Aggressive deposit moblisation, cost cutting measures and reprising of assets are strategies being considered by deposit money banks, as the implementation of the new 75 percent cash reserve ratio (CRR) on public sector funds by the Central Bank of Nigeria (CBN) begins tomorrow, Business Day investigations have found.
Analysts also said at the weekend that a combination of strategic focus and establishment of various competencies, among others, would guarantee improved returns on equity for stakeholders.
Consequently, they posit that banks must exhibit discipline on the cost line and low impairment charges, so as to ensure delivery of attractive earnings growth.
The development is capable of engendering real intermediation by banks, with the likelihood of appreciation of interest rates currently hovering between three and eight percent, as banks begin aggressive deposit mobilisation.
“We are thinking of encouraging our customers to deposit with us through the possibility of increase on interest paid on deposits. This will guarantee cheap funds that will enhance our deposit base,” an operator said at the weekend.
“The increase in the CRR on public sector deposits means that the days of banks being able to make very easy returns (mobilising public sector deposits and reinvesting these in high-yielding government securities) are likely to be over. Banks will have to work a little harder to mobilise liabilities.
“Given the nature of the Nigerian economy, public sector deposits – available in sizeable quantities – are easier to attract than private sector liabilities, where scale varies considerably. Initial tightness in market liquidity should see banks bidding up deposit rates in order to attract liabilities,” says Razia Khan, analyst with standard chartered bank, London.
She further said that, “In effect, it suggests a more difficult environment for the larger banks that have traditionally been more dependent on public sector deposits. Margins are likely to come under pressure in the near-term. Longer-term however, it should encourage Nigerian banks to intermediate more efficiently, and should be a positive development for the economy on the whole, helping to enhance the transmission of monetary policy.”
Analysts at the Renaissance Capital, (Rencap) said deposit money banks, particularly, tier one banks “have brighter prospect from their loan growth and further upward adjustments to lending rates as they try to offset the lost income from the higher cash reserve ratio (CRR).”
Commenting further, the analysts said, “We expect higher CRR and cuts in commission-on-turnover (CoT) caps to be the primary challenges in 2014, saying the environment does not allow for significant earnings growth, in our view. In order for the banks to deliver earnings growth, we believe: banks must be disciplined on the cost line and impairment charges will have to remain benign.”
On the tier two banks, the analysts said that they can deliver improved return on equity through “a combination of strategic focus, driving scale in their respective niches and improving asset quality.
“Conseqently, the challenged banks not only need to have a clear strategic focus, but need to communicate this clearly to investors. We think success in this area is a function of management having both clear strategic business goals and the right people in place to drive the communication process.”
They further argue that with the high level of market concentration at the top, tier 2 banks, for instance, cannot compete successfully simply by replicating the tier 1 banks’ model on a smaller scale. They add that niche play with significant market share should be the way out.
The local currency has been steady at between N155 and N156 to the dollar at the Central Bank of Nigeria (CBN) official rate, while depreciating at the parallel market at N172/N173 to the dollar, thereby creating a wider gap between the two markets and creating arbitrage and round-tripping opportunities.
By: John Omachonu
