Business
Banks face new profitability challenges …Rising credit costs cast a pall on projections
BY EMEKA EJERE
Continuous liquidity deficit in the Nigeria’s banking sector has left the players depending heavily on the Central Bank of Nigeria (CBN) in order to meet their obligation.
This has seen the lenders’ borrowings from the CBN jumping by more than three folds in the last six years, with many market analysts blaming high Cash Reserve Requirement (CRR) and other regulatory measures of the apex bank.
Available records show that banks’ borrowings from the CBN rose by 233 per cent, year-on-year, to N26.9 trillion in 2021, reflecting increased reliance on the apex bank to cope with the intense scarcity of funds which prevailed in the interbank money market for most part of last year.
The CBN has two short term lending windows for banks namely the Standing Lending Facility (SLF) and Repo (Repurchase) lending. While it lends money to banks through the SLF at interest rate of 100 basis points (bpts) above the Monetary Policy Rate (MPR), the apex bank also lends money to the lenders through Repo arrangement, which involves the purchase of banks’ securities with the agreement to sell back at a specific date and usually for a higher price.
On the other hand, the banking sector regulator accepts deposits from banks through its Standing Deposit Facility (SDF).
Data from the CBN showed that banks’ borrowing through Repo arrangement rose sharply last year by 1,602 per cent to N13.938 trillion from N819 billion in 2020. Most of the borrowing via Repo occurred in the second half of the year (H2’21) when banks’ borrowed N7.37 trillion, up by 12 per cent from N6.57 trillion in the first half of the year (H1’21).
Similarly, banks’ borrowing through the CBN’s SLF rose sharply by 79 per cent, YoY in 2021 to N13 trillion, from N7.25 trillion in 2020.
Financial Vanguard analysis however showed that borrowings through the SLF fell by 57 per cent in H2’21 to N3.9 trillion from H9.04 trillion in H1’21.
Consequently, banks’ borrowing from the apex bank through the SLF and Repo rose by 233 per cent YoY to N26.9 trillion in 2021 from N8.1 trillion in 2020.
“Activities at the standing facility windows showed predominance of the lending window over the deposit window due to tight liquidity in the banking system,” CBN noted in its monthly economic report.
“Banks have to cover their positions to cover any gap left by the CRR debits,” Ayo Ebo, senior economist/head, Research and Strategy, Greenwich Merchant Bank, said, linking the increase in banks’ borrowings to the “frequent CRR debits by the CBN in recent times.”
In a bid to moderate inflation amid efforts to maintain a stable exchange rate, the Monetary Policy Committee (MPC) of the CBN increased CRR to 27.5 percent for both merchant and commercial banks in January 2020.
The CRR empowers the central bank to sequester up 27.5% of customer deposits held by commercial banks, effectively restricting the banks from accessing the money.
The apex bank has debited a chunk from banks’ deposits since 2019 as part of a mutually inclusive CRR and Loan to Deposit Ratio policy that was targeted at driving lending more to the private sector. Market analysts believe that the record-high CRR of 27.5 percent by the CBN is cribbing the lenders’ profitability.
Banks have had to suffer severe liquidity constraints in 2021 as CBN’s mop-up activities via LDR debits have weighed on financial system liquidity, a research analyst at United Capital, Ayorinde Akinloye, said.
“In addition, federal government’s borrowing activities have been fairly aggressive with the sovereign debt managers typically overselling debt instrument auctions, leaving a net deficit impact on system liquidity,” Akinloye observed.
He believes the aforementioned forced banks to heavily rely on CBN’s SLF window as they are able to borrow at accommodative interest rates to ease liquidity pressures.
Findings show that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRRs of below 10 percent.
According to Agusto & Co.’s flagship 2021 Banking Industry Report, the industry’s restricted cash reserves exceeded N9.5 trillion in 2020 and translated to an effective CRR of 37 percent.
“We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review,” research analysts at the Lagos-based credit rating agency said.
Explaining how the CRR policy is affecting the banks’ profitability, Agusto & Co. said banks could have earned as much as N482 billion if the lenders had invested the cash they kept with CBN in a fixed income instrument.
“Assuming the sterile CRR was invested in treasury securities at 5 percent, N482 billion would have been added to the industry’s profit before taxation. This would have increased the industry’s return on average equity (ROE) by 11% to 31.6% in the financial year ended 31 December 2020.”
Among other factors, the policy by the central bank that requires banks to keep the cash they could have used to grow their bottom line with the regulator may have also affected investors’ appetite for the stocks of the Nigerian banks.
A recent report by Bloomberg revealed that Nigerian banks were some of the cheapest stocks in Africa. Four of the five African stocks with the lowest price-earnings ratios among companies valued at $500 million or more are Nigerian lenders, data compiled by Bloomberg show: United Bank for Africa, Access Bank, FBN Holdings and Zenith Bank.
Meanwhile, some shareholders have called for the reduction of banks’ mandatory CRR. Founder of the Independent Shareholders Association of Nigeria (ISAN), Sunny Nwosu, urged the apex bank to reduce the CRR to 15% from 27.5% or pay interest on the restricted deposits to the banks, noting that the banks had over N12 trillion restricted deposits with the CBN.
Nwosu, according to NAN, explained that the decision by the apex bank to review most bank charges and fees downward, coupled with the hike in the CRR, amid expectations of increasing regulatory headwinds, was currently causing a setback in the sector.
“We believe the elevated CRR level moderated the industry’s performance and liquidity position during the year under review”, he said.
According to Nwosu, the tight monetary policy of the CBN has continued to plummet the banking sector with a multiplier effect on the equities market and loss of value addition to shareholder.
He said: “After serious evaluation of the CRR and current AMCON scam, ISAN insist that CBN should pay interest to banks on restricted deposits to enhance banks obligation to the real sector.
“In the alternative the apex bank should reduce the CRR to 15 per cent to enable banks declare meaningful dividends that would encourage domestic investments.
“We urge CBN to have a rethink on CRR and among other things to enhance the performance of the financial sector of the economy.”
The National Coordinator, ISAN, Mr. Anthony Omojola, noted that banks’ interim reports in 2021 showed poor revenues following higher borrowing costs as CRR hike further complicated banks’ currency flow already hit by fallout from the COVID-19 pandemic and the oil price shocks.
Omojola said the CBN warehousing of about N12 trillion from the banking system since it raised the CRR by five per cent to 27.5 per cent coupled with the AMCON sinking funds called for serious concerns by all stakeholders.
“The cumulative restricted deposits of banks so far as at 2020, if invested in treasury securities at five per cent, would have N482 billion added to the industry’s profit before taxation”, he said.
“The industry’s return on average equity (ROE) would have increased by between 11percent and 31.6 percent as at December 2020.”
