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•FX liberalisation, CRR to impact banks’ earnings –Analysts
By Chinwendu Obienyi
Deposit Money Banks (DMBs) across the country are set to face huge pressure and will struggle amid the Central Bank of Nigeria (CBN)’s recent Loan-to-Deposit-Ratio (LDR) directive.
Last month, the apex bank informed DMBs, reaffirming its commitment to not only retain the minimum Loan to Deposit Ratio (LDR) at 65 per cent but also resume its enforcement of this directive effective July 31, 2023.
Accordingly, banks who fail to comply with the requirement from the effective date will be liable to an additional Cash Reserve Requirement (CRR) of 50 per cent charged on the lending deficit implied by the target LDR (i.e 65 per cent – DMBs LDR).
Specifically, the apex bank mentioned in the circular that this policy aims to moderate the financial system’s excess liquidity, bridging the credit gap and supporting Nigeria’s real sector.
However, Daily Sun investigations reveal that since the CBN’s effort to ensure DMBs comply with the 65 per cent LDR directive in 2020, there has been constant breach by some banks. For instance, tier-1 banks’ LDR averaged 50 per cent, paling in comparison to the overall industry average (65.9 per cent) and the preliminary numbers for 2023 underscore the preceding.
According to analysts at Cordros Research in their report titled; ‘Impact of CBN’s plan to re-enforce LDR on Tier-1 banks’, the reason for this breach is due to the moderate loan growth across tier 1 banks as at the first quarter (Q1) of 2023 (average: +0.7 per cent). The report further noted that according to the previous directive, DMBs were liable to a 32.5 per cent additional CRR on their lending deficit, which has consistently constrained earnings growth as the 3-year historical average of Tier 1 banks’ restricted cash with CBN as a proportion of total deposits settled at 22.2 per cent.
It added that the proportion of restricted cash to total deposits is lower compared to the lending deficits due to the combined impact of the CBN allowing banks to request funds from their CRR debits through the differentiated cash reserve ratio (DCRR) to finance greenfield and brownfield projects, and lower CRR in other countries where our coverage banks operate.
However, in an effort to drive compliance and enhance its liquidity management mandate, the CBN increased the additional CRR to a maximum of 50 per cent. Interestingly, the LDR re-enforcement comes at a time of sharp FX depreciation, implying that loans and deposits in foreign currencies will have to be revalued.
Reacting to the development, Cordros Research said, that utilising the additional CRR of 50 per cent and applying this to banks’ current lending shortfalls, it is estimated that Tier 1 banks’ restricted cash with CBN as a proportion of total deposits will settle higher at an average of 28.8 per cent.
“The preceding indicates that the increase in the additional CRR will put further pressure on DMBs’ earnings growth and pose challenges to their liquidity levels. Also, we applied a 38 per cent naira depreciation on banks’ loans and deposits in foreign currency and recalculated the LDR. Against the preceding, we found out that the naira devaluation had a nil effect on some of the banks.
While we await further guidance from banks on their initiative on how they intend to comply with this directive, we anticipate DMBs will be torn between considerably increasing their loan books and reducing their deposit growth. Overall, we expect the impact of the re-enforcement of this policy will be mild on DMBs’ NIMs expansion at the end of 2023. On average, we estimate net interest margin across our coverage banks will increase by 200 basis points (bps) relative to our previous estimates (+250bps) prior to the LDR re-enforcement.
That being said, the financial performances of tier 1 banks at the end of 2023 are expected to be stronger on account of the anticipated revaluation gains and elevated interest rates in the forecasted period”, they said.
