Standard Bank Securities: Banks under our coverage could pay N217bn as proposed windfall tax

The Standard Bank Group (SBG) Securities says banks under its coverage could pay N217 billion in the proposed windfall tax.

In a report on Thursday, the firm said the banks include United Bank for Africa (N56.1 billion), First City Monument Bank (N43.2 billion), First Bank of Nigeria (N4.4 billion), and Zenith Bank (N18 billion).

SBG Securities is a financial service provider (FSP) and a subsidiary of Standard Bank Group Limited.

On July 17, the federal government asked the national assembly to amend the 2023 Finance Act to impose a one-time windfall tax on banks’ foreign exchange (FX) gains.

A windfall tax is a higher tax imposed by the government on sectors or businesses that have benefited disproportionately due to favourable market conditions.

According to SBG Securities, if the policy is implemented, the impact on the banks would vary depending on the profits realised.

“Though there is a need for clarity on the specific line item to be taxed, we estimate that the bulk of the profits taxed is likely to be from FX-related trading gains, FX-related fees and realized FX revaluation gains,” the report reads.

“Within our coverage, we estimate that only 17% (relating to FCMB N84bn) of the FX revaluation gains reported by the banks in FY23 was realized.

“We estimate that the total amount subject to windfall tax from our coverage banks is N434.6bn including FX related trading gains and FX related fees-based income (commission on foreign exchange deals, commission on letter of credit, foreign withdrawal charges, etc).”

‘POLICY COULD RAISE CONCERNS AMONG INVESTORS’ 

According to the securities firm, the timing of the pronouncement could potentially raise more concerns for investors amid the recapitalisation exercise.

SBG Securities said the amendment bill comes at a time when banks are under pressure to fulfil the Central Bank of Nigeria’s (CBN’s) increased minimum capital requirements.

“Amidst the already tight system liquidity, challenging economic and business environment, and growing risk-off sentiment towards emerging markets, Nigerian banks are potentially faced with the trilemma of paying additional 50% windfall tax on all foreign exchange transactions, recapitalization exercise and navigating the Nigerian economy,” the firm said.

“These concerns may potentially drive scepticism among existing and potential investors.

“We estimate windfall tax of c. N217.3bn for the banks under our coverage: We expect our coverage banks to pay windfall tax as follows: United Bank for Africa (N56.1bn), First City Monument Bank (N43.2bn), First Bank of Nigerial (N4.4bn), and Zenith Bank (N18.0bn).

“We highlight that there is a wide margin of error, as the required disclosure to derive an accurate estimate significantly exceeds the disclosure/reporting made by the banks in the published financial statements.”

According to the firm, line items such as net fair value gains from derivatives may be subject to the windfall tax if it is FX-related.