Banks are increasingly turning to the Central Bank of Nigeria (CBN) for financial support in shoring up their cash positions.
In the face of sustained liquidity mop-up and stringent monetary policy measures by the CBN, numerous deposit money banks are opting for substantial borrowings from the apex bank to fulfill their regulatory and liquidity obligations.
According to CBN’s Financial Data for February 2024, as reported by Vanguard, there’s been a noteworthy month-on-month increase of 65.5 percent in banks’ borrowing from the CBN Standing Lending Facility (SLF), reaching N5.96 trillion in February compared to N3.6 trillion in January 2024. In contrast, the data reveals a significant 72.4 percent month-on-month decline in banks’ deposits in the CBN’s Standing Deposit Facility (SDF), dropping from N1.2 trillion in January 2024 to N330.71 billion in the same period.
This trend unfolds against the backdrop of various CBN policies. Analysts anticipate that the hike in interest rates could potentially enhance asset yields for some banks by an average of 400 basis points (bps) by the end of the 2024 financial year.
In their March Banking Sector update report, analysts at CardinalStone Research state, “Based on the first and second-order impacts of the rise in auction stop rates and a 400 basis points increase in MPR to 22.75%, we now forecast asset yields to rise by an average of 400 bps across our coverage banks in FY’24.”
They further project an 83.4 percent average increase in interest income for the covered banks. While the discontinuation of daily CRR debits is seen positively, the recent decision to raise the statutory CRR to 45 percent poses a potential downside risk to interest income. This implies that banks may now deploy only 55 percent of new deposits to interest-earning opportunities, assuming adherence to other rules such as the loan-to-deposit ratio.
The prevailing high-interest rate environment may exert additional pressure on banks to enhance dividends in the upcoming months, offering potential avenues for substantial dividend income compared to de-annualized returns from fixed-income options.
These strategic financial moves are designed to fortify banks against vulnerabilities, both internal and external. Notably, one of the latest policy shifts includes raising the benchmark interest rate (Monetary Policy Rate, MPR) to 22.75 percent from 18.75 percent and increasing the Cash Reserve Ratio (CRR) to 45 percent from 32.5 percent last week.
Analysts express concerns about adverse macroeconomic conditions potentially leading to an increased risk of Non-Performing Loans (NPLs) in FY’24, particularly affecting sectors heavily reliant on imported raw materials and equipment maintenance, such as manufacturing, due to the short-term cost implications of ongoing reforms.
