Last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held its first meeting in 2020. Contrary to the consensus the expectation for the committee to maintain the status quo amid the CBN’s dovish bias, the MPC, in a surprise hawkish move decided to increase the Cash Reserve Requirement (CRR) by 500bps to 27.5% while leaving all other policy parameters constant.
By our estimates, the 5.0% increase in CRR will further warehouse above N800.0bn of commercial banks deposit with the CBN at 0.0%. However, to maintain the current minimum liquidity ratio of 30.0% and meet the new effective CRR of c. 34.3%, commercial banks might have to sell down on positions at the short-term debt capital market
(Treasury Bills and OMO) or grow deposits.
On one hand, we note that the Nigerian treasury bills market (valued at N1.6tn) may not be able to plug the expected liquidity shortfall (N800.0bn). Also, the attractive yield on OMO bills, makes the case for banks to sell their OMO bills less compelling. Yet, concerns around asset quality due to aggressive expansion of loan book, following 65.0% LDR regulation, makes the case for growing deposits unattractive. Give or take, we believe the relatively low cost of funds (viz. high yield on OMO) makes growing deposits the lesser
evil for banks. Accordingly, we expect banks to drive deposit and marginally increase their deposit rates (especially term deposits).
United Capital Research