Nigeria’s biggest banks were more concerned about their exposure to risk than the return on their investment in the first quarter of 2021 as their investment in government securities rose faster than their lending to the economy.
Despite the negative real return, the five tier-one lenders raised their holdings in government securities by 46.49 percent in the first three months of 2021 as against the 11.72 percent rise in their loans and advances to customers.
This mirrors their perception of an economy that’s still reeling from the pandemic and is stuck in a low growth cycle, with fears that lending aggressively at such a time would increase their non-performing loans, investment analysts said.
“Despite the low-yield environment In Q1, banks took more position in investment securities that are secured rather than lend aggressively to an economy still reeling from the pandemic,” Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said, adding that banks will lend based on how economic activities improve.
After two straight years of declining NPLs, the Nigerian banking industry saw an increase in non-performing loans to 6.02 percent of gross loans in 2020 due to the pandemic.
Analysis of the Q1 financial report of the five biggest lenders in Africa’s largest economy showed that their holdings in investment securities increased by N2.61 trillion to N8.23 trillion in the first quarter of 2021 from N5.63 trillion recorded in the corresponding quarter of 2020.
Compared to the N7.86 trillion reported in the fourth quarter of last year, the banks’ investment in government securities like bonds and treasury bills increased by N370 billion. The N8.23 trillion reported in the review period is the highest on record since BusinessDay started tracking the data in 2015.
On the other hand, the banks’ loans and advances to customers was up N1.3 trillion or 11.72 percent, 34.77 percentage points less when compared against the 46.49 percent rate the lenders increased their investment securities. The five banks gave loan that was worth N12.77 trillion to their customers in Q1 2021, N1.34 trillion higher than the N11.43 trillion they gave the year before.
On-quarter-on comparison, the banks’ lending was up 2.74 percent from N12.43 trillion in Q4 2020 to N12.77 trillion in Q1 2021.
“Yields have been improving this year and as long as they get better return they wouldn’t want to take much risk with lending,” Ebo said.
After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free Treasury bills (T-bills) climbed to more than one year high in the first quarter of 2021.
The rates on the 364-day federal government short-term T-bills rose to 9 percent from 1.5 percent at the beginning of the year.
But with Nigeria’s 18.17 inflation rate in March, the highest in four years, the real return on the federal government less risky short term debt instrument depreciated further when compared to March 2020 when the inflation rate stood at 12.26 percent.
Read Also: FX, inflation possible consideration for a ‘hold’ as MPC meets Monday
While inflation-adjusted return on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively in the first quarter of 2020, the real return on the bills dropped further to -16.17 percent and -14.67 percent in the comparable quarter of 2021, thanks to Nigeria record-high 18.17 inflation rate in March.
The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -9.17 percent in the same period of this year.
As the interest rate is trying to play catch up, inflation is moving upward too, Yinka Ademuwagun, Research Analyst, FMCGs, United Capital Plc said in March.
“The real return is still clearly negative because inflation is rising faster,” Ademuwagun said.
However, the recent uptick in the yields on the short term government instrument is helping to comfort investors against the rate at which the high inflation rate is impacting their returns.
The stop rates on T-bills climbed to more than 17 months-high at the last primary market auction on May 14, 2021. Open Market Operation (OMO) policy by the central bank on October 23, 2019, which prevents domestic investors from participating in OMO auction was largely responsible for the record low-interest rates.
Market analysts link the recent uptick in interest rates to the hike in CBN’s OMO rates a few months ago. Investors are bidding at higher rates and the Debt Management Office (DMO) also needs to raise the cut-off rate to fill some of the orders, an analyst noted.
Weeks after the CBN shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed-income investors demanded higher rates for T-bills.
While investors bid at a rate as high as 5 percent for the 91-day bill, 7.5 percent and 12.9 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 9.75 percent, respectively.
Stop rates for the 182-day & 364-day bills remain unchanged. However, the 91-day bill rose by 50bps to 2.5 percent.
The move by CBN to convert all excess CRR debits of roughly N4.0tn to special OMO for banks was another reason for the increase in banks’ investment in securities in Q1 2021, Ayorinde Akinloye, investment research analyst at United Capital said.
According to him, it caused a surge in investment securities for most banks. Thus, may have been “CBN-induced.”
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auction at both the primary and secondary market. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
United Bank for Africa (UBA) topped the chart with the highest investment in securities in Q1 2021. The lender increased its holdings to N2.65 trillion from N1.82 trillion in Q1 2020.
It was followed by FBN Holdings with N1.78 trillion in the review quarter. Access Bank, GT Bank and Zenith completed the list with holdings of N1.78 trillion, N1.01 trillion, and N999.69 billion, respectively in investment securities.
