On 17 July, the Nigerian (Caa1 positive) presidency announced a one-off 50% windfall tax on Nigerian banks’ foreign-currency revaluation profits in 2023 to raise funding for infrastructure and other critical spending as part of a NGN6.2 trillion ($4 billion) addition to the 2024 budget. The government expects the tax to be implemented as part of a bill amending the country’s Finance Act 2023, which has been sent to the legislature for approval.

The tax will significantly reduce the profits available to banks for problem-loan provisioning and transfers to retained earnings, which form part of regulatory capital, both credit negative for the sector. The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds.

The tax follows record profits declared by banks in 2023, largely because of foreign currency revaluation gains related to the naira's massive devaluation of 37% in June 2023. The tax is in line with the Central Bank of Nigeria's September 2023 policy prohibiting banks from using foreign-currency-related profits for operational expenses and dividends.

Eight of the nine Nigerian banks we rate reported in excess of NGN3.5 trillion in aggregate pretax profits in 2023 versus NGN1.1 trillion in 2022, and we estimate that over a third of the profits were from foreign-currency revaluation and trading gains. It is unclear, however, what proportion of the revaluation gains will be taxed, given the differences between trading and revaluation gains. Additionally, the 2023 revaluation gains include unrealised gains, which may affect how the tax is applied, particularly as the government has not been clear how the 50% windfall tax will be achieved.

The severity of the negative effect of the tax on banks’ foreign-currency-related profits is also not yet known because details are not yet available. Given banks have already been subject to the standard 30% corporate income tax rate for 2023, in a less aggressive scenario a surplus tax of 20% on the foreign-exchange gains would equate to the total 50% windfall tax. It is also possible the government may pursue an additional 50% windfall tax on banks' foreign-currency revaluation gains, which we estimate would equate to as much as 6% of the aggregate equity (shareholders funds) of banks rated by us.

For the government, we estimate the windfall tax may yield revenue of as much as 0.3% of
2024 GDP. Although this is not negligible given the government's small tax intake of around
9% of GDP in 2023, it remains marginal and only a temporary revenue measure.
The central bank has yet to make a public statement about the tax, but we believe it may
gain approval before the end of July once the appropriate legislative approval has been
secured. Banks would need to fully comply with the windfall tax directive by 31 December

2024, after which they will face penalties of 10% per year on the tax amount due, plus interest at the monetary policy rate, currently
26.25%. Principal officers of noncompliant banks may also face up to three years in prison.