Solid profits will cushion windfall tax effects – Fitch

International rating firm, Fitch Ratings, has said that strong profitability by Nigerian banks will be able to absorb the impact of the windfall tax.

This was disclosed in its latest rating action report, which upgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to ‘B’ from ‘B-’ with a stable outlook.

The PUNCH reported that six banks paid about N205.59bn as windfall tax in the 2024 financial year following the amendment of the Finance Act 2023 to allow the imposition of a windfall tax on the profits that banks made from the devaluation of the naira in June 2023.

Fitch Ratings stated, “The windfall tax on realised gains on FX transactions announced in 2024 appears to be much less significant than we initially feared and will be absorbed by strong profitability.”

According to the audited reports filed with the Nigerian Exchange Limited, of the six financial institutions, Zenith Bank paid the highest windfall tax of N63.31bn, followed by UBA, which paid N57.91bn. UBA indicated that the N57.91bn that the group paid was for two years, 2023 and 2024.

“On the general banking sector, Fitch said that it expects the ‘non-performing loans ratio (end-November 2024: 4.9 per cent) to rise in 2025 on high inflation and interest rates. Stage 2 loans are high in some banks, and the expected lifting of forbearance measures on loan classification could further increase impaired loans. However, loan books are small (35% of total assets), limiting the impact on banks’ performance.”

It also adjudged that significant progress has been made in raising capital to achieve compliance with higher minimum paid-in capital requirements by March 2026, as required by the Central Bank of Nigeria, and reiterated that the possibility of mergers and acquisitions remains likely among third-tier banks.

On the wider economy, Fitch recognised the increased efforts by the CBN to reduce FX liabilities even as it said that there was a lack of detail on the composition of reserves amid recent indications by the central bank that it would place net reserves at $23bn at the end of 2024, up from about $4bn at the end of 2023.

“Nonetheless, we estimate that roughly 14 per cent of gross reserves comprise FX swaps with local banks, down from 25 per cent in our November 2024 assessment, amid increased efforts by the CBN to reduce FX liabilities,” Fitch Ratings stated.

The rating firm also projected that the budget deficit will widen in 2025-2026, averaging 4.2 per cent of GDP, even as revenue increases.

It further stated, “Expenditure will be driven by higher wages, social and security expenses, debt servicing costs, and election-related expenses ahead of the 2027 elections. General government revenue will be bolstered by non-oil tax revenue reforms, although political challenges and high implementation risks may hinder progress.

“We expect GG revenue/GDP to rise but to remain structurally low (averaging 13.3 per cent in 2025-2026), largely accounting for a high GG interest/revenue ratio, above 30% (‘B’ median 13.2 per cent), with Federal Government interest/FG revenue ratio nearly 50 per cent. Banks’ ample liquidity and strong demand for government securities should support domestic financing capacity.”

On debt and external debt service, Fitch stated, “We expect GG debt/GDP to decline marginally in 2025-2026, to 51 per cent, in line with our ‘B’ median due to strong nominal GDP growth. Nigeria’s public debt has a fairly long average maturity of 10.9 years, and over half is local-currency denominated (‘B’ median of 37 per cent).

“Government external debt service is moderate but expected to rise to $5.2bn in 2025 (with $4.5bn of amortisations, including a $1.1bn Eurobond repayment due in November 2025), from $4.7bn in 2024, and fall to $3.5bn in 2026. There was a minor delay in paying a coupon due on 28 March 2025 on the sovereign’s $4bn Eurobond, highlighting public finance management challenges.”

On crude oil refining capacity, Fitch expects Nigeria’s oil refining capacity to increase in 2025 as the Dangote refinery scales up operations to reach 0.65 mbpd capacity by end-2Q25 from 0.55 mbpd currently, stating, “The refinery is operating at 85% of capacity and meets daily domestic consumption estimated at 50 million litres, helping to reduce oil-related import costs accounting for about 30 per cent of goods imports. However, the refinery continues to rely on foreign markets for a portion of its crude oil due to Nigeria’s limited production capacity.

“We expect crude oil production (excluding condensates) to increase in 2025-2026, averaging 1.43 mbpd, from 1.34 mbpd in 2024, helped by improved onshore surveillance and increased investments by local oil companies. However, underinvestment and production outages persist, constraining production below 2019 levels.”