Banks adjusting to impending lower interest rate regime

Nigerian banks are facing increasing pressure to adjust to the impending lower interest rate regime as their vaults brim with liquidity waiting for deployment, according to several economists and analysts.

Operational models of banks in Nigeria are being challenged after many years of protection from unusually high interest rates and the easy resort to trading in treasury bills but the Buhari administration’s frugal disposition means  banks must now look to making money the old fashioned way of credit expansion.

The Central Bank of Nigeria (CBN) is gradually adjusting its monetary policy stance with a view to achieving lower interest rates and stimulating the real sector which is currently crimped by double digit lending rates, banking sources tell BusinessDay.

The banks will be told at the next bankers committee meeting they must work quickly to cut lending rates, and there is now the very likely chance that the monetary policy rate, MPR, will be cut at the next monetary policy committee meeting of the Central Bank, BusinessDay has learnt from industry sources.

A major plank of the CBNs move to lower rates is its decision to cut back on open market operations (OMO) that hitherto sucked liquidity out of the system.

“The CBN has not sold OMO bills in about a month, which is unusual,” one senior investment banking source said on condition of anonymity.

“We believe that it is inevitable that the monetary policy rate (MPR) will be cut at the next committee meeting to bring it more in line with the current interest rate environment.”

A senior government official told BusinessDay there was a deliberate policy by the Buhari administration to slow down the sale of treasury bills to allow more room for lending to the real sector.

Nigerian Interbank rates or NIBOR, have also collapsed in recent weeks, as the Central Bank eased liquidity by cutting banks cash reserve ratio (CRR) to 25 percent at its last policy meeting.

NIBOR is the benchmark rate that Nigerian banks charge each other for short-term loans, ranging from spot, to six months tenor, and is considered a useful proxy for liquidity in the domestic credit markets.

The overnight rate (the most active) was quoted at 5.66 percent, according to October 23, data from the FMDQ.

The CBN last sold OMO bills on September 29, 2015, when it offered N50 billion at its primary auction at a rate of 13.5 percent, according to CBN data on its website.

Analysts say that without the regulator’s bold moves on FX management, the CBNs deliberate policy to pump liquidity into the system could have put artificial pressure on the naira.

The naira has remained stable against the dollar at near the N198/$ mark since early March, 2015, despite the halving of oil prices.

Banks may however have to change their business model and adjust to the new reality of lower net interest margins to maintain profitability.

“An orderly transition to a lower interest rate regime is possible, but requires bold reforms in banks’ liquidity management,” Ayo Teriba, the Cambridge trained CEO of consulting firm Economic Associates told BusinessDay.

The CBN believes deposit banks for now are holding on to see how long they can charge customer’s at current high interest rate levels and that they will have no choice but to adjust to the current reality.

Commercial banks currently prime and maximum lending rates range between 17 and 27 percent per annum respectively, according to CBN data.

“Despite low interbank rates, it is unlikely that we will see significant loan growth, because of perceived weak economic conditions, and doubts about the sustainability of low interbank rates,” Razia Khan, Standard Chartered Bank’s chief economist and head of Africa global research said in response to questions.

Bismarck Rewane, who is CEO at Financial Derivatives, expects “interest rates will come down symbolically by 100 basis points to 12%p.a at the next meeting.”

  Rewane says it will be difficult to justify and maintain low interest rates because inflation has crept up for eighth time this year, to 9.4% and explained that “the interest rate/inflation differential has moved against the naira.”

Nigeria’s GDP growth in the second quarter of 2015 was a meager 2.35 percent, mostly on lower oil prices.

September year on year rate of inflation printed at 9.4 percent (still in single digits) and gives the CBN room to cut the MPR, which is currently at 13 percent.

Meanwhile Treasury bill rates have fallen across board to an average of 4.56 percent and 11.45 percent for the one month and 12 month tenor, according to FMDQ data.

The Federal Government had N2.83 trillion in outstanding Treasury Bills as at June 2015, according to data from the Debt Management Office (DMO).

Falling interest rates while potentially reducing bank profits, will help boostthe real sector through lower cost of funds, as well as ease borrowing costs for government.

“Banks will need to scale up lending, as a mass crash in rates looms. With the Federal Government issuing less debt and not crowding out the real sector, it provides a stimulus for the economy,” a Central Bank source said.

PATRICK ATUANYA