Negative sentiment greeted the Cash Reserve Ratio (CRR) raise by the Central Bank of Nigeria (CBN) as big lender stocks slumped Monday with the sector emerging the day’s worst performing.
Apart from Guaranty Trust Bank which traded flat, tier-one banks lost bringing the sector’s index 1.19 percent lower in the day, while the broader market dipped 0.26 percent.
“The new CRR would affect the performance of banking stocks for now, but as the week progresses, the impact should fade,” said Gbolahan Ologunro, analyst at CSL Securities.
Ologunro said the policy would further pressure the earnings of banks, coming at a time when banks are trying to meet the 65 percent LDR target, minimum liquidity ratio of 30.0 percent and facing shrinking revenue from interest income.
Zenith Bank dropped 2.28 percent to end trading at N21.45, United Bank for Africa dropped 2.34 percent to end trading at N8.35, Access Bank ended the day at N10.00 after shedding 2.44 percent, while First Bank Holding traded at N7.00 after losing 4.11 percent.
CBN’s Monetary Policy Committee (MPC) had at its first meeting this year which held last week sprung a hawkish surprise on the market, as nine out of the 11 members of the committee elected to adjust the Cash Reserve Ratio (CRR) upwards by 500bps to 27.5 percent – a move last witnessed in March 2016.
Meanwhile, the committee kept all other policy parameters constant – MPR at 13.5 percent; asymmetric corridor around the MPR at +200bps/-500bps, and liquidity ratio at 30.0 percent.
Explaining the rationale behind its decision, CBN argued that the primary reason for the CRR hike was to curb possible inflationary pressures that may arise from expected excess liquidity in the near term.
On the contrary, raising the CRR further raises the questions about the seriousness of the apex bank’s policy actions towards driving credit extension to the private sector. More worrying is the fact that the 500bps hike in the CRR will sterilise between NGN1.00 to NGN1.50 trillion in liquidity from the system.
Cordros Securities in a report said the gross earnings growth of banks will be pressured by 6.5 percent on a base case, which implies that without growing asset bases, banks would generate 6.5 percent less income from earnings assets.
“Given this, there will be a need to significantly grow their asset bases to generate more income in 2020,” the report said.
Ologunro predicts that banks would sell down their holdings in fixed income to get the much-needed liquidity.
OLUFIKAYO OWOEYE
