Nigerian banks have defied economic odds to post extraordinary profits for 2024, with Zenith Bank reporting a profit after tax of N1.03 trillion and GTCO close behind at N1 trillion.
These figures stand out against Nigeria’s challenging economic landscape: GDP growth edged up to 3.40% from 2.74% in 2023, inflation soaring to 34.8% before easing to 23.18% in February 2025 due to rebasing, and the Naira depreciated by roughly 100% since 2023, dropping from N898 to N1,600 against the US dollar. This prompts a deeper look into the factors driving these profits and whether the market’s valuation of Nigerian banks truly reflects their earnings potential.
Factors Driving Nigerian Banks’ Profitability in 2024
Several factors have converged to propel Nigerian banks to record-breaking financial performance, leveraging both economic conditions and strategic advantages.
- High Interest Rates: The Central Bank of Nigeria (CBN) tightened monetary policy in 2024, lifting the monetary policy rate (MPR) to 27.50% from 27.25%, maintaining an asymmetric corridor of +500/-100 basis points, and keeping the Cash Reserve Ratio at 50% for deposit money banks and 16% for merchant banks. This hawkish stance, aimed at curbing inflation, created a high-interest-rate environment that boosted banks’ earnings from loans and government securities. Zenith Bank’s net interest income skyrocketed by 135% to N1.73 trillion from N707.5 billion in 2023, while GTCO’s surged 142% to N1.06 trillion from N437 billion, showcasing the profitability of lending in this climate.
- Digital Transaction Fees: The pivot to digital banking, accelerated by the COVID-19 pandemic and cash scarcity, has become a goldmine for Nigerian banks. Non-interest income from transaction fees has soared as Nigerians increasingly embrace online and electronic payments. Zenith Bank raked in N208 billion in banking fees, including N80 billion from e-transactions, N73 billion from account maintenance, and N79 billion from foreign withdrawal charges. UBA reported N284.7 billion from digital channels, an 85.9% jump from 2023, spanning ATM withdrawals, card transactions, and online banking. These fees, often a point of customer contention, underline the banks’ ability to monetize Nigeria’s digital adoption.
- Market Dominance: The Nigerian banking sector is ruled by an elite group of Tier-1 banks, First Bank, UBA, GTCO, Access Bank, and Zenith Bank, collectively dubbed FUGAZ. Their dominance affords them significant market share, extensive branch networks, and the power to dictate high fees with minimal competition. This oligopolistic structure stifles new entrants and reinforces abnormal profit margins.
- Forex Gains: The Naira’s steep fall in 2024, triggered by exchange rate unification and market liberalization, handed banks holding foreign currency assets a windfall. Converting dollar-based earnings into Naira amplified profits significantly. Zenith Bank’s trading business, bolstered by forex activities, generated N1.1 trillion, nearly double the N566.9 billion from 202,3, highlighting how currency volatility has become a profit engine for banks with international exposure.
Nigerian Banks vs. Global Peers: A Valuation Disparity
To gauge these profits, a comparison with JP Morgan offers perspective. In 2024, JP Morgan posted a profit of $58.5 billion with a market capitalization of $685 billion, yielding a price-to-earnings (P/E) ratio of about 12. By contrast, Zenith Bank, with a market cap of N1.96 trillion and profit of N1.03 trillion, has a P/E ratio of just 1.3. GTCO, with a market cap of N2.35 trillion and profit of N1.017 trillion, sits at 2.31. These strikingly low P/E ratios signal that Nigerian banks are undervalued relative to their earnings. However, this gap isn’t merely a market oversight. It reflects deeper risks tied to Nigeria’s operating environment.
Why Are Nigerian Banks Undervalued?
Despite their profitability, Nigerian banks face structural and perception challenges that depress their valuations.
- Political Instability: Nigeria’s political stability index was -1.77 in 2023, per TheGlobalEconomy.com, signaling a high risk of government upheaval or violence. This uncertainty spooks foreign investors, who see political volatility as a threat to long-term stability, keeping stock valuations low.
- Macroeconomic Turbulence: Even with GDP growth at 3.40% in 2024, driven by services and agriculture, the oil sector’s contraction and inflation’s peak at 34.8% (later moderated to 23.18%) paint a volatile picture. The Naira’s 100% depreciation since 2023 further erodes investor confidence, complicating profit repatriation and future earnings forecasts.
The question of whether Nigerian banks are undervalued or if the market is correctly pricing their earnings hinges on the sustainability of their profit drivers. Research suggests that much of their profitability is tied to macroeconomic inefficiencies, high interest rates, forex gains, and fee income rather than organic growth.
Foreign investors are reluctant due to currency risks and difficulties in repatriating profits, further depressing valuations. The low P/E ratios, while seemingly undervalued, reflect a risk premium demanded by the market, given the political and economic uncertainties.
If banks can sustain profitability through digital expansion and operational efficiencies, as seen with their growing e-transaction revenues, investor confidence could improve, leading to higher valuations.
