…as lending raises concerns of high NPL


On the back of the drive to support the real sector of the economy, analysts have identified that the Central Bank of Nigeria (CBN) may again raise loan to deposit ratio to 70 per cent in 2020. A number of equity analysts pointed out that lending to the real sector has expanded in terms of size, but the growth is still lacking in key economic segments.

In its note on major theme that would shape Banks performance in 2020, analysts at WSTC Securities limited mentioned that the firm foresees increase in the LDR to 70 per cent in 2020. The LDR had been raised from 60 percent to 65 percent in September with effect from December 2019.

Meanwhile, the apex bank last week in a circular to deposit money banks retained 65% LDR ratio for first quarter of the year. CBN however said that the incentives which assign a weight of 150 percent in respect of lending to the SMEs, retail, mortgage and consumer lending shall continue to apply.

It warned that failure to achieve the target shall continue to attract a levy of additional cash reserves requirement of 50 per cent of the lending shortfall of the target LDR on or before March 31, 2020.

Reacting to the CBN stance, Consultants at LSintelligence said the LDR thing is regulator’s last resort after its failed moral suasion. The firm said what the apex bank is trying to do is to connect macroeconomic growth with financial services sector performance.

“Banks have been outperforming the economy in the past. For example, when the Nigeria’s economy slipped to recession in 2016, Banks performance were very strong and uptick”.

“In a properly structured economy with policy strategy drive, it’s an anomaly. Banks performance elsewhere often reflects actual situation in the economy”, the firm stated in an email.

Reading the mood in the economy, they stated that in the apex bank quests to spur lending into the real sector of the economy, LDR is expected to be increased again.

Investment bankers and analysts recalled that in a bid to stimulate growth and drive private sector lending, the Monetary Policy Committee reduced the Monetary Policy Rate for the first time in three years. The MPR was reduced by 50 basis points from 14 per cent to 13.5 per cent in March 2019, which has thereafter been sustained at the level.

Analysts think this was not enough to encourage banks to lend to the private sector as yields on risk-free instruments hovered at about 12 to 14 per cent. Pundits anchored this on the fact that the CBN has almost exhausted measures to support economic growth, and looking at the banking sector that hold about N100 trillion in total assets has been its free ticket.

The banks’ books have been bulging on the back of increased loan growth given the new minimum 65% loan to deposit ratio (LDR) directive by the CBN. Analysts at WSTC however said that the decline in yields in investible risk-free instruments and resultant excess liquidity bode well for the banking sector cost of funds.

CBN singular act of preventing non-banks and other investors from participating in OMO sent yields (1-yr) crashing to 6.78% in December 2019, from 12.50% in the first half of 2019 and 16.28% as at the start of 2019.

“Interestingly, rates at the OMO space remained at about 15 per cent”, WSTC analysts revealed.

Analysts said they expect an improved net interest margin, but estimated a slight uptick in non-performing loan ratio (NPL) owing to increased loan drive. WSTC in a note mentioned that lower non-interest income expected on the back of reduction in bank charges by the CBN.

However, we expect the impact to be partially cushioned by increase in transaction volume on bank’s digital platforms, analysts projected. There is also expected to be an increased competition in the digital banking space, resulting from the influx of several fintech players.

“We note the efforts and intentions of the Central Bank of Nigeria to spur private sector lending. However, we are cautious about the sustainability of policy, as the fundamentals, in our view, does not support lower rates in the economy”, WSTC reckoned.

WSTC analysts highlighted that while it expects the CBN to use more of the LDR regulation to direct banks to lend, they foresee a possibility of rates reversal in 2020, owing to a couple of factors discussed below”.

“Based on the CBN’s liquidity management policy of stabilising the foreign exchange markets through regular interventions, and the current declining trend of the external reserves, we expect to see a relatively aggressive stance in the OMO market.

This is to keep supply afloat and T-bills market as a way to keep demand in check amid excess liquidity. That is, the possibility of funds going after the U.S dollar. The nation’s external reserve slipped to low gear to $38.6 billion as at December 2019 from $42 billion as at January 2019.

In the mid-year, external reserve had crossed $45 billion mark but analysts at Cardinalstone stated in a note that the apex bank expended more on defending the local currency down the year. WSTC Securities noted that in the T-bills space, a basis for a possible reversal of the CBN stance stems from the anticipated wider fiscal deficit.

“Although the FG estimated a fiscal deficit of N2.17trillion in 2020, we believe that the deficit will be much wider to N3.22trillion as estimated.

“As a result, we expect to see increased activity in the domestic debt markets, especially as the possibility of a foreign debt took a hit following the sovereign downgrading by Fitch and Moody”, WSTC emphasised.

Inflation stood at 11.85 per cent as at November 2019. With 1-yr bill in the investible T-bills market at 6.78 per cent, it implies a negative yield of about per cent.

The firm’s analysts estimated that given the supposed impact of the hike in electricity tariffs expected to take-off in 2020 and continued inflationary pressures due to the border closure; they expect that there will be a market repricing in yields in 2020.

WSTC again stated that there was three consecutive decline in the current accounts to the sum of -$2.61billion in the first quarter of 2019, -$3.77billion in the second quarter, and $2.79billion in the third.

“The implication of a current deficit is that importation of goods and services outstrips exports. When the current account is negative, it has to be matched with a surplus (net inflows) from the capital accounts”.

Hence, we see a possibility of an upward trend in rates in 2020.