Windfall Tax Will Hamper Banks’ Capital Raising –Rating Agency

As banks race to raise enough funds to meet the new capital requirement, the new windfall tax being introduced by the federal government may hinder their ability to raise fresh capital particularly from foreign investors, rating agency Agusto & Co have said.

In its report titled “Nigeria’s Retroactive Windfall Tax: A Short-Term Fix, Long-Term Risk” released on Wednesday, Agusto & Co noted that asides hindering banks ability to raise the needed capital, the move by the federal government would see banks cut back lending leading to stifling of economic growth in the country.

The rating agency noted targeting the banking sector, a critical economic intermediary, seems counterintuitive to stimulating growth, as the proposed 70 per cent windfall tax is likely to have a credit-negative impact on Nigerian banks, substantially eroding profits.

“Institutions with capital adequacy close to regulatory thresholds will be particularly vulnerable. To offset the tax burden, banks may tighten lending standards, resulting in higher borrowing costs for individuals and businesses. This could ultimately stifle economic activity and hinder growth prospects.

“The timing could also prove to be counter-productive. With banks currently grappling with a significant recapitalisation exercise mandated by the Central Bank of Nigeria (CBN), the proposed windfall tax is an unwelcome distraction that could further strain the industry’s ability to raise the necessary capital, particularly from foreign investors. Moreover, the tax could negatively influence bank share prices in the short term, compounding the challenges faced by the industry.

“Retroactive taxation is a significant deterrent to investment as it creates a climate of uncertainty, making it difficult for businesses to accurately forecast their tax liabilities. Such unpredictability can erode investor confidence and discourage future investments. Why banks have been singled out is still unclear, as any business that holds monetary assets in foreign currency is likely to have benefitted significantly from the weaker naira, albeit not as much as banks.

“Many now believe that the banking industry could merely be an initial target of this policy and there is a real risk that it could be extended to other industries in the future, further exacerbating investor anxiety.

Despite the potential for protracted legal and constitutional challenges, we believe prolonged tussle is unlikely given the lack of a united front by the banking industry, which limits its ability to mount a robust defence against the proposed tax,” it pointed out.