Nigeria’s big banks see 13% dip in interest expense as customers’ deposits hit 4-year high

Nigeria’s tier 1 banks saw a combined 13 percent dip in interest expense on customers’ deposit to N196.8 billion in half year (H1) 2020 from N225.9 billion in H1 2019, the largest drop in 4 years stemming from downward revisions of interest on deposits and monetary policy rate (MPR).

The tier 1 banks in Nigeria are Guaranty Trust Bank (GTB) Plc, Zenith Bank Plc, Access Bank Plc, United Bank for Africa (UBA) Plc and Union Bank Nigeria Plc (UBN) according to market value by the Nigerian Stok Exchange (NSE).

Meanwhile, customers’ deposits reached its highest point of N18.37bn in 2020, a 24% rise from N14.8bn in 2019 on half-year basis.

This increase is a huge improvement from N10.05bn in H1 2017, which accumulates to 82.8% growth in customers deposits over the four-year period.

Whereas, the increase in customers deposit is a stark contrast from the 16.5% decline in interest expenses on these deposits to N196.8bn in H1 2020 from N235.7bn within the four-year period observed.

“One major factor that triggered the reduction of interest on deposit was the increased loan-to-deposit ratio (LDR) in July 2019 to meet 60% threshold by 30th September 2019”, said Gbolahun Ologunro, a research analyst at Lagos-based CSL Stockbrokers.

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“This hike in LDR was initiated by the Central Bank of Nigeria (CBN), which later extended LDR to 65% by December 2019 for Nigerian lending banks”, added Ologunro. In line with this, Omobola Adu, a research analyst at Growth and Development Asset Management (GDL) explained that “the new LDR means that for every N100 banks receive as deposit, they must give N65 as loans as against the former N60 and prior lesser amounts. “So, in a bid to avoid the risks that come with non-performing loans and avoid penalty charges from CBN by meeting up with the LDR threshold, banks are left with two options.

“First, banks can either reduce customers’ deposits by making it unattractive to discourage people from depositing money with them.

“But this could negatively drain their customer base and hurt the banks who majorly thrive on customer deposits for their expansion. “Alternatively, banks could reduce interest rate on customers’ deposit, which seems to be the preferred option given the recent trends of Nigerian banks”, said Adu.

For instance, a N500,000 deposit in access bank would attract a 1% interest earning between the end of 2019 till now compared to previously higher interest rates of 5%.

“This preference to reducing interest on customer deposit can be easily understood considering the fact that Nigerian banks were wary of the already high level of nonperforming loans”, Adu added.

According to the latest banking sector report released by the National Bureau of Statistics (NBS), non-performing loans in Nigerian banks rose by 14% to N1.212 trillion at the end of June 2020 from N1.059 trillion in December 2019.

Also, the Computer and Enterprise Investigation Conference (CEIC), a Global Economic Data Platform, reported Nigeria’s nonperforming loan ratio stood at 11.4 percent as at December 2018 with non-performing loan defined as interest or principal that is due and unpaid for 90 days or more.

So, banks’ reluctance to expand on loans to customers was related to the repayment difficulties that many individuals and sectors faced as a result of difficult economic situations, and a need to cut cost to match their now lower revenue stream.

“Ologunro further mentioned that “Prior to the revised guideline from CBN, banks had already reviewed their interest rates on all form of customer deposits (time, savings and current deposits) downward since Q4 2019”

The statistical database from CBN shows how the weighted average interest rate of deposit money banks has been on a downward trend for some years now.

As far back as 2017, which is the starting year of the period under review, the weighted average on savings has consistently declined to 3.78% in July 2020 from 4.22% in January 2017.

Similarly, commercial banks interest rate on time deposit for various maturity periods ranging from 7 days to 12 months have reduced within the period of study with very slight increases in 2018.

This corresponds with data gathered by Businessday from NSE financial reports on the interest expense of tier 1 banks in Nigeria. “Another key factor that contributed to the drop in interest on customer deposit was the reduction of monetary policy rate (MPR) by the monetary policy committee (MPC) of CBN to 12.5% in May 2020 from 13.5% in May 2019”, Adu said.

Ologunro added that “this drop in MPR was a response to CBN’S policies and consequently restricted domestic investors from participating in the open market operations (OMO) market.

“Further, these CBN policies led to decline in low yields on loans and risk-free assets causing banks to scramble for customers.

“Customers, then had bargaining power to demand lower rates for borrowed funds and fixed deposits in addition to taking advantage of re-financing existing debt obligations at lower rate”, Ologunro said in explaining the reduced interest on customer deposits. More recent trends of the further reduction of MPR to 11.5% on September 22, 2020 signal that interest on customers’ deposits is likely to plunge even deeper.

This is because the former MPR of 12.5% meant that interest rate on savings deposit of minimum 1.25% in May 2020 as against its former 3.75% would now further reduce to 1.15%.

So, customers would likely earn even lower interest on their deposits moving forward while banks strive to reduce their cost and meet up with the new LDR rate of 65% to avoid huge penalty (50 percent of the shortfall in LDR in additional cash reserve requirement) from CBN.