Commercial banks woo moneybags with high deposit rates

Few months after politicians were accused of stockpiling US dollars ahead of Nigeria’s primary elections and causing naira’s depreciation, fresh facts have emerged that commercial banks are wooing high net-worth individuals and fund managers with juicy interest rates in order to attract their naira deposits.

This, according to experts, is boosting activities within the Money Market funds space and has opened another window of opportunity for investors to invest in the funds which today can offer yields of 10.0percent per annum, or more, net of fees.

These yields according to experts are the best offered by Money Market funds in almost three years and are far higher than T-bill yields.

Over the past four months, the policy rate of the Central Bank of Nigeria (CBN) has risen from 11.5percent to 14.0percent.

In their combined e-mailed comments, analysts from Coronation Research said that Money Market funds can invest in bank deposits and these are attractive at the moment because commercial banks are offering rates in the region of 13.0percent to 15.0percent per annum for 90-day deposits.

“This probably comes as news to the majority of individual deposit account holders, whose personal accounts may yield much less than this: but these high rates are usually only available to large deposits of N1.0billion (those who have US$2.3m) and upwards.

“It makes sense, therefore, for individual savers to pool their money in Money Market funds to take advantage of this,” the Analysts advised.

The interest rate on 90-day Treasury Bills has only risen from 2.81percent to 3.93percent, well short of the CBN’s policy rate.

Offering further explanation, the analysts observed that most Money Market funds cannot just invest in bank deposits, but are obliged to invest at least 25.0 percent of their holdings in government securities such as treasury bills or securities issued by the CBN.

So, a Money Market fund today might invest in some juicy bank deposits (supposing it has N1.0billion or more of cash) but might have to dilute that yield by investing in relatively low-yield T-bills as well.

“This is where it gets interesting because Money Market funds may instead invest in the Special Bills of the CBN. The yields of Special Bills have climbed recently and last week reached 12.3percent pa. So, a Mutual Fund can combine bank deposit rates with Special Bills, along with other instruments, to achieve much higher yields than before. “Today, a typical Money Market fund yield may be as high as 10.0percent pa, net of fees, or slightly more,” according to Coronation Research analysis.

The firm explained that the banks are offering high rates for term deposits, as an indirect consequence of the cash reserve requirement (CRR).

The CRR is the percentage of customer deposits that banks are required to lodge with the CBN.

This percentage is officially 27.5percent but is generally acknowledged to be, in practice, 50.0percent or more.

A low CRR has little influence on deposit rates because people, for the most part, tend not to draw on all their deposits.

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“So banks are not affected by keeping a proportion of deposits with the central bank: but at a certain level of CRR, the demand for deposits affects liquidity, and banks have to offer high rates to keep their deposit levels high,” the firm noted further.

A message from one of the wealth managers to clients and seen by Nigerian Tribune read in part: ” The AXA Mansard Money Market Fund is a large pool of funds from different similar minded investors like you that is invested on your behalf in different securities which include treasury bills, fixed deposits and commercial papers.

“To enjoy these benefits, all you need to do is buy units of the Fund, create a profile and watch your investment grow. Using your very own customer dashboard, you can always buy more units of the Fund, make a withdrawal and generally monitor your investment.”

However, money market conditions are transitory, and constantly changing. Therefore, banks may offer high deposit rates for large term deposits today, and Special Bills may enjoy high yields today, but nothing stays the same for long.

It is just that Money Market fund yields look better now than they have for almost three years, the analysts insist.

Money market funds have very low risk given that they invest in cash and securities guaranteed by the government, such as Treasury bills, Treasury notes and repurchase agreements and Commercial papers.

Commercial papers are money-market securities issued by large corporations to obtain funds to meet short-term debt obligations like payroll and are backed only by an issuing bank or company’s promise to pay the face amount on the maturity date, which is usually in 270 days or less.