Nigerian banks are sitting on N654.23 billion income from treasury bills as at the third quarter of 2020, which is 6.97 percent lower than 2019’s N703.27 billion as ultra-low interest rate signals the end of free money.
That’s the first drop in five years since MoneyCentral started gathering data, as juicy yields no longer shield lenders from tepid demand or economic downturn.
To spur loans to the economy, the central bank barred individuals and non-financial companies from its high yielding bonds and hiked the minimum loans to deposit ratio, a monetary decision that sent yields crashing.
Average yields on Treasury bills that are sold at regular auctions have declined to less than 1 percent, near the lowest on record, while rates on central bank paper, otherwise known as OMOs, which went for 13 percent in January, have declined to about between 1 percent and 4 percent at the moment.
The yield on Nigeria’s government bond due 2026 fell to 6.7 percent, compared with more than 14 percent a year ago.
Analysts say banks prefer to remain on low profitability for the one year paper than extend credit to bad borrowers, and they added that the government should de-risk the real sector of the economy.
Wale Okunrinboye, equity research analyst at Sigma Pension Limited is of the view that the government should make fundamental reforms that create loans as some of the loans that are being extended at the moment will go bad once there is a shock.
“The question we should be asking ourselves is whether the central bank can keep the interest rate low till the end of next year. At one point things will blow up. And the Naira will continue to go down unless oil prices reach between $70 and $80 per barrel,” said Oknurinboye.
FBN Holding Plc’ saw interest income from treasury bills reduce by 19.54 percent as at September 2020 from N124.81 billion the previous year.
Zenith Bank’s income from treasury bills fell by 11.80 percent to N129.43 billion in the period under review as against N146.76 billion the previous year.
Access Bank’s interest income from treasury bills reduced by 27.65 percent to N61.18 billion as at September 2020 as against N84.57 billion the previous year.
However, United Bank for Africa (UBA)’s interest income on treasury bills increased by 5.53 percent to N130.91 billion as at September 2020, but the growth is poor when compared to 32.05 percent increase in 2017.
Of course, the coronavirus pandemic that caused unprecedented shocks and a difficult operating environment means interest income will decline, resulting in slow growth at the bottom line.
Nigeria’s gross domestic product (GDP) shrank 3.6 percent in the three months through September from a year earlier, the statistics body said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weighed on output.
The International Monetary Fund (IMF) has forecast that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.