Profit Decline in Nigerian Banks’ Foreign Subsidiaries Linked to High Impairment Losses on Assets.|Idika Aja

Article Highlights

  • Nigerian Banks expanded aggressively into Foreign Markets, sustaining revenue growth but faced profit decline in 2022.
  • Four of the top banks’ (FUGAZ) aggregate pre-tax earnings from their offshore operations declined by 41% YoY in 2022.
  • This was primarily due to high impairment losses on financial and non-financial assets.

Driven by the desire to unlock incremental value, Nigerian banks have aggressively expanded into other African countries, as well as the UK, US, and Europe where some banks have established operating segments

An analysis of the financial performance of major Nigerian banks, known as FUGAZ, with offshore subsidiaries reveals a consistent increase in revenues generated from their foreign operations.

However, 2022 witnessed a decline in pre-tax and post-tax profits. This decline can be attributed to high impairment losses incurred on financial and non-financial assets.

For instance, across the four banks (Access, GTCO, UBA, and Zenith Bank) reviewed, there was a notable surge in gross earnings from N2.85 trillion in 2021 to N3.7 trillion in 2022, representing a remarkable 31% year-on-year increase.

Furthermore, the banks witnessed a rise in revenue from offshore operations, with figures increasing from N651.85 billion in 2021 to N744.29 billion in 2022 with revenue from outside Nigeria contributing 19.95% of total revenues in 2022, though slightly lower than the previous year’s 22.91%.

However, despite generating significant revenues from their offshore operations, net earnings saw a decline compared to the previous year. For instance, total pre-tax profits in 2022 (excluding FBN Holdings) declined to N145 billion from N246 billion in the prior year. Pre-tax profits from operations outside Nigeria contributed 16.83% of the total, down from 29.60% the previous year.

The data obtained from the banks’ audited financial statements highlights a significant increase in impairment losses from their offshore subsidiaries, which surged by 327.79% to reach N174.252 billion in 2022. It is noteworthy that the majority of these impairment losses were primarily attributed to operations in Ghana. Top of Form

This sharp rise in impairment losses indicates potential challenges and difficulties faced by the banks’ subsidiaries in Ghana, impacting their financial performance.

Why does this matter? The impairment losses experienced in Ghana by the offshore subsidiaries of Nigerian banks serve as an important lesson on market-specific risks, risk diversification, risk management, governance, market knowledge, and continuous evaluation.

The expansion of Nigerian banks into other countries outside Nigeria has demonstrated the need for caution, as exemplified by the experiences of Access, Zenith, and UBA, where significant impairment losses were incurred in their offshore operations.

UBA, being one of the pioneering banks to venture outside Nigeria, has established a strong presence across Africa with over 19 subsidiaries and a presence in the UK. In 2022, UBA’s African operations alone contributed a remarkable 38.33% of revenues and an astonishing 46.05% of pre-tax profits, amounting to N92.6 billion. Overall, operations outside Nigeria accounted for 49% of revenues and an even more significant 62% of profits in the same year.

However, it is crucial to note that UBA’s impairment losses outside Nigeria saw a substantial increase of 891% to reach N30.855 billion in 2022. This sharp rise in impairment losses suggests potential challenges and risks faced by UBA’s offshore subsidiaries, impacting their financial performance and overall profitability.

Access Bank’s aggressive expansion strategy is evident through its 12 offices in the rest of Africa and the UK. In terms of financial performance, the bank reported gross earnings of N1,388 billion, with N142.37 billion coming from its African businesses and N56.83 billion generated outside of Africa. As a whole, the foreign subsidiaries of Access Bank contributed 14.35% of the bank’s total revenue.

However, there was a substantial decline in pre-tax profits, which decreased by 72% year-on-year to N19.058 billion. This decline is primarily attributed to a significant rise in impairment loss, which increased by 169%. The decline in pre-tax profit and the sharp increase in impairment loss serves as a reminder that expansion into new markets comes with inherent risks.

GTB’s presence in the international market is reflected in its eight offshore businesses outside Nigeria. In 2022, the bank generated a total revenue of N539.235 billion, with 15% originating from its foreign subsidiaries. These subsidiaries also contributed 14.89% of the bank’s pre-tax profits.

However, there was a notable decline of 39% in pre-tax profits from GTB’s foreign subsidiaries, amounting to N31.878 billion. This decline can be attributed to higher operating expenses incurred by the subsidiaries. It indicates that the foreign operations faced increased costs, which impacted their profitability despite contributing to the bank’s overall revenue

Zenith Bank Plc reported a substantial 24% growth in gross earnings for the year ending December 31, 2022. The bank’s gross earnings increased from N765.56 billion in the previous year to N945.554 billion, with its foreign operations contributing approximately 12.61% to this growth.

However, the bank’s subsidiaries in Ghana, the UK, Gambia, and Sierra Leone faced significant challenges. These subsidiaries collectively recorded a loss before tax of N2.799 billion in the financial year ending December 2022, marking a sharp decline of 109% compared to the profit before tax of N32.171 billion in the previous year. The primary factor behind this decline was a staggering 1,526.32% year-on-year increase in impairment losses from foreign subsidiaries, particularly Zenith Bank Ghana.

These financial results highlight the complexities and risks associated with operating foreign subsidiaries. The substantial increase in impairment losses points to potential challenges in managing credit quality and other financial risks in these markets.

BanksGroup Gross EarningsPBT From African SubsidiariesPAT From African Subsidiaries
20222021% Chg20222021% Chg20222021% Chg
in Millions #in Millions # in Millions #in Millions #in Millions #in Millions #in Millions # 
ACCESS BANK1,387,911971,88542.81%-6,00944,830-113.40%-18,78129,120-164.50%
ZENITH BANK945,554765,55823.51%-23,34427,246-185.68%-17,64918,309-196.40%

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