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CBN’S N2.2trn CRR debits mean downward pressure on banks’ liquidity position

The Central Bank of Nigeria (CBN) has within the last four months precisely, April to July 2020, debited banks about N2.2 trillion for breaching its Cash Reserves Requirements (CRR).

This implies further downward pressure on deposit money banks liquidity ratios and earnings according to analysts at Fbnquest.

With eyes on rising inflation and surging liquidity, the CBN on January 24, 2020 raised the CRR by 500 basis points to 27.5 percent from 22.5 percent since 2016.

CRR is the percentage of banks’ deposits required to be kept in reserves with the Central Bank. Last week Friday, the CBN debited banks an additional sum of N118 billion for breaching its CRR requirements. Last week’s debit is the fourth by the CBN this year and brings the total sector debits for 2020E to about N2.2 trillion.

Read also: Breaking: CBN devalues official naira to N381/$

Johnson Chukwu, managing director/ceo, Cowry Asset Management Limited said in January that the banks are now suffering from multiple regulatory headwinds. One is that the CBN on one hand wants them to lend 65 percent of their deposits and also keep 27.5 pecrcent of their deposit with CBN and 30 percent liquidity, but the CRR does not count as liquid assets. So it is almost impossible for the banks to comply with all these regulatory requirements and still make profits.

In its previous note on the Implications of CBN’S debits on banks for CRR compliance in June 24, 2020, FBNQuest analysts discussed the impact of the discretionary debits on banks’ liquidity positions, cost of funds, and the potential implication of a rise in the cost of funds on banks‘earnings.

“In this analysis, we attempt to quantify the opportunity cost of the debits which Zenith and UBA were the most affected banks under the coverage of FBNQuest, Stanbic IBTC and GT Bank were the hardest hit this time around, both with debits of N15 billion each.

“Based on the total sum that each bank has been debited this year and our NIM assumptions for each bank, we estimate an aggregate opportunity cost of funds of N86 billion for our universe of banks coverage. Due to the sizable debits on their accounts with the CBN, Zenith and UBA have the highest opportunity cost of funds at about N34.4 billion and N15.8 billion respectively”.

In contrast, Fidelity and Access are the least impacted, with opportunity cost of funds of N2.9 billion and about N3.8 billion respectively. Assuming these funds were available to be deployed for lending by the banks, all else being equal, the firm estimates an average earnings impact of about -14.0 percent for its coverage universe.

According to the report by the firm, it is clear that the CBN sees these discretionary debits as a viable administrative tool for foreign exchange management.

“In our view, the CBN’S stance on CRR debits is at variance with its desire for banks to expand their balance sheet to increase lending to the real economy. Year-to-date, our universe of banks stocks has shed -21 percent compared with the -9.3 percent return on the NSE ASI. Nonetheless, we expect the hawkish stance of the CBN to continue to have a negative read-across for banks’ share performance. Our preferred names within the sector are GT Bank and Zenith (both rated outperform) because of their supportive valuations (P/B multiples of 0.8x and 0.4x for 26.6% and 22.7% respectively) and the quality of their financial soundness indicators relative to peers”.

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