Reading the equity market tea leaves: Overweight tier-1 banks

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Recently, the CBN reviewed the minimum interest payable on savings deposit by Banks from 30.0% of MPR (or absolute of 3.75%) to 10.0% of the MPR (or absolute of 1.25%), effective from 1st September 2020.

In line with the recent decline in the overall interest rate in the capital market, this is yet
another move by the apex bank to prop up the real sector, discourage easy money and bolster investment, following the 6.1% contraction recorded in Q2-2020.

Notably, the decrease in savings rate is expected to further drive down the cost of funds of Nigerian Banks, especially for the top-players like FBNH, FCMB, GUARANTY, UBA and FIDELITY with over 20.0% savings to total deposits ratio, respectively.

By implication, this will support Net-Interest Margin(NIM) across the industry, as we do not expect a drastic fall in savings deposit considering liquidity needs for households and corporates. Also, as cheap funds get even cheaper, we expect profit margins to improve.

However, this does not directly imply that Commercial Banks will become more aggressive about growing their loan books. No thanks to sustained uncertainties in the horizon. We
recall that the lower yield environment has already forced term deposit rates lower, hence, savings rate is merely playing catch up.

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For investors, we are of the view that this move is positive for the Banks, as we expect margins to improve. Thus, this policy further strengthens the outlook for the Nigerian banking industry in 2020, as signalled by the Q2-2020 GDP report published recently by the NBS. In all, we maintain our preference for Tier-1 Banks, for discerning investors.



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