Nigerian banks already facing an operating environment characterised by an oil price shock, slow gross domestic product (GDP) growth, pressure on the naira, limited access to foreign currency and policy uncertainty, have one more thing to worry about, the new FGN savings bond.
The Nigerian debt management office (DMO), this week introduced a new two-year savings bond targeted at the retail investor with yields on offer as high as 13 percent and minimum subscription levels of N5,000.
The bond will pay interest quarterly, with a bullet repayment for principal at maturity. The initial offer will close on March 17, the DMO says.
If widely accepted, the bond could pose a problem for deposit money banks (DMB), which currently pay little to nothing on savings deposits, by raising their cost of funds.
“At 13 percent, the yield is very attractive for the average retail investor who is earning about 3 percent per annum on savings accounts or under 8 percent on term deposits. If the initiative is well implemented over time and if the stockbroking community pushes the product aggressively at every auction, there is a major risk to deposit money banks as cost of fund will rise,” Tosin Ojo, head of research at Investment Firm, Cardinal Stone Partners, said in response to questions.
“Commercial banks will eventually have to raise deposit rates, it will be difficult to match the rate offered by the savings bond. Eventually the net interest margins (NIMs) of commercial banks will shrink.”
Nigerian banks charge as high as 23 percent on customer loans and pay as low as 3 percent on deposits, thereby ensuring juicy spreads.
With February inflation in Nigeria running at 17.78 percent, the new savings bond could inadvertently help shake up its entrenched banking system as well as boost real returns for millions of bank customers with savings accounts.
The bonds will be “good for savings towards retirement, marriage, school fees, house projects,” the DMO said in a release following the launch.
Zenith Bank, a tier one lender that has released Full Year 2016 results booked N273.3 billion in interest income on loans and advances to customers.
Interest expense paid on current, savings and time deposits by customers came in at N110.9 billion or only 40 percent of interest income.
Guaranty Trust Bank (GTB), the largest lender by market value, had interest income of N262.4 billion, compared to interest expense of N67 billion for the Full Year 2016 period.
Analysts say the savings bond offer, if popular, could push deposits out of commercial banks into Government bonds from which retail investors are mostly shut out currently.
The minimum subscription for FGN bonds is N50 million, compared to the minimum subscription of N5, 000 for the FGN Savings bond.
While retail investors could previously access the bond market, their participation was very limited, as the deposit money banks and other institutional investors primarily dominated the market.
One game changer, however, is the emergence of the stockbroking community as the distribution agents for the FGN savings bond.
“I think the incentives of the government and the capital market operators are well aligned, hence it should be easier for retail investors to now participate in the bond market,” another source said.
Nigerian banks have outperformed the market this year with the banking index eking out a +0.74 percent gain in 2016, compared to -6.09 percent return for the NSE all share index as at March 10.
Sentiment for the sector improved somewhat, following recent moves by the Central Bank of Nigeria (CBN) to increase intervention in the foreign exchange interbank market and increase supply of foreign exchange.
According to Fitch Ratings, “the measures announced on 20 February by the CBN may ease some of the severe foreign currency liquidity pressure faced by the Nigerian banks.”
A further risk however, to banks from the savings bonds, besides rising costs, would be lower profitability.
Analysts say as the volume of bonds offered at the FGN savings bond auction increases, the Federal Government will eventually reduce the amount being offered at the DMO auctions – which then implies that yields will trend lower.
This could then have an adverse impact on commercial banks (a reduction in interest income) that have been the primary beneficiaries of the high yield on government bonds as major participants at the DMO auction.
Zenith Bank for instance, earned N48.73 billion in interest income from government and other bonds in 2016, while GTB earned N53.6 billion interest income from investment securities, of which 98 percent were Federal Government securities.
How soon the banking landscape changes is not known for now, according to Ojo of Cardinal Stone Partners.
“The impact will likely not be immediate and is dependent also on how aggressively the stockbroking firms push the savings bond initiative.”
PATRICK ATUANYA
