A hike in Cash Reserve Ratio (CRR) for Nigerian banks that saw an uptick in primary auction NTBills rates for the first time in 16 weeks could weigh on stocks after a previous policy by the CBN pushed short-term bonds yields lower and supported flows to the equities market.
A total of N229.63 billion worth of successful transactions was recorded at the Nigerian Treasury Bills (T-Bills) auction conducted Wednesday by the Central Bank of Nigeria (CBN) on behalf of the Federal Government of Nigeria (FGN), this was the same amount offered at the auction.
“The impact is expected to be bearish on the equities market,” said Ayorinde Akinloye, a research analyst Lagos-based CSL Stockbrokers Ltd.
Akinloye said initial expectations was that there would be a liquidity anomaly in the fixed income space given negative yields which could have forced some funds back to the equities market particularly from PFAs.
“However, with yields showing signs of recovery, I expect PFAs to exercise patience to see if yields can come up to a decent level for them and thus could impact possible flows into the equities market,” Akinloye said.
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The stock market declined for third-straight session on Wednesday as year’s return dropped to 8.45 percent.
Thinning yields in treasury bills with negative real return have forced big local investors to look elsewhere for gains.
According to the National Pension Commission (PenCom) data as of 30 November 2019, there was an increase in equity exposure of local fund managers to 5.36 percent, up from 4.85 percent at the end of October.
Meanwhile Boboye Olaolu, Investment Research Analyst at Cordros Capital Limited said despite Wednesday’s auction outcome, yields are still at unfavourable levels compared to 13 percent levels it was late last year, above inflation rate.
“The high-end rate you saw at the auction, only few bills were sold at that rate. However, rates might go higher in next auction,” he said.
Analysts say banks will reduce demand for bonds as they struggle to meet up with CBN’s 65 percent LDR policy amid new CRR requirement. A move that would support higher fixed income yields.
The hike in Cash reserve ratio for commercial banks in the last Monetary Policy meeting from 22.5% to 27.5% is expected to suck up 5% of banks deposit, reducing the money supply.
The fear of a further spike in inflation regime forced the Central Bank of Nigeria (CBN) to undertake a moderate tightening stance at the first monetary policy of 2020, leading to the raising of Banks’ cash reserve ratio (CRR) by 500 basis point, from 22.5 per cent to a new level of 27.5 percent.
The move by the Central Bank is to mop up what the apex bank described as liquidity surfeit in the Nigerian economy, responsible for driving the inflation since August of 2019.
A breakdown of the results for the Treasury bill auction for January 29, 2020, reveals that the allotment for the 91-day and 182-day maturities were oversubscribed by a joint N42.73 billion.
The 91-day instrument was oversubscribed by N21.82 billion, the total amount that was placed on offer stood at N28.02 billion but investors jostled for N49.84 billion. For the 182-day, N33.68 billion was offered for auction but investors bid forN54.59 billion.
“This is the obvious impact of the increase in CRR. The increase took effect immediately and banks are therefore concerned about preserving liquidity,” Ayorinde Akinloye, a research analyst at Lagos-based CSL said.
While investors bid at rates as high as 12 percent, 11.5 percent and 14.4 percent on the 91-day,182-day and 364-day bills, the apex bank lowered rates across the three tenors to 3.5 percent, 4.5 percent and 6.5 percent, respectively. While the rates are the first rise since October 2019, they compare with 2.95 percent, 3.95 percent and 5 percent they cleared on the 91-day, 182-day and 364-day bills at the previous T-Bills auction which saw rates crash to a single digit for the first time in 3years.
“The investors’ panic mode has begun to subside. Due to the availability of other investment options like the Federal Government promissory notes with a higher yield, investors bided at a higher rate. Also, investors are cautious to lock in their funds at a lower rate,” Ayodeji Ebo, Managing Director, Afrinvest Securities Limited.
Stop rates across all maturities took a downward turn from 11 percent in October 2019 to the lowest bid rate for 364 days at 4 percent, as compiled from market auction results for January 15, 2020.
Analysis of the auction result for Wednesday 29 January 2019 revealed that the 364-day maturity was under-subscribed by a tune of N42.73 billion. While a total of N167.93 billion was offered, investors bid were N125.20 billion.
Market analysts see the move by investors, the first in a long time as an indication of unwillingness to stay at the long end of the curve.
According to Ebo, the DMO could not achieve its planned offer for the 364 days due to the higher bid rates. “This may be the end to the downward trend in yields, albeit, we do not foresee any significant rise in yields at the next auction,” he said.
Akinloye expects this to persist in the face of tightening system liquidity “while upcoming maturities are not very significant.”
