James Emejo in Abuja reports that a new analysis from Emerging & Frontier Capital (EFC) warns that implementing a windfall tax, amid the Central Bank of Nigeria’s (CBN) mandated recapitalization, could severely impact the banking sector. The report highlights that Nigerian banks are already burdened with high regulatory costs, including the Cash Reserve Ratio (CRR), AMCON levy, and deposit insurance premium. Top six banks incurred $1.8 billion in regulatory costs in 2023, totaling $7.6 billion over the past five years.
Titled “More Pain for Longer,” the EFC report indicates that while the government’s need for revenue is understood, the windfall tax could further strain the banking sector. It notes a decline in dividend payout ratios from 38% in 2018 to 16% in 2023, despite rising profits. The report argues that the proposed tax conflicts with the current consolidation efforts in the banking industry, questioning why banks should be taxed when shareholders are already being asked to invest more capital and receive lower dividends.
The report also notes that bank valuations have significantly dropped since the Global Financial Crisis (GFC), with current valuations being one-tenth of their previous value. This situation raises concerns about the rationality of imposing a windfall tax when banks are mandated to raise capital. EFC urges the CBN to reconsider the policy, given its potential to negatively impact shareholders and the banking sector.
The EFC report underscores the need to consider the high regulatory costs that banks face, questioning why the Federal Government seems to overlook these expenses. It emphasizes that in 2023, the top six banks booked $3.1 billion in FX trading and revaluation gains, of which $2.9 billion were unrealized. The report highlights that the high costs of USD funding are not factored into these figures, and the proposed tax could exacerbate the financial burden on banks.
The report stresses the discrepancy between banks’ rising profits and declining dividend payouts, noting that the aggregate payout ratio of the top six banks fell from 38% in 2018 to 16% in 2023. This decline has primarily impacted Nigerian shareholders, who constitute over 90% of the banking sector’s investors. The EFC report concludes by questioning how these policy decisions, which shrink shareholders’ net worth, benefit Nigeria in the long term.
