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.
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