Anxiety over rising banks’ borrowing from CBN

…as Access, Fidelity and FCMB sit pretty


In order to avoid the Central Bank of Nigeria, CBN, sanction, four Tier-I capital banks are expected to increase their loan book by N1.2 trillion in the next three months. The four affected banks are FBNH, Zenith, UBA and GTB. In spite of the fact that they have big sizes, the affected banks failed to convert substantial amount of their deposits to loans and advances to customers, their books have shown.

Apparently, the new CBN deposit to loan policy may have been designed with these top banks ostensibly in mind. As the top crust of the industry in terms of leadership in critical indicators especially deposits and asset base, they may have been perceived as not making significant contributions to boost investment and growth of the economy through lending to the real sector.

Checks by BusinessHallmark showed that most businesses are abandoning the banking system as the primary source of lending and credit to the capital market through Commercial Papers, CPs, in view of the outrageous interest rates charged by banks which act as a disincentive to borrowing. Also banks had resorted to fixed interest incomes in the past few years as their main investment avenue which focused on government instruments, such as Treasury Bills and Bonds.

However, banks complained that the Cash Reserve Rate, CRR, of the CBN, which has been pegged at 22.5 percent for close of two years is still too high because its sterilised instead of being deployed for lending; although the CBN argued that even with zero CRR, the banks would still be averse to lending due to the challenges in the economy which have contributed to high non performing loans, NPL, profile.

Their loans to deposits ratios were below 60%, though initial benchmark has been 80%.  Noting this development, the Central Bank had recently demanded that all the banks must extend 60% of their deposits collection to the real sector as loans and September 30 is fixed as deadline.

Given their current loans as proportion of total deposits, United Bank for Africa, Guaranty Trust Bank, First Bank of Nigeria Holdings and Zenith Bank Plc would need to create additional credit assets N1.2 trillion required to meet the new apex bank’s directive of 60% loan to deposits floor.

FBNH and UBA top the league with expected new loan portfolio of about N466 billion and N431 billion loans respectively to avoid the hammer of the regulatory authority. This shows also how massive their penetrations are as deposit mobilisers and banks of popular choice. GTB is expected to create additional loan book of about N145 billion before target date, while Zenith Bank must create more than N133 billion loans and advances, to escape CBN’s sanction.

Reacting to the directive, Tellimer, a London based developing market financial institution, said that this directive may pose asset quality risks to the sector, as banks may have to lower risk criteria to achieve the CBN’s threshold.

It would be recalled that BusinessHallmark reported that Tier 1 banks were not practically lending, given their positive cash position, as they were able to closed earnings gaps with yield from fixed interest rate market. Many of them ramped up deposits from customers but failed to lend to real sector.

Also some market analysts have noted that the rush to force banks to book more loans for the real sector would result to further increase in the banking sector non-performing loans. Thus, they are tasking government to set appropriate economic agenda that would increase growth rate and broad base performances rather than its selective sectoral targeting.

Against their loans guidance for financial year 2019, FBNH has to increase loan book by 18%, UBA 19%, and Stanbic 18% in order to meet the requirement. GTB has 10% loan guidance as its expected loans growth. Meanwhile, Access Bank, Fidelity and FCMB Plc would be unscathed by the CBN directive as these banks already have significant chunk of their deposits converted to loans and advances.

It would be recalled that the Central Bank of Nigeria (CBN) released a new guideline for Deposit Money Banks (DMBs) via a circular on regulatory measures to improve lending to the real sector. The highlights from the circular indicated that with effect from September 2019, DMBs are mandated to maintain a minimum loan to deposit ratio (LDR) of 60% compared to sector LDR of 58.5% as at May 2019 and regulatory maximum of 80%,  which is subject to quarterly review.

In a bid to encourage lending to SMEs, retail, mortgage, and consumers, the apex bank assigned a weight of 150.0% to these sectors in the computation of LDR. The CBN also disclosed plans to provide guidelines for the classification of businesses that fall under the named sector categories.

According to the apex bank, a failure to meet the minimum LDR of 60.0% by the specified date will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50.0% of the lending shortfall of the target LDR. Although bank lending to the domestic economy rose by 8.2% year on year to about N21 trillion as at April 2019, an increasing need to encourage greater allocation to strategic segments within the private sector necessitated CBN’s recent move.

In addition to this, the apex bank may have been concerned that the decline in LDR to 58.5% in 2019 from 67.4% as at May 2018 may negatively impact credit to the real sector if not checked.

“In our view, the new requirement is unlikely to come as a surprise to banks given CBN’s previous references to the need to boost credit to the real sector. Notably, the new floor for LDR represents an attempt to move some banks closer to the relatively higher LDR levels recorded historically”.

“For context, banks such as Stanbic, GTB, and FBNH experienced significant deterioration in LDR in the last five years. Put together, our coverage banks boasted a five-year average LDR of 72.1% relative to 62.3% in the first quarter of 2019.

“We also highlight that our coverage LDR ratio for first quarter 2019 was significantly flattered by higher ratios from a few banks within our Tier 2 coverage while our coverage Tier 1 banks had average LDR of 54.4% in the first quarter of 2019”, Cardinalstone stated.

The firm said that based on first quarter numbers, only Access, Fidelity and FCMB met the new regulatory requirement within its coverage banks.

“Assuming deposits are unchanged from first quarter of financial year 2019 levels, non-compliant banks within our coverage – GTB, Zenith, FBNH, UBA, and Stanbic – would likely have to grow loans by a mean of 14.3% to meet the requirement”, Cardinalstone stated.

By implication, these banks may be required to create an additional N1.3 trillion in credit assets by September 2019. Our analysis suggests that UBA may likely have to grow loans by 19.4%, while Zenith could require the least loan growth of 6.2%.

Analysts observed that the estimated loan growth that may be required by GTB and Zenith to meet the regulatory requirement already falls within their financial year 2019 guidance.

Overall, they believe the September 2019 timeline may be too short for non-compliant banks given the unfavourable macro-economic environment. This may force the CBN to extend the current timeline”, Cardinalstone reckoned.

Cardinalstone is of the view that its estimates assume that the new requirement applies to entire group balances for the banks. However, it is likely that CBN’s new measures may only apply to the banks’ operations in Nigeria, given its Nigeria-centric aim of stimulating domestic growth.

In the latter case, first quarter LDR would be lower for banks like UBA (FY’18 – 46.8%) with huge African operations. Their estimates also utilise gross loans in the computation of the LDR. Computations with net loans would lead to a much lower LDR and an increase in the additional credit assets required by non-compliant banks to meet the shortfall.

Tellimer said, “We could see an outcome where banks choose a much higher CRR over rushing to achieve the loan/deposit threshold, to manage asset quality headwinds.

“Bearing in mind that the CRR peaked at 50-60% for some well-capitalised banks (according to IMF Article IV, April 2019), there is bound to be pressure on margins and profitability due to this.

“We could also see banks showing less interest in taking deposits, in order to limit the loan growth required to meet the new loan/deposit threshold”, Tellimer stated. The CBN’s directive favours SME, retail and mortgage loans, which would have a 150% weighting in computing the regulatory loan/deposit ratio.

“This segment has been an area of recent focus, and has been identified as a growth area by many banks in financial year 2019. This would ideally raise the ‘regulatory’ loan/deposit ratio close to the benchmark and could help banks catch up a bit more easily, although the CBN maintains the right to define what constitutes such loans”, Tellimer stated.

At the end of first quarter, Access Bank recorded loan to deposits ratio of 66%, FBNH 48% and FCMB 74%. GTB 53%, Stanbic 56% and UBA 48% and Zenith did 50%. The penalty for not meeting the threshold by the set deadline is an additional CRR levy equal to 50% of the lending shortfall of the target threshold, which would be likely to restrict banks’ ability to invest in government treasuries.

“There is standard policy on cash reserve ratio, it should not be modified to satisfy other objectives other than the reason it was formulated”, Kingsley Ezoh, a senior consultant with LSintelligence said.

Ezoh added that, “The CBN can create special vehicles where target sectors can access funds at a cheaper that to satisfy its urge or economic growth. Look at commercial paper, there are certain companies that have stopped patronizing overdraft or short term loans from commercial banks. They are going for commercial papers even banks are raising funds with it”.

In a note, Afrinvest registered concerns with the inconsistency of monetary policy targets, continued financing of the FG and the apex bank’s perceived lack of independence which would continue. Similarly, the firm expressed worry over the bank’s expanding development financing agenda rather than a focus on price stability.

Banks have been bearish on booking more loans since 2016 when the recession hit. Also, the CBN had expressed worry over rising case of loan default which led to expanded non-performing loans in the sector. The sector NPL was at about 15%, as banks toxic assets jerked up. Due to need to clean up balance sheet, banks increased investment in the fixed income market to replace booking loans.


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