CRR policy pinches Nigeria’s biggest banks’ return to shareholders -

CBN banned banks on Friday from reselling dollars bought at its currency auctions to other banks

Nigeria’s biggest banks have seen their Return on Equity (ROE) decline in the last two years as a curious Cash Reserve Ratio (CRR) policy continues to batter their performance.

A BusinessDay’s analysis of First Bank Holdings, United Bank for Africa, Guaranty Trust Bank, Access Bank and Zenith Bank shows that the lenders have seen their average ROE decline from 11 percent in the first half of 2020 to 9 percent in 2021.

Declining ROE signals that banks are generating less profit with the funds provided by shareholders.

ROE measures how the management of a company utilized the company’s assets to create wealth for shareholders. It is the amount of net income returned as a percentage of the shareholders’ equity.

“Banks have had to suffer severe liquidity constraints in 2021 as CBN’s mop-up activities via CRR debits have weighed on financial system liquidity,” a research analyst at United Capital, Ayorinde Akinloye, said.

The decline began in 2020 when the CBN increased the CRR from 22.5 percent to 27.5 percent in January 2020.

CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the CBN. The higher the CRR, the lower the liquidity with the banks and vice-versa.

The CBN cited the need to control inflation and grow the economy as the reason for raising the CRR.

Over the years, Nigerian banks have had to contend with rising inflation, low Gross Domestic Product (GDP) growth, currency depreciation and other macroeconomic pressures.

These vulnerabilities were further compounded by the COVID-19 pandemic of 2020 and have made the banks more cautious with their funds.

At 27.5 percent, Nigeria has the highest reserve requirement in sub-Saharan Africa, while peers such as South Africa, Kenya and Ghana all have CRRs of below 10 percent.

The CBN has also increased the minimum loan-to-deposit ratio (LDR) of commercial banks to 65 percent, up from the 60 percent in 2019. The CBN has debited banks a huge chunk of their deposit in an attempt to drive lending to the private sector.

Analysts at Agusto & Co in its latest report say banks are facing tough times due to the CRR policy limiting their capacity to grant loans to customers.

“Assuming the sterile CRR were invested in treasury securities at 5 percent, N482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11 percent to 31.6 percent in the financial year ended 31 December 2020.”

Banks are also yet to fully recover from the low-interest rate environment experienced last year and this also affected their performance.

“The declining ROE can also be attributed to the low interest rate environment experienced in 2020. Banks invest based on maturing funds and although interest rate has risen compared to last year, it might not be till Q3 till banks see the impact,” Gbolahan Ologunro, an economist at Lagos-based Cordros, says.

Zenith Bank, GTBank and First Bank saw their interest income decline 6 percent, 18 percent and 22 percent, respectively. However, Access Bank and UBA grew their interest income by 32 percent and 8 percent, respectively, in the first half of 2021.

Access Bank

Access Bank recorded the highest ROE relative to other tier-one banks. The bank recorded an ROE of 11 percent in H1 2021, which implies that for every unit the shareholders’ equity held, 11 kobo was generated as profit.