Banks begin reduction of interest rate on savings account

IN compliance with the Central Bank of Nigeria’s review of the minimum interest rate on savings deposits to 10 per cent of Monetary Policy Rate (MPR), Deposit Money Banks (DMBs) have started sending out email and text messages to customers informing them of the reduction on savings accounts to 1.25 per cent.

The slight reduction in banks’ funding cost according to experts will save a lot of cost for banks, just as it is a way of widening the negative real interest rate on customer deposits.

The CBN in a circular to all banks directed that the minimum interest rate on savings deposits be reduced to a minimum of 10 per cent of MPR, or 1.25 per cent from the previous minimum of 30 per cent of MPR, or 3.75 per cent.

According to the circular, the new interest rate regime is to take effect from September 1, 2020.

Broadly speaking, experts at FBNQuest Research believe that given that savings deposits account for around 20 per cent of the deposit liabilities of commercial banks, the new directive should be positive for banks in terms of a slight reduction in their overall cost of funds.

“All else being equal, our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around 50 basis points (bps) in the fourth Quarter (Q4).

“In terms of earnings impact, we estimate an average increase of around +8 per cent in the 2020 PBT for our banks universe,” the research firm stated in a note to clients.

According to FBNQuest Research, banks with already low cost of funds such as GT Bank and Zenith will benefit the least from the interest rate reduction.

However, given the stringent rules around interest on savings, it is doubtful that the impact will be that material.

“Our reason is simple. Statutory provisions indicate that customer savings accounts will be ineligible for (monthly) interest rate payments in any month where a customer makes more than 4 withdrawals.

“Typically, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts on a monthly basis.

“Consequently, for most banks, the average funding cost for savings deposits is much lower than the 3.75 per cent implied by the MPR,” it stated.

It further noted that given an inflation rate trending above 12 per cent (12.8 per cent July 2020), the negative interest earned on savings deposit accounts will widen to -11.5 per cent from the -8.7 per cent rate implied by the former interest rate regime.

Despite limited investment outlets due to the subdued interest rate environment, the firm believes that some bank customers might be encouraged to take a second look at alternative asset classes such as equities.

“In our view, with most banks trading below book value, we believe that a significant portion of banks’ credit risks is already reflected in their share prices.

“Despite the deterioration in the macro environment, GT Bank and Zenith, our preferred names within the sector, have adequate capital and liquidity buffers to withstand potential shocks,” the firm said in a note to clients.

 

YOU SHOULD NOT MISS THESE HEADLINES FROM NIGERIAN TRIBUNE

TOUGH POLICIES: IMF, World Bank Take Over Nigeria’s Economy •More Pains Ahead For Nigerians
ALTHOUGH this seems a difficult period for Nigerians, Sunday Tribune investigations have, however, revealed that it  could actually be a signal to the beginning of more unbearable pains in the form of economic policies as the Federal  Government continues to implement the stringent conditions of its international creditors…

What I See Around The Villa — Primate Ayodele
In this interview by KEHINDE OYETIMI, founder of Inri Evangelical Spiritual Church, Lagos, Primate Ayodele speaks on both global and local issues…

High Cost Of Fuel, Electricity Will Ruin Our Lives — Market Leaders, Business Owners Lament
CONDEMNATION of the hike in petroleum products and electricity went notches higher at the weekend as more  Nigerians flayed the decision of the Federal Government to take such a decision not minding the fatal blow dealt the economy by the coronavirus pandemic…

No Govt Has Raped Nigeria Like Buhari’s — Labour Leaders
WITH last week’s increase in the pump price of fuel, the organised labour has warned President Muhammadu Buhari against pushing Nigerians to the wall, saying no government has raped the country like the current administration. The labour leaders, in separate interviews with Sunday Tribune, said Buhari has lost touch…

P&ID $10B Scandal: How Govt Officials Frustrated Nigeria’s Case — Shasore
FORMER Lagos State Attorney-General (AG) and Commissioner for Justice, Olasupo Shasore, a Senior Advocate of  Nigeria, at the weekend opened up on the salacious scandal trailing the controversial contract crisis between Nigeria and an offshore Shell company, Process and Industrial Development Limited…

What Caused My Rift With Oshiomhole — Obaseki
THE Edo State governor and candidate of the Peoples Democratic Party (PDP), Mr. Godwin Obaseki, has said that one of the reasons his predecessor, Adams Oshiomhole is against his re-election bid is his reversal of the sale of Edaiken  Market, which Oshiomhole sold to his friends…

You might also like
Comments

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. AcceptRead More