Why many banks will not meet 65% LDR in December —Comercio Partners

Due to the paucity of investment outlets as an aftermath of the Central Bank of Nigeria (CBN) Loan to Deposit Ratio (LDR) directive, many banks will find it difficult to meet the 65per cent threshold.

The above prediction was made over the weekend by Comercio Partners, a limited-liability company in Nigeria providing trading, investment, asset management and principal investments.

The Central Bank of Nigeria (CBN) recently announced the exclusion of non-bank locals (individuals and corporates) from participation in its Open Market Operations (OMO) at both the primary and secondary markets. The exclusion implies that only Deposit Money Banks (DMBs) and Foreign Portfolio Investors (FPIs) can participate in OMOs, while everyone else, including non-bank financial institutions, will have to shift focus to Treasury Bills and other investment options.

The apex bank also, recently released another circular stating that it would provide a one-way quote in the market particularly for OMO bills. This was in a bid to address the liquidity concerns raised by foreign portfolio managers.

In a note to clients, Comercio Partners highlighted how this policy has impacted various markets and the likely hood of the sustainability of this impact.

CBN says this new policy directive is to drive more lending to the real sector.

According to the firm, this will play out in different ways in banks’ balance sheets.

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During third quarter (Q3) 2019 results presentation,  some banks according to the investment advisory firm, revised their deposit growth forecast downwards by as much as 10per cent -20 per cent and revised upward the loan growth assumption.

However, the loan growth is unlikely to happen as the new CBN circular has created a wall of money (Due to the paucity of investment outlets) which will sit with the banks making it difficult to meet the LDR requirement it explained.

This would easily see further debits in December, crimping the banks’ profitability, Comercio Partners stated, adding that the possible upside to this new policy for banks is that they  will see a possible decline in interest expenses, thereby, increasing interest income.

The firm’s analysts  believe this policy is in continuation of the apex bank’s attempt at forcing Deposit Money Banks to channel liquidity in the form of credit to the real sector, thereby reducing the continued crowding-out effect on the private sector in terms of real credit growth to the economy.

Recall that the bank recently recalibrated its Loan to Deposit Ratio (LDR) limit for banks from 60 per cent in September to 65per cent with a 31st December 2019 deadline.

According to CBN data, the use of OMO bills as a liquidity management tool dates back to 2007 when the bank issued a N27 billion 174-day paper.

This process was predominantly an arrangement between the Central bank and deposit money banks. It is however important to note that the proliferation of OMO bills over the years (rising from just under N30 billion in 2007 to over N13 trillion thus far in 2019, with a peak of over N17 trillion last year) has necessitated the participation of other market players including local corporates, fund managers, pension fund managers as well as foreign portfolio investor, the firm emphasised.

The rise in the issuance of OMO has essentially been on the back of the apex bank›s preference for the tool with regards to foreign exchange management as its auctions have continued to attract an increasing number of foreign portfolio managers who are happy to take on Naira risk at those yield levels.

According to the firm, over the last couple of years, OMO issuance has outstripped regular Nigeria Treasury Bills (NTB) issuance, significantly increasing the cost of liquidity management as the apex bank keeps the rate attractive to ensure a continuous flow of «precious» foreign exchange to keep the Naira stable.

Since the release of the circular by CBN, yields at the primary market auction has declined quite significantly as the market remains thin on volumes.

Bond yields have declined significantly across the curve with the five-year declining by 158 basis points (bps) to 12.05 per cent, 10-year bond yields have shrunk by 103bps to 13.14 per cent and the yield on the 30-year bonds is down by 81 bps to 13.68 per cent.

“We expect yields to decline further on the back of the resolution of the CBN to stay true to their new policy and the anticipated OMO maturities repayment.

“The question here is how far these yields can fall off to make a plunge into risk assets worth the while of market participants,» the partners wonder.

 

Nigerian Tribune