The New York-based Fitch Ratings has faulted the Central Bank of Nigeria’s recent directive to have the country’s lenders give out at least 60 percent of deposits in loans, saying it is credit negative for the banking industry.
Fitch, one of the big three credit rating agencies, believes that the guideline will compel banks to turn on their lending tap to riskier borrowers, thereby putting banks’ asset quality at risk.
“Due to the new loan-to-deposit ratio (LDR) requirement, we have raised our 2019 loan growth forecast to an average of 10 percent for Fitch-rated banks compared with 1 percent growth in 2018”
Recall that the Central Bank of Nigeria last week mandated deposit money banks to maintain a minimum loan-to-deposit ratio of 60 percent effective September 30, 2019 in a bid to spur lending particularly small and medium-sized enterprises, retail, mortgage and consumer lending.
Erring banks will be sanctioned by depositing additional cash reserves equal to 50 percent of the lending shortfall.
To have the apex bank’s 60 percent LDR target achieved within the space of three months could be tough for lenders especially if customers’ deposits continue to grow at current level.
The current 57 percent LDR of Nigerian lenders is 3 percent short of CBN’s new target, and one of the lowest compared to emerging markets peers – India (79%), Kenya (76%) and South Africa (94%), according to figures compiled by Bloomberg.
Nigeria’s low LDR ratio indicates that banks are risk averse towards the economy that is yet to fully recover from the 2016 economic slump that skyrocketed lenders’ default loans.
For instance, despite the deposits received by the five big banks (First Bank, Zenith, Access, UBA and GTB) rose to a five-year high at N18.7 trillion in the first quarter of 2019, LDR dipped to a five-year low at 54 percent as banks’ prefer investing cash in the fixed income market to disbursing funds to real sector.
“It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards” said Fitch, adding that lenders continue to battle with high impaired and other problem loans, which is partly the cause for muted lending since 2016.
The current economic conditions do not support banks increasing their loan book, even as rapid lending during sluggish economic recovery could worsen lenders’ asset quality.
Regardless of the risks associated with rapid loan growth, Fitch urged Nigerian lenders to comply with the 60percent LDR target, saying penalty for erring might drag performance.
“Depositing cash at the central bank is highly unattractive for banks as they receive no interest on it, in contrast to the high yields they can earn by holding treasury bills and government bonds”
The rating firm said it will monitor how lending develops in the third quarter at individual bank and sectoral levels, maintaining that fast loan growth in the face of Nigeria’s hostile operating environment could hamper lenders’ asset quality and capitalization, two key sensitive indices for rating.
ISRAEL ODUBOLA
