatively immune to inflationary pressures, have provided banks with consistent income even as consumer spending contracts.
Additionally, banks have broadened their wealth management and investment banking services, providing advisory, treasury management, and corporate financing to large businesses. This move allows them to tap into the profits from sectors still performing well, such as telecommunications, oil and gas, and agriculture.
- Currency devaluation as a profit driver
While the Naira’s depreciation has caused economic pain for many Nigerians, it has also created opportunities for Nigerian banks. With more businesses seeking foreign exchange for imports, banks that handle forex transactions have experienced higher revenues.
Furthermore, banks with significant foreign-currency-denominated assets have gained from the revaluation of these assets in local currency terms. Some banks, particularly those involved in international banking, have been able to hedge against currency depreciation by holding part of their reserves in US dollars, bolstering their profitability.
The risks and challenges on the horizon
Despite their recent financial success, Nigerian banks face substantial risks that could affect the sustainability of their profitability.
- Exposure to macroeconomic volatility
As much as Nigerian banks have thrived amidst the current economic environment, the country’s continued macroeconomic volatility presents a looming threat. High inflation, persistent currency depreciation, and low consumer purchasing power are expected to erode the quality of bank assets, particularly their loan books.
Consumer and corporate loan defaults could rise as businesses struggle to service debts amid reduced profitability and escalating costs.
- Regulatory and policy uncertainty
Nigerian banks operate within a regulatory environment that can shift rapidly. The CBN has taken various measures to stabilise the Naira and control inflation, but sudden policy changes or stricter regulatory measures could affect the banking sector’s growth trajectory. For example, any decision to lower interest rates or cap forex earnings could narrow profit margins.
- Declining Consumer Confidence and Spending Power
With Nigeria’s inflationary pressures showing little signs of easing, consumer confidence remains low. The purchasing power of ordinary Nigerians continues to decline, which directly affects the ability of retail banking customers to save or borrow. This has resulted in a drop in savings deposits, a key source of funding for many banks.
A continued downturn in consumer spending could translate into reduced loan demand, limiting future revenue growth for banks. More critically, it could hamper the expansion of digital and retail banking services, which depend heavily on active consumer participation.
- Currency risk and external shocks
While banks have benefitted from foreign exchange earnings and asset revaluations, currency risks remain a double-edged sword. Further devaluation of the Naira could significantly increase the cost of foreign loans that banks may hold or the repayment obligations of clients who borrowed in foreign currencies. Additionally, external shocks—such as fluctuations in global oil prices, which directly affect Nigeria’s foreign exchange reserves—could affect banks’ liquidity positions.
Is the growth sustainable?
The profitability of Nigerian banks, despite economic challenges, has raised questions about sustainability. Banks have shown a remarkable ability to adapt, leveraging higher interest rates, diversification, and currency devaluation to drive their profitability. However, the underlying risks—ranging from macroeconomic volatility to regulatory changes—cannot be ignored.
In the short term, banks may continue to report solid financial results, particularly if interest rates remain high and inflation persists. Yet, over-reliance on interest rate hikes and forex gains poses long-term risks. If inflation is brought under control and rates decline, banks may find it harder to maintain their current level of profitability.
Furthermore, the deteriorating economic conditions affecting consumers and businesses alike could lead to a rise in non-performing loans and a reduction in overall banking activity. Nigerian banks will need to adopt more strategic approaches, including strengthening their risk management frameworks, innovating their digital services, and diversifying into new markets to weather potential future storms.
As Nigerian banks navigate the complexities of a volatile economic environment, their recent performance has been nothing short of impressive. However, the coming years will test their ability to sustain this momentum. The success of the sector will hinge on its ability to adapt to new challenges, particularly macroeconomic shifts and regulatory changes.
The resilience of Nigerian DMBs in the face of economic adversity may provide some optimism for the country’s broader financial landscape, but significant risks remain.
The coming days and months will reveal if these institutions can continue to thrive or if the weight of Nigeria’s economic challenges will eventually catch up with them.
