CardinalStone Research
In line with its recent drive to stimulate domestic economic growth by igniting bank lending, the Central Bank of Nigeria (CBN) has taken a raft of actions to achieve its goal over the last few days.
Precisely, on 30 September 2019, the apex bank released a circular mandating an increase in banks’ minimum LDR requirement to 65.0% from 60.0%, with a compliance deadline of 31 December 2019. Days later, several media outlets revealed that the CBN also debited 12 banks who failed to meet the initial deadline of 60.0% LDR by September 30, 2019, in line with the penalty stipulated in the initial circular. ZENITH BANK (N135.6 billion), UBA (N99.7 billion) and FBNH (N74.7 billion) were the worst hit of the 12 sanctioned banks. GUARANTY (N25.1 billion) and FCMB (N14.4 billion) were the other affected banks within our coverage.
While we await more clarity on some prevailing issues surrounding the sanctions, we highlight the following key themes:
- The CBN is serious! The decision to not only increase the minimum LDR requirement but also penalize banks that failed to meet the initial deadline suggests that the CBN is very deliberate about its plan to support growth. With CBN’s body language suggesting limited scope for rate cuts in the near term, we believe that the apex bank is being strict on the enforcement of regulatory measures to enhance credit creation
- The CBN’s assessment is likely based on overall net stable funding, not just deposits. It appears that the CBN uses a broader definition of the loan to deposit ratio (LDR), which encapsulates other sources of funds such as borrowings, shareholders’ funds, and deposits. This, possibly, explains why a bank like FCMB, which had an LDR of 75.1% at the end of H1’19, was also penalized. As at H1’19, the bank’s loan to funding ratio was at 51.7%. This may also partly explain ZENITHBANK’s early redemption of part of its $500 million Eurobond in September
- Banks will likely be antsy in their strategies to grow loans. The new measures are also likely to force banks to anxiously re-evaluate their loan growth strategies. Based on the H1’19 numbers of our coverage banks, only ACCESS (+37.8% – reflecting the impact of its merger with Diamond Bank), FIDELITYBK (+15.8%), and STANBIC (+6.0%) reported YTD loan growths. Unsurprisingly, none of these banks were negatively impacted by the recent sanction
- Asset quality concerns may re-emerge. We see this as a possibility given the prevailing weakness in macro fundamentals, which likely explains banks’ cautious approach to loan growth. With the near term outlook for most consumer and manufacturing firms looking largely unfavourable on the back of recent fiscal measures, we believe that a desperate push to increase lending could lead to growth in non-performing loans
- Net interest margins are likely to be depressed on banks’ reaction. We see this as a possible negative consequence of CBN’s latest push as banks may be forced to reprice loans lower in competition for scarce quality obligors. This implied weakness in NIMs, as well as the opportunity cost of relinquishing 50.0% of the lending shortfall to the CBN, could also negatively impact earnings. We expect that banks who have already been punished will be unwilling to get caught up in the storm again, as that will be a negative signal to investors
All in, we believe this development is largely negative for the banking sector, which has only just recovered from the weak asset quality issues prevalent since 2016. We also believe that the macro-environment is still too fragile to support strong growth in lending.