Banks’ profits suffer as CBN debits N15trn cash reserves

Nigerian banks had as much as N15 trillion in cash reserves idling away with the Central Bank of Nigeria (CBN) in 2021, a move that affected the profitability of the lenders, Bode Agusto, CEO, Agusto & Co, said Thursday.

Agusto said this had impacted the banking industry liquidity and made the CBN introduce special treasury bills to banks.

On December 2, 2020, the regulator introduced a special 90 days tenor bill with zero coupons as part of efforts to deepen the financial markets.

The CBN increased the cash reserve ratio (CRR) from 22.5 percent to 27.5 percent in January 2020. 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 below 10 percent.

“The impact of the CBN’s hawkish CRR policy on the banking industry is huge and the impact is being felt in the sector,” Agusto said.

“I believe that is why the CBN now came round and said, okay, we will refund some of your CRR but we will call it special bills. We will give interest at point 5 percent per annum and then you can classify the special bills as part of your liquid assets, and it will qualify for the liquidity requirements,” he explained.

The special bills are not easily convertible into cash but a piece of paper that counts towards their liquidity, he said.

Apart from the banking sector, he said the development also constrained the ability of Asset Managers to deliver competitive returns and that pension assets are going to be impaired big time, “because last year inflation was 18 percent.

“Is there any pension assets manager that has been able to deliver a return on assets of 17 percent plus to its pensioners? It means there is a negative return eroding the purchasing power of pensioners.”

If this continues for a reasonable length of time then there is going to be a big problem for pensioners, Agusto said at a webinar on ‘Nigeria in 2022 – “Will 2022 be a year of strong growth driven by herd immunity from Covid-19?”

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Abiodun Keripe, managing director, Afrinvest Research & Consulting, had said, “We are all looking at the CBN easing liquidity within the banking system and broader economy but when they do another round of debit in connection with CRR, what they are doing is threatening liquidity and making it difficult and more complex for banks to support the economy via the creation of credit at a decent pricing.”

Uche Uwaleke, a professor at the Department of Banking and Finance, Nasarawa State University, Keffi, said the impact would be a reduction in banking sector liquidity capable of pushing up lending rates. The frequency of the debits is a pointer to the fact that the 27.5 percent CRR is on the high side and that the time is ripe to reduce it, consistent with the CBN’s present pro-growth stance.

The Return on Equity (ROE) of Nigeria’s biggest banks has declined in the last two years over hawkish CRR policy, which has continued to batter their performances.

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 declined from 11 percent in the first half of 2020 to 9 percent in 2021.

In 2019, the CBN introduced a policy requirement for banks to achieve a Loan to Deposit Ratio (LDR) of at least 65 percent, to encourage more lending to the real economy.

This will make it harder for banks to meet the target, potentially leading to penalties for non-compliance, including having to deposit extra cash reserves over and above 27.5 percent, according to analysts at Fitch Ratings, who admitted that the higher CRR will also dampen banks’ profitability as reserves deposited with the CBN are unremunerated.

However, the CBN in 2020 introduced the Differentiated Cash Reserves Requirement (DCRR) Regime. Under this programme, deposit money banks interested in providing credit finance to greenfield (new) and brownfield (expansion) projects/customers in the real sector (agriculture and manufacturing) are provided with cheap funds from their CRR.

The banks interested may request for the release of funds from their CRR to finance such projects.