Windfall tax spooks investors as bank stocks fall to lowest level in a month

Nigerian banks sustained a bearish run last week as investors reacted to the planned 70% windfall tax to be imposed on the capital gains earned from forex between 2023 and 2025. Data from the NGX indicate the Banking Index fell 2.9% during the week taking the month to date losses to 1.32%. The Nigerian Banking Index has now reversed at the start of the year when it ended the first quarter with 14.76% gain. The banking index is currently down to 819 points, the lowest level in nearly a month. Sell pressures arising from high liquidity and bearish sentiments amidst regulatory curve balls sent most of the major banking share prices lower with nearly all major banking stocks incurring losses during the week. Banking equities have lost about N398 billion in market cap since the announcement of the windfall tax on July 17. Since the announcement of the proposed 50%, now 70% windfall tax on the realized FX gains recorded by banks in 2023, investors have displayed bearish sentiments towards banking stocks. On July 17, banking stocks closed with a combined market capitalization of N6.89 trillion. However, on July 26, the stocks closed with a market capitalization of N6.49 trillion. As the index that tracks banking stocks, the NGX-Banking Index declined by 5.86% during the same period. FUGAZ lose big Nigeria’s tier one banks, also known as FUGAZ, all posted losses during the week as investors assigned bearish valuations. ACCESSCORP saw its share price drop by 4.6% over the week, with a month-to-date decline of 2.6% and a year-to-date fall of 20%. FBNH also experienced a decrease, with its share price falling by 4.8% for the week, 1.4% for the month, and 11% for the year. GTCO was down by 2.1% for the week and 1.2% for the month but still holds a year-to-date increase of 9%. UBA faced the most significant weekly drop among FUGAZ banks, declining by 7.9%, with a month-to-date drop of 6.0% and a year-to-date fall of 18%. ZENITHBANK’s share price decreased by 3.1% for the week, although it managed a slight month-to-date gain of 1.0%, with a year-to-date decline of 7%. Other Banks Among the other banks, FCMB experienced a slight weekly decline of 0.6%, but its month-to-date performance improved by 1.9%, resulting in a year-to-date increase of 7%. FIDELITYBK remained unchanged over the week, with a positive month-to-date gain of 4.9% and a minor year-to-date decline of 1%. STANBIC’s share price remained stable over the week, with a month-to-date increase of 2.9% despite a significant year-to-date drop of 23%. STERLINGNG saw a small weekly decline of 0.5% and a month-to-date decline of 4.1%, with a year-to-date decrease of 7%. WEMABANK experienced a slight weekly decline of 0.8%, a substantial month-to-date decline of 14.4%, but maintained a year-to-date gain of 12%. Analysts View The broader fall in Nigerian bank stocks can be attributed to several significant factors, most notably the recent 70% windfall tax that the government is imposing on the forex gains of banks for the period 2023 to 2024. This substantial tax burden has caused widespread concern among investors for several reasons. Firstly, investors believe that this tax will significantly impact the ability of banks to pay half-year dividends. Dividends are a key component of investor returns, and any reduction in their payout can lead to decreased investor confidence and reduced demand for bank stocks. The anticipated lower dividends are a direct consequence of the increased tax liabilities, as banks will have to allocate a significant portion of their profits to cover these taxes. Secondly, the imposition of the windfall tax is likely to affect the overall valuations of banks. Higher taxes translate into lower net profits, which in turn can lead to lower stock prices as investors reassess the profitability and growth prospects of these institutions. Nairametrics estimates that banks made a combined N3.3 trillion from capital gains on forex in 2023 and the first quarter of 2024, even though most of these gains are unrealized. This means that while banks have reported significant forex gains on paper, they have not necessarily converted these gains into actual cash flow. Moreover, the windfall tax requires banks to pay the taxes in cash, which presents another layer of difficulty. Much of the necessary cash may already be tied up with the central bank as part of the cash reserve requirements, which are estimated to be around N20 trillion. This means banks might face liquidity constraints as they scramble to meet the tax obligations. The need to secure additional cash to pay the windfall tax could lead to increased borrowing or asset sales, further straining their financial stability. This tax imposition has created a climate of uncertainty and pessimism among investors with sources informaing Nairametrics that foreign investors are getting apprehensive. The apprehension stems from the potential for reduced profitability, constrained liquidity, and the overall impact on the financial health of banks. These concerns have contributed significantly to the bearish trend observed in the Nigerian banking sector, as reflected in the falling stock prices and market indices.
https://nairametrics.com/2024/07/28/windfall-tax-spooks-investors-as-bank-stocks-fall-to-lowest-level-in-a-month/