It is likely going to be a tough year for the banking sector, following the new Cash Reserve Ratio (CRR) announced by the Central Bank of Nigeria (CBN) on Friday, which will lead to lenders’ deposit with the regulator rising to about 22 percent.
With eyes on rising inflation and surging liquidity, the CBN on Friday moved against wide projections by analysts and raised the CRR by 500 basis points to 27.5 percent from 22.5 percent since 2016.
According to the CBN monthly economic report in November 2019, total deposit at the CBN stood at N14.35 trillion, of which deposits by commercial banks amounted to N5.15 trillion (35.9% of total deposit).
At previous CRR of 22.5 percent, a N5.15 trillion in deposit at the CBN mean total customer deposit in banks stood at N22.89 trillion as at November 2019. With the new increase in CRR to 27.5 percent, given a total deposit in banks at N22.89 trillion, banks would be required to deposit with the CBN N6.29 trillion representing a 22 percent increase in deposit to the CBN.
Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, said this simply means that the banks are now suffering from multiple regulatory headwinds. One is that the CBN on one hand wants them to lend 65 percent of their deposits and also keep 27.5 percent of their deposits to CBN and 30 percent liquidity, but the CRR does not count as liquid assets. So it is almost impossible for the banks to comply with all these regulatory requirements and still make profits.
The amount in cash reserve is completely sterilised, and does not attract interest to the banks, so the banks are going to have 27.5 percent of their deposits with the CBN at no interest, no benefit and they can only lend 65 percent of their money and expected to keep liquidity ratio of 30 percent.
“So, if you sum all these, it is clearly above the 100 percent of the deposit. So in effect, the CBN is expecting banks to lend from their shareholders’ fund”, Chukwu posited.
Godwin Emefiele, governor of the CBN, who announced the increase in the CRR after the first Monetary Policy Committee (MPC) meeting for the year, said Committee was confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards.
Razia Khan, managing director, chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said given the punitive CRR that banks face in the event that they fail to meet the stipulated minimum LDR, it is not entirely clear that the ‘normal CRR’ rate itself needed to be raised. “Today’s (Friday) announcement is however still a tightening of liquidity, and near-term, we would expect market interest rates to adjust to this, most likely at the very front-end of the curve,” Khan said.
She said continued Open Market Operation (OMO) maturities will still prove to be an offsetting influence, but the floor in yields should now adjust higher, sending a message on the CBN’s intention to preserve currency stability and its ongoing concern over the price level.
The CBN also left the Liquidity Ratio (LR) steady at 30% as well as the Assymetric corridor around the MPR at +200/-500 basis points.
Bismarck J. Rewane, the managing director of Financial Derivatives Company Limited said, “I think it was a smart move from the CBN because he realized that inflation is rising. Knowing the inflation above 12 percent is growth retarded and he has to do something and be proactive”.
Inflation moved up to 11.98 percent (year-on-year) in December 2019, the highest rate within that year and also since May 2018. Authorities blame heightening inflation which has come through largely food and also core – on the current border closure policy.
Rewane said the banks’ earnings will definitely be threatened with its high volumes and low margins. “And I think that the cost of funds could be the real issue because they have to cover this position. Effective CRR for many banks is above 22 and half or maybe above 27 percent. But the reality is that the CBN will debit you, so there will be some debit flying around all over the place. I think the soundness of the banking system and the relative difference between the performance of tier one, two and other banks will be a major factor,” he said.
Ayodeji Ebo, MD, Afrinvest Securities Limited, said this would be a negative one for them because the funds will be taken out of the banking system to CBN and it means that they will not be able to earn anything on those funds. This will tell on their income and add additional pressure on them. The CBN is trying to reduce liquidity available to the banks on one hand.
On his part, Ibrahim Tajudeem, head of Research, Chapel Hill Denham, said the development will reduce the liquidly position of the banks. “And what we will expect for the banks is properly to reprise the interest rate, the loans that some of them have reprised downwards they may consider to take them back up and they will be unwilling to issue new loans at lower interest rate because when you have less liquidity, it means your ability to lend has reduced and there are chances that you will increase your interest rate at the back of that.
So this is a hawkish move by the CBN. The CBN has been dovish by giving out loans and to build up liquidly in the financial system but now they are pulling back the excess liquidity via CRR which makes them sort of hawkish from dovish.”
HOPE MOSES-ASHIKE, ONYINYE NWACHUKWU (Abuja) & BUNMI BAILEY
