As a result of the recent cut in interest rate by the Central Bank of Nigeria (CBN), deposit money banks have begun to reprice deposit rates lower, even as they stand firm on loans as customers still pay between 25 and 30 percent as cost of borrowing in a system already awash with liquidity, BusinessDay findings show.
The CBN at the last Monetary Policy Committee (MPC) meeting, reduced the Monetary Policy Rate (MPR) to 11 percent from 13 percent, and cut the Cash Reserve Requirement (CRR) to 20 percent from 25 percent and Asymmetric corridor around the MPR of +2/-7 percent.
Consequently, banks have cut the interest rates on customer savings to 3.3, 3.1 and even 3 percent from 3.6 percent previously, while interest on loans remains elevated.
Most banks have sent text messages informing their customers of their move lower deposit rates.
Some messages read: “Dear customer, in line with the CBN’s reduction in MPR, kindly note that you will earn an interest of 3.3 percent per annum on your savings account.”
Following the seemingly low interest rate environment, analysts expected banks to improve on their risk management, while calling on the CBN to be vigilant on risk assessment standards.
“The low interest rate environment is favourable to the government from a borrowing cost perspective. Notably, the 2016 budget will be partly funded by debt. It should also underpin debt-capital raising by corporates. On the banking sector liquidity, I expect the excess liquidity in the banking sector to be channelled to sectors that can drive employment and economic growth, particularly the infrastructure and agriculture sectors. Nonetheless, I expect banks to improve on their risk management in this regard,” Tajudeen Ibrahim, head of Equity Research, Chapel Hill Denham Securities Limited, said in an e-mail response.
Ibrahim further said, “I expect banks to keep their customers with product innovation, offering solutions to customer’s needs. A more robust relationship management should also keep banks’ customers in the financial system, despite the lower interest rates on their deposits.”
The average spread of 16 percent between the benchmark policy rate (11 percent) and top lending rates (30 percent) is unusually high in Nigeria, compared to peers.
In South Africa, the continents second largest economy, the benchmark Repo rate (rate at which the private sector banks borrow rands from the SA Reserve Bank) is at 6.25 percent while the prime lending rate quoted by Standard Bank is 9.75 percent, giving a spread of 3.5 percent.
The Central Bank of Kenya (CBK) has its Central Bank Rate at 11.50 percent and the Kenya Bankers Reference Rate (KBRR) at 9.87 percent.
The KBRR was introduced by the CBK to replace banks setting their own rates. This was done to increase transparency in credit lending and enhance the transmission between the Central Bank Rate and banks’ lending rates.
It is calculated as the weighted “average of the Central Bank rate and the weighted 2 month moving average of the 91-day Treasury bill rates” and adjusted every six months.
The KBRR is the base rate for banks and mortgage finance companies to charge their customers plus their own premium, determined by factors such as credit risk funding cost and cost of capital, among others.
Kenyan households are currently paying an average of 17.8 per cent for consumer loans and 15.2 per cent for mortgages, according to data from the Central Bank, meaning banks there earn an average spread of between 5.33 and 7.93 percent.
Boladeola Agbola, executive director, Cashcraft, Asset, Management, limited, envisaged people being forced to invest in income generating activities as margin on bank loans will thin out, while there will be more reliance on non interest income. Agbola advised banks to step up service delivery to remain profitable.
Razia Khan, managing director, chief economist, Africa Global Research, Standard Chartered, London said the hope was that banks would use the excess liquidity to direct towards real sector lending. However, she said given that the system is likely to be awash with liquidity, the CBN would need to be vigilant that underwriting standards/ risk assessment standards are not relaxed, with banks under pressure to find real sector lending opportunities in a slowing economy.
“If we see deterioration in asset quality of banks in the rush to deploy the new liquidity, it will not serve the banking sector well in the long-term”, she told BusinessDay in an e-mail response.
According to Adesoji Solanke, banking analyst at Renaissance Capital, interest rates will clearly remain low for longer, which implies 4Q15 margin pressure continues into 2016.
He said some banks would have significantly more funding cost benefits than others, while some are better shielded from asset yield pressure, given their loan/asset penetration levels. Further, the classic tier 1 banks (FBNH, Zenith, GTBank and UBA) that typically operate with significant excess liquidity on their balance sheets could face considerable margin pressure, given the low yield environment, while some banks such as Access and Stanbic could benefit more from lower funding costs vs. peers while dealing with systemic asset yield pressures, according to Solanke.
HOPE MOSES-ASHIKE
