Negative sentiment greeted the Cash Reserve Rate (CRR) raise by the Central Bank of Nigeria (CBN), as big lenders’ stocks slumped Monday with the sector emerging day’s worst performer.
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.
CBN’s Monetary Policy Committee at its first meeting this year on Friday, January 24, raised the Cash Reserve Ratio (CRR) upwards by 500bps to 27.5percent – a move last witnessed in March 2016.
The MPC retained all other policy parameters constant – the Monetary Policy Rate at 13.5percent; asymmetric corridor around the MPR at +200bps/-500bps; liquidity ratio at 30.0percent.
It also maintained the demand for a minimum of 65 percent on the loan-to-deposit ratio for the banks. The combination of these ratios, analysts say, will impact negatively impact the operations of banks in the year.
“The new CRR would affect the performance of banking stocks for now, but as the week progresses the impact should fade,” Gbolahan Ologunro, an analyst at CSL securities, said.
According to Gbolahan, the policy would further pressure the earnings of banks and comes at a time when banks are trying to meet the 65percent LDR target, a minimum liquidity ratio of 30 percent, and shrinking income from interest income.
Zenith Bank dropped 2.28percent to end trading at N21.45; United Bank for Africa dropped 2.34percent to N8.35; Access Bank ended at N10.00 after shedding 2.44percent, while First Bank Holdings traded at N7.00 after losing 4.11percent.
The CRR is the portion of total deposits that lenders are expected to keep with the central bank. It serves as a monetary management tool used by the central bank to control the volume of money in circulation and attracts no interest payment.
Explaining the rationale behind its decision to raise the CRR, the 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.
Inflation at the end of December 2019 rose to 11.98 percent, according to figures released by the National Bureau of Statistics.
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 worrisome is the fact that the 500bps hike in the CRR will sterilize between NGN1.00 to NGN1.50 trillion in liquidity from the system, according to Cordros Securities.
Cordros in a report published Monday said the gross earnings growth of banks would be pressured by 6.5percent on a base case, which implies that without growing asset bases, banks would generate 6.5percent less income.
“Given this, there will be a need to significantly grow their asset bases to generate more income in 2020,” the report said.
Gbolahan predicts that banks would sell down their holdings in Fixed Income to get the much-needed liquidity.