Nigerian banks are rushing to boost lending to retail customers barely a month to the September 30 deadline set by the Central Bank of Nigeria (CBN) for banks to increase their loan-to-deposit (LDR) ratio to a minimum regulatory level.
This comes as three banks are currently below that threshold, according to data from their most recent financial statements for the second quarter (Q2) of 2019.
In order to spur lending to the real sector and propel economic growth, the CBN had mandated all Deposit Money Banks to maintain a minimum LDR of 60 percent, which will be subject to quarterly review.
The LDR compares a bank’s total loans to its total deposits for the same period and is expressed as a percentage. A high loan to deposits ratio means that the bank is issuing out more of its deposits in loans and vice-versa.
In computing the LDR, BusinessDay considered the loans and deposits at the bank level for the Nigerian operations, excluding the impact of the 150 percent SME/retail weighting on the LDR.
A cursory examination of the financial statements of lenders that have released Q2 results shows that one tier-1 bank and two mid-tier lenders failed to meet the minimum requirement as they recorded LDR of 57 percent, 52.50 percent, and 56.25 percent, respectively.
On the other hand, Zenith Bank, First Bank Holdings, First City Monument Bank, and Sterling Bank scaled the hurdle as their LDR stood above the threshold at 69.78 percent, 63.0 percent, 65.82 percent, and 75.28 percent, respectively.
In order to magnify their customer base, improve asset quality and bolster loans to deposit ratio, Nigerian banks are planning on tapping the retail segment of the market.
Guaranty Trust Bank’s management said in a conference call this week that the bank is on track to grow loans by about N40 billion-N50 billion to meet CBN’s 60 LDR limit by the September 30, 2019 deadline.
“We are ramping up efforts to grow our digital loan book, with related exposures now at N25.0 billion. Targeted sectors for loan growth are manufacturing, retail, consumer lending and telecommunications,” GTB said in the conference call.
Zenith Bank said it is creatively deploying new retail loan products to ensure it captures a reasonable share of the retail loan market.
Other lenders, from Access Bank to Stanbic IBTC, have rolled out new retail loan products.
Nigerian banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 percent. That compares with 78 percent across Africa, according to data compiled by Bloomberg. It’s above 90 percent in South Africa and about 76 percent in Kenya.
Lenders have been taking advantage of attractive yields on short-term securities to bolster profit and deliver higher returns to shareholders in form of higher dividend.
Analysts say banks are cautious to grant credit to the real sector of the economy as most of them are still recovering from the precipitous drop in crude oil price, which battered asset quality.
While the new lending measures could be slightly positive for loans in the subsequent quarters, they may impact negatively on banks’ assets quality as such credit extension may likely go to the low-asset quality sectors compared with the high-quality corporate bonds.
Kayode Tinuoye, fund manager at United Capital Limited, says he believes the tier-1 lenders will want to take the risk by forfeiting 50 percent of the target shortfall on the LDR to the central bank than create low-quality assets within the short period of time.
“I think close to 60-70 percent of the small players are close to that level but the ones without earnings capacity will struggle,” said Tinuoye.
However, Ronke Akinsola, head, financial services at Chapel Hill Denham, is of the opinion that it might not be easy for key players in the industry to cut deposits to meet the target.
BALA AUGIE
