Nigerian banks, which are facing the steepest rise in non –performing loans since at least 2011, may choose to pull back on creating new risk assets and stymie the Central Bank’s monetary policy committee’s (MPC) push to encourage lending by flooding the financial system with liquidity.
Last Tuesday, the CBN reduced its monetary policy rate to 11 percent from 13 percent for the first time in more than five years.
The Central Bank also decreased the cash reserve ratio (CRR) to 20 percent from 25 percent after reducing it from 31 percent in September.
Liquidity arising from the reduction in the CRR will only be released to the banks that are willing to channel it to employment generating activities in the economy, such as agriculture, infrastructure and solid minerals, according to the CBN.
“Given the weak macro environment which continues to deteriorate, system capital constraints (17.5% CAR as at 1H15 vs. current 15% minimum which rises to 16% for SIBs 1 July 2016), scarce FX liquidity, weak credit demand and mounting credit risks, it appears unlikely that the banks will grow credits at the pace at which the MPC desires,” said Adesoji Solanke, a Sub-Saharan Africa banking analyst and head of research – Nigeria, at Renaissance Capital in a Nov. 25 note to clients.
The Central Bank’s policy actions reverse a tight monetary policy stance that the bank implemented after 2010, when it sought to contain inflation and support the naira.
Godwin Emefiele, the CBN governor, indicated that the changes were necessary to stimulate economic growth.
Nigeria’s annualised real GDP growth slowed to 2.8 percent in third-quarter 2015 from 6.2 percent a year earlier.
Moody’s Investors Service, a global provider of credit ratings, research, and risk analysis, yesterday published a research note saying that while the recent monetary policy easing would improve banks liquidity, it would not move the needle on loan growth.
“The interest rate cut is credit positive because it will release funds to banks and reduce their costs of deposits, ”Akin Majekodunmi, author of the report and a Moody’s Vice President and senior analyst, said.
“However, we do not expect these measures to offset the negative trends currently affecting asset quality and loan growth because of banks’ lower appetite to extend new loans or roll over outstanding loans, given the slowing economy and the government’s weak fiscal position in the face of low oil prices and pressure on the naira.”
While the new reserve requirement may release up to N634 billion ($3.2 billion) of funds to the banks, the policy actions are unlikely to moderate the asset risk challenges that Nigerian banks face, according to Moody’s.
As of June 2015, the banking system’s nonperforming loans ratio increased to 4.7 percent from 2.9 percent in December 2014, highlighting the challenge.
Moody’s says that it expects nonperforming loans will continue to rise to up to 10 percent of total loans despite measures to support liquidity and the economy, and recent relief provided by the conversion of short-term bank loans owed by Nigerian states into 20-year Federal Government bonds.
Additionally, the size of the cushion protecting banks against problem loans has also weakened, with non-performing loans net of provisions as a proportion of capital deteriorating to 11.9 percent in June 2015 from 4.1 percent in December 2014, the first time it has breached 10 percent since 2011, according to Moody’s.
For the banks, the choice is between lower margins and potentially higher non-performing loans as market rates have already declined significantly to single digit levels across different treasury assets and maturities, since the CBN began its easing cycle in early October.
“The classic tier 1 banks (FBNH, Zenith, GTBank and UBA) that typically operate with significant excess liquidity on their balance sheets could face considerable margin pressure, given the low yield environment, while some banks such as Access and Stanbic could benefit more from lower funding costs vs. peers while dealing with systemic asset yield pressures,” Solanke said.
PATRICK ATUANYA
