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Lenders’ Restricted Deposits With CBN Hits N8.43trn on High CRR

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Lenders have combined restricted deposits with the Central Bank of Nigeria (CBN) to a tone of N8.43 trillion in the first six months alone as a hike in the cash reserve ratio (CRR) by the regulator poses threat to future profit growth.

Data gathered by MoneyCentral shows that is 6.25 percent from the N7.94 trillion recorded the previous year.

The Monetary Policy Committee (MPC) of the CBN, who has adopted an aggressive hawkish stance as it seeks to curb stubborn inflation exacerbated by the war between Russia and Ukraine, has raised the benchmark interest rate to 14 percent from 15.50 percent.

The cash reserve ratio, which means the share of a bank’s total customer deposit kept with the central bank as cash, was also raised to 32.5 per cent from 27.5 per cent. It, however, retained the liquidity.

Nigeria’s inflation rate has surged further to 20.52% in the month of August 2022, from 19.64% recorded in the previous month. This represents the highest rate since September 2005,

Analysts say the hike in CRR, which is one of the highest in the world,  will test banks’ resilience, but a benign yield environment could add impetus to revenue.

“On CRR increase, while the policy action would aid the CBN’s objective of curtailing demand-pull inflation, we believe the ability of banks to sweat out their assets would further be dampened,” analysts at Afrinvest Securities.

“Should the yield environment not increase materially to boost trading income, we see banks responding with more cost-cutting measures, some of which could negatively impact the broader economy,” said analysts from Afrinvest Securities.

Cash Reserve Ratio (CRR) is the amount of cash banks need to hold on to without being allowed to invest or lend it for interest. Also known as the reserve ratio, this percentage lets the commercial banks find out the portion of monetary reserves they need to keep with their respective central banks.

A higher reserve ratio stifles the use of funds to be lent out or invested in an economy that is growing slowly and beset by foreign exchange scarcity that is undermining businesses.

Zenith Bank has restricted deposit with the Apex Bank to a tone of N1.39 trillion; Access Bank, N1.83 trillion; First Bank Holdings, N1.38 trillion;  United Bank for Africa,  N1.01 trillion, and Guaranty Trust Holdings Company, N954.32 billion.

Also, Tier 2 or small and midsized banks such as Union Bank, Stanbic IBTC Holdings, Fidelity, and Sterling have claims of N297.86 billion, N492.15 billion, N700.75 billion, and N368.60 billion respectively.

A punitive regulatory environment as well as the policy maker’s capital control measures and nebulous exchange rate regimes have heightened investors’ apathy towards the banking shares even amid a rally in the equity market.

“Higher CRR hurts the banks’ liquidity ratios, compels them to borrow and take extra trading risks to generate supposedly “risk-free” income,” said Director – Frontier / SSA Banks & FinTech | VC at Renaissance Capital.

The NGXASI Banking index has lost -5.56 percent since the start of the year, underperforming the NGXASI year to date return of 14.77 percent.

A high interest rate and foreign exchange revaluation gains propelled banks earnings as their combined net income reached N496.47 billion, which is 18.42 percent higher than the N419.22 billion earned in the previous year.

This is the fastest profit growth since 2017 even amid regulatory imposed-macro difficulty such a high cash reserve ratio, minimum loans to deposit ratios, and competition with Telco’s and fintechs.

It is important to note that the conventional wisdom is that in a high interest rate environment banks’ interest earned on assets like loans will go up faster than the cost of their liabilities like deposits.

Also, the rising rates can be a good sign for the economy and signal of rising loan demand or relatively low credit risk,

But the uncertainties surrounding the 2023 elections as campaigns have flagged off is seen to be another elephant in the room for banks.

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