Investors have been said to have little to fear amid the current fluctuations in interest rates and Nigerian banks are also confident they can re-price deposits and loans advantageously this year.
This was stated in a new report on Nigerian Banks, titled, “Nigerian Banks, Resilience Built-In” by Coronation Asset Management.
Last year saw a precipitous fall in Naira-denominated market interest rates, and this year is seeing them rise again. Last year saw 1-year T-bill rates fall from 5.40 percent per annum in January to 0.15 percent in early December.
Twenty twenty-one is proving to be a year of volatile Naira market interest rates (rising sharply), as was 2020 (when they crashed).
The report shows that Nigerian banks’ earnings have been remarkably resilient over the interest rate cycle, their profitability is improving over time. and their stock values are remarkably cheap compared to Ghanaian and Kenyan bank stocks.
The report, written by Ope Ani and Guy Czartoryski of Coronation Research, examine what has happened within the Nigerian Banking industry in the last 10 years, it is a unique 10-year study of the margins and profitability of six listed banks: Zenith Bank; GT Bank; Access Bank; FBN Holdings; UBA, and Stanbic IBTC. These banks have adapted successfully to many changes in interest rates over the 10 years from 2010 to 2020. Therefore, they are well-positioned for the rise in rates in 2021.
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“While underlying growth in assets has been elusive, especially when data are adjusted for inflation, profitability has generally improved. The return on average equity (RoAE) and return on average assets (RoAA) of the six banks studied have both converged and improved over 10 years. This trend appears to be under-appreciated by investors, and the report shows the positive investment potential in the sector” says Guy Czartoryski a senior research analyst at Coronation Research.
According to the report, this year rates are heading back up again. 1-year Nigerian Treasury Bill (T-bill) rates have risen from 0.65 percent in January to 9.77 percent recently. The rate at which banks lend to each other, the interbank rate, has also gone up sharply, with 1-month NIBOR rising from 0.54 percent in January to 12.55 percent recently.
“Financial institutions that depend on short-term funding in the marketplace, and that have relied excessively on duration trades for their asset yields, could be facing problems this year, in our view,” Czartoryski.
On Cash Reserve Requirement (CRR), “what makes these rates move up and down? The obvious answer is Naira liquidity, but what is driving Naira liquidity at the moment? One way to answer this, at least in the context of late 2020 and 2021 year-to-date, is to look at the Cash Reserve Requirement (CRR).
The CRR is the proportion of customer deposits that banks must deposit with the CBN. This is 27.5% but it is widely acknowledged that the CBN requires more than this, with the so-called Excess CRR taking the total CRR up to close to 50.0% on average (our estimate)”, the report stated.
