Banking system liquidity gains amid interbank declining rates

Liquidity in Nigeria’s banking system rebounds at N572.8 billion from a N307.8 billion deficit recorded in January, driven by substantial inflows from primary market repayments, open market operations repayments, and standing lending facility transactions, Afrinvest report shows.

According to the report, inflows from primary market repayment rose to N2.9 trillion, and standing lending facility transactions grew to N24.2 trillion outpacing the open market operations repayment of N823.3 billion in January.

“Inflows from primary market repayment (N2.9 trillion), OMO repayment (N823.3 billion), and SLF (N24.2 trillion) outpaced outflows via OMO sales (N1.4 trillion), PMAs (N1.4 trillion), and SDF (N4.2 trillion). As such, OPR and OVN fell 2.4ppts and 2.2ppts m/m to 26.8 percent and 27.3 percent respectively,” the report said.

A standing lending facility is a short-term loan that a central bank provides to commercial banks while standing Deposit Facility is a financial instrument employed by central banks to regulate liquidity within the financial system.

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Additionally, open market operation refers to any of the purchases and sales of government securities and sometimes commercial paper by the central banking authority for the purpose of regulating the money supply.

As a result of the improved liquidity, the open repo rate and overnight rate declined by 2.4 percent and 2.2 percent month-on-month to 26.8 percent and 27.3 percent, respectively.

According to Afrinvest, this auction was met by strong interest from investors with an overall bid-to-cover ratio of 2.5x. Most of the interest was on the 362-day notes with a bid-to-cover ratio of 1.5x.

“At the NT-bills auctions, instruments worth N1.4 trillion were offered cumulatively (Subscription: N5.6 trillion, Sales: N1.4 trillion). Overall, the long-end of the curve saw the most interest (bid-to-offer ratio: 5.5x) while short- and mid-dated notes were less demanded with bid-to-offer ratios of 0.8x and 0.3x respectively,” it said.

Afrinvest reported that buy-side interest was recorded across the yield curve, leading to declines of 2.6 percent, 2.8 percent, and 4.6 percent on short, mid, and long-term instruments, respectively, bringing their yields to 19.4 percent, 19.8 percent, and 21.3 percent.

Looking ahead, analysts at Afrinvest expect the bullish sentiment in the fixed-income market to persist, driven by net inflows of N2.6 trillion from bond coupon payments and maturities.