How CBN generated N103.8 bn in profits in 2022 despite Naira’s poor performance

The Central Bank of Nigeria (CBN) has reported a remarkable increase in its profit after tax for the year ended December 2022, marking a substantial growth from the previous year. This surge in profitability, despite challenging economic conditions and various financial activities, has been attributed to several key factors that have contributed to the bank’s financial success.

This was revealed after the apex bank released its long-awaited audited accounts for the year ended December 2022 showing it made a profit after tax of N103.8 billion, an increase from the N75.1 billion declared a year earlier.

The report’s results, which were signed by Godwin Emefiele and audited by EY and KPMG, also included audited results for 2016, 2017, 2018, 2019, 2020, and 2021, which were published on the apex bank’s website.

The apex bank’s results show it reported a profit after tax every year for the last 8 years, despite facing currency depreciations and doling out intervention funds, and loans to the government amongst other development finance activities.

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Income generation strategies

One of the primary drivers of the CBN’s profit surge has been its effective income generation strategies. The bank’s audited accounts reveal that it successfully leveraged a combination of higher interest income, fees, and commissions.

Notably, the apex bank achieved an impressive 80% surge in net interest income, reaching N1.8 trillion, up from N1 trillion in the preceding year. This increase can be attributed to the strategic management of its loan portfolio and other interest-bearing assets.

“Ways and means” provision: a profitable endeavour

A major highlight of the CBN’s income generation was its involvement in the controversial “Ways and Means” provision. This provision involved extending loans and overdrafts to the federal government, resulting in substantial interest income.

Critics have questioned the size of these loans and their compliance with the central bank act which mandates maximum lending of 5% of the previous year’s government revenues. Despite that, the N23 trillion loans generated N1.9 trillion in interest income, significantly surpassing the previous year’s N1.2 trillion.

According to the audited accounts of the apex bank, the Ways and Means provision is priced at a whopping MPR+3%. “Included in interest income on Loans and receivables is interest income on Overdraft facility granted to the Federal Government amounting to N1.9 trillion (2021: N1.2 trillion). The interest rate applied on this facility is MPR+3%.” the CBN says.

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Diverse sources of income

The CBN’s financial success was also bolstered by its diverse income sources. The bank reported additional income from various avenues, including earnings of N247 billion and N156 billion from the Asset Management Corporation of Nigeria (AMCON) and FGN Securities, respectively.

Moreover, the bank reported a significant income of N422.7 billion from debt instruments measured at fair value through profit and loss (FVTL), reflecting the bank’s prudent investment practices.

FVTL is a way companies account for certain investments they own. Instead of noting the investment’s original cost, the company regularly updates the investment’s value to reflect its current market price.

Foreign exchange transactions yield positive results

Foreign exchange transactions played a vital role in contributing to the apex bank’s profitability. The CBN earned N104.5 billion in income from commissions related to the sale of foreign currency and other foreign exchange-related activities.

An additional N15.9 billion was derived from processing currency, Bureau de Change applications, fund transfers, and fees from other financial institutions. These activities showcase the bank’s ability to capitalize on forex-related opportunities.

Balancing Act: managing expenses

While the CBN experienced impressive income growth, it also incurred significant expenses, particularly in managing foreign exchange and credit-related losses. Notably, the bank incurred substantial “other operating expenses” of N888.3 billion, which included foreign exchange revaluation losses amounting to N346.2 billion.

Additionally, the bank reported N155.5 billion in “rebate expenses” linked to the RT 200 and Naira4Dollar policy aimed at enhancing forex inflows, demonstrating the bank’s commitment to maintaining a balanced approach. The policy was implemented by the then Governor, Godwin Emefiele.

“Rebate expenses represent expenses incurred by the CBN in connection with the RT200 and Naira 4 Dollar schemes which the Bank introduced to enhance foreign currency inflow, diversify the sources of FX inflow, increase the level of non-oil exports, ensure stability and sustainability of FX inflows, and support export-oriented companies to expand their export operations and capabilities.“

So for example, the RT 200 allowed the apex bank to pay exporters an incentive for repatriating their dollars.

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Credit losses and balance sheet expansion

Despite its success in generating income, the CBN reported significant credit losses of N875.2 billion, nearly doubling from the previous year’s N498.2 billion. This highlights challenges in managing loan impairments within its extensive loan portfolio of approximately N31.4 trillion.

Furthermore, the bank’s balance sheet underwent a substantial expansion, growing from N35.5 trillion in 2018 to around N57.9 trillion in 2022, reflecting the bank’s evolving role in the Nigerian economy.

It is worthy of mention that a major expense item reported by the central bank and included in the “other operating expense” was N125 billion (N45 billion in 2021) which it incurred in connection to national security, the federal government, and security agencies. While the expenses are actually an extension of loans to the federal government, it is expensed on the FG to repay the loans.