Banks squeezed further as N40bn may vanish from industry wide profits

The Central Bank of Nigeria’s (CBNs) moves to tackle excess liquidity in the banking system via a further hike in reserve requirements may lead to an industry wide reduction in profitability by as much as N40 bn.

The MPC tightened policy via a 1ppt increase in the policy rate to 13 percent. The MPC also increased the CRR on private sector deposits to 20 percent, from 15 percent and devalued the official naira exchange rate, by moving the mid-point from N155/$1 to N168/$1, which is equivalent to 8 percent devaluation.

The committee also widened the band around the midpoint to 5 percent, from 3 percent, implying a new target (official) exchange rate band ofN160-176/$1.

“The moves imply a

further N400 billion in additional money sterilised from the system by the CBN,” said Dapo Olagunju, group treasurer at Access Bank.

“This means about N40 billion of banking sector profitability disappears,” Olagunju said.

The IMF estimates that a 2 percent increase in the level of the CRR adds approximately 0.5 percent to the spread between deposit and lending rates.

Further regulatory actions squeezing banks profits include revised banking charges that reduced Commission on Turnover (COT) and removed ATM transaction fees.

The cumulative after tax profit of 15 commercial bank’s which have released third quarter 2014 financial results, increased by just 9 percent, to N424.04 billion from N390.09 billion, lower than the 13.16 percent growth recorded in the 2013 period.

The tightening of the CBN’s policy rate and hike in reserve requirements for banks could lead to more sell-off in bank stocks and the broader stock market.

The Nigerian Stock Exchange (NSE) Banking index which tracks Nigeria’s 10 biggest banks by market value, has lost -20.61 percent as at Nov. 24, underperforming the -18.04 percent fall in the wider NSE all share index.

Banks may face more cost pressures and lower margins in the near future.

The new CBN directive to divert forex demand from the official FX window (the retail Dutch auction) to the interbank market, is seen as having a negative impact on Nigerian bank asset quality.

Bank borrowers, most notably SMEs, could see repayment obligations for their loans become more difficult, as their import bills get inflated (by about 8 – 10 percent, according to analysts) on the back of a higher dollar exchange rate.

With borrowers facing more difficult repayment terms, the banking sector loan quality can be seen taking a dent.

“The rules hurt at a sector level but we see the tier 2 banks taking more pain on the back of this, given their relatively higher exposure to SMEs and lower quality obligors, says Adesoji Solanke, SSA Banking Analyst at RenCap.

“The ability of the obligors to transfer this cost to consumers also affects their capacity to service open obligations”, he says further.

Businessday