CBN refunds N200bn to penalised banks on improved LDR

The Central Bank of Nigeria (CBN) has refunded part of the funds it debited a dozen lenders that missed its September deadline of a minimum lending threshold, after a majority of the affected banks improved their loan-to-deposit ratio (LDR) positions.

The apex bank returned about N200 billion to banks whose proportion of total loans to deposits increased between September 26 and 30, a reliable source told BusinessDay. The amount represents 40 percent of almost half a trillion naira of the banks’ customer deposits restricted by CBN on September 26.

Lenders were also asked to submit their net treasury bills (T-Bills) purchase in the last three-four months as the regulator intensified watch on banks’ participation in the money market which competes for funds that can support the real economy, sources say.

The CBN had in July asked banks to lend a minimum of 60 percent of their customer deposits in its bid to boost lending to the real sector of the Nigerian economy, failure of which would result in a levy of 50 percent additional Cash Reserve Requirement of the lending shortfall of the target LDR. The financial regulator had also assured a refund of the deduction whenever the lenders meet the set threshold.

The CBN further raised its minimum LDR this month to 65 percent for a December deadline and said it would review the benchmark every quarter. According to the bank, the policy is aimed at accelerating growth in Africa’s largest economy whose economy has expanded by less than 3 percent per annum (below population growth) since its emergence from a recession in the second quarter of 2017.

While Guaranty Trust Bank (GTBank) and First Bank of Nigeria were part of Nigeria’s biggest banks that failed to meet the 60 percent minimum LDR target, findings revealed that GTBank may have benefitted from the refund having met the target to provide more credit.

In the third quarter 2019 period, the CBN debited GTBank the sum of N25.1 billion as excess funds on which it could not earn any interest but would still pay its customers interest for depositing the fund in its custody, according to notes from its financial statements for the period.

“From our calculations, GTBank’s LDR stood at 60.7 percent as at 30th September 2019,” analysts at Lagos-based InvestmentOne said in a note to clients on Thursday.

United Bank for Africa plc was also given back some of the N99.7 billion deducted as additional Cash Reserves Requirement after it increased lending, according to the bank’s chief financial officer, Ugochukwu Nwaghodoh.

Nigerian banks have been wary to lend to the real sector of the country’s economy after a slump in oil price in 2016 which made their loan book go bad, prompting the lenders to seek the safety of depositors’ fund in low-risk government securities such as bonds and T-Bills which offered attractive returns and helped profit.

But the policy which has now seen an expansion of banks’ loan books by 5.33 percent to N16.39 trillion as at September 26, 2019 casts a pall on their earning capabilities as they move the fund to the real economy where Micro, Small and Medium Enterprises (MSMEs) need credit to expand.

Gross earnings of GTBank, Nigeria’s most capitalised lender, declined by 3.3 percent to N326 billion in the first nine months of 2019 following a 5.6 percent reduction in interest income to N224.2 billion, although its after-tax profit rose 3.4 percent to N146.99 billion.

“We think this was a decent performance by the bank, given the tough operating and regulatory environment so far this year,” analysts at InvestmentOne said.

“We do not have any target price for this stock, we proffer a Bloomberg consensus Target Price of N47.50, implying an upside potential of 75.9 percent, based on its closing price of N27.0 yesterday,” the analysts said.

Already, there has been a decline in banking stocks, many of which are attractive at record-lows, but investors are worried about the ability of banks to generate quality returns, analysts say.

The banking sector index is down 19.2 percent year-to date underperforming the broad market by 3.4 percentage points.

A reduction of the daily refunded deposit by banks at the Standard Deposit Facility (SDF) which can attract interest makes it unattractive for banks to keep funds with the apex bank, and a failure to meet the new minimum loan threshold of 65 percent by December 31 would see erring banks debited.

Analysts have called for a tighter risk management framework to ensure non-performing loans remain subdued, and in spite of the expected impact on earnings in the immediate period, they are optimistic on the resilience of banks.


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