60% LDR: Top banks to increase loan book before Sept. 30 —Analysis

INDICATIONS have emerged that going by their first quarter (Q1) 2019 financial reports, First Bank of Nigeria Holdings (FBNH), United Bank for Africa (UBA), Zenith Bank and Guaranty Trust Bank (GTB) are among the top tier lenders that will be required by a new lending rule of the Central Bank of Nigeria (CBN) to increase Loan to Deposit Ratios (LDRs) to 60 per cent by September 30.

Analysis of the Q1 results by a financial intelligence group, Proshare Research showed that only one tier-1 bank has an LDR above the minimum 60 per cent regulatory requirement while the tier-two banks dominated with higher loans to deposit ratios.

Available records show that out of the 15 listed Deposit Money Banks (DMBs) reviewed, Fidelity bank had the highest LDR of 95 per cent in Q1 2019.

Of eight banks which LDR fell below 60 per cent, Unity Bank took the lead with a deficit of 36 per cent. The large LDR gap implies that at current customer deposit level, Unity bank needs a lot more additional retail loan growth between now and September 30, to meet up with the minimum LDR requirement.

So also, seven other banks need to adjust their customers’ loan books to meet up with the LDR requirement within the given deadline.

FBNH, UBA, Zenith Bank and GTB need to increase their current loans and advances to customers by 12 per cent, 12 per cent, 10 per cent and seven per cent respectively over the next three months in order to meet the new regulatory requirement.

Interestingly, Fidelity, Sterling, FCMB, Wema Bank and Access Bank are within the safe zone as their LDRs are in surplus, with Access having the least surplus of six per cent but still above the 60 per cent minimum requirement.

In a letter to all banks dated July, 03, 2019, the CBN mandated all Deposit Money Banks (DMB) to maintain a LDR of 60 per cent by September 30, 2019, in its bid to improve lending to the real sector of the Nigerian economy.

The CBN further stated that failure to meet the regulatory requirement by the stated date would result in charge of an additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR.

Analysts note that as a result of high Open Market Operations (OMO) and treasury bills yield rates as high as 17 per cent, banks shifted their focus from lending to the private sector to lending to the Government through investments in binds and treasury bills but, this new rule will check the menace.

The two sides of the coin according to analysts however, is that banks can ramp up loan exposure to the CBN target sectors, increase exposure to sectors they are comfortable with or reduce their deposit book to meet the guideline.

In Q1 2019, Fidelity bank had low customer deposits compared to its Tier 1 rivals, with customer deposits of N1.02trillion, but the bank had the highest LDR at 95 per cent of its deposit (N966.25 billion). Ecobank Transnational International (ETI), on the other hand, had a total customer deposit of N5.48 trillion but only gave out 56 per cent of deposits as loans amounting to N3.09 trillion in Q1 2019.

• An outlier’s riveting tale

Abdulazeez Kuranga & Glory Okutue  of Proshare Research  in their report last week, stated that the economic implication of this new regulatory requirement is that DMBs will have to reduce their investment in debt securities while diverting funds to higher risk loan assets.

However, this is perceived to increase risk assets and potential income but at higher levels of potential impairments, which would reduce bottom line profit.

“The new requirement would create a pull-push effect on profit depending on the quality of new assets created,” the analysts stated.

Proshare quoted Tola Abimbola, a fixed income and currency specialist as having said that, “the regulation is probably targeted at some tier-1 banks that do not bother to lend because of the low cost of the fund as most tier-two banks lend as they require higher yield on their assets to offset their more expensive cost of fund.

“But as the experiences of tier-two banks show, retail lending comes with the risk of poorer asset quality.”

In the same vein, CSL Stockbrokers are concerned that forcing banks to lend under the current macro-economic conditions will result in a buildup in Non-performing Loans (NPLs) given the sluggish growth in the economy and the high risk in the operating environment.

According to the brokers, apart from the fact that margins of banks may decrease if lending redirects to the real sector, high NPLs will also directly affect the profitability of banks.

However, with a more favourable economic climate and improved infrastructure, the SME sector should see growth, and with less stringent CRR rules, the new guidelines may trigger a boost in the real economy, the firm stated.