|
Listen now
Getting your Trinity Audio player ready...
|
As the Central Bank of Nigeria (CBN) begins to unwind its aggressive tightening cycle, the nation’s major banks are strategically positioned to capitalize on the resulting shifts in the fixed-income market.
There was an increase in fair value through profit and loss (FVTPL) bonds as at the 9-Months (9M) 2025 period, with banks positioning to boost bond-trading income as interest rates fall.
Access Holding’s FVTPL book increased 6-fold year-to-date (YTD) to N1.4 trillion as at 9M 2025, while UBA and GTCO increased two-fold to N220 billion and N101 billion, respectively. Stanbic’s FVTPL doubled to N121 billion, while Zenith Bank’s increased 64% to N69 billion.
The CBN has embarked on monetary policy easing in the second half of 2025, slashing the monetary policy rate (MPR) for the first time in five years.
The 50 basis points (bps) cut in September 2025 lowered the MPR to 27%. In addition, the cash reserve ratio (CRR) was slashed by 5ppts, to 45%. Inflation has eased to 16.1% in October 2025 from its recent peak of 34.8% in December 2024.
Interest rates have begun trending downwards as signalled by the September MPR cut, with rates across the yield curve falling by as much as 5 percentage points (ppts).
The CBN has indeed signaled the possibility of rate cuts resuming in 2026 if disinflation is sustained.
This policy shift directly impacts banks’ bond-trading activities through a well-known financial mechanism of the inverse relationship between bond prices and yields.
When the CBN cuts the Monetary Policy Rate (MPR), it pressures down the yields on government securities like bonds and Treasury Bills.
As yields fall, the market price of the fixed-income bonds already held by banks rises.
Banks can then realize significant “fair value gains” or “trading gains” by selling these appreciated bonds in the secondary market. These gains are categorized as non-interest income and can dramatically boost the bank’s profitability.
Tier-One Banks well positioned to Profit
Due to the high Cash Reserve Ratio (CRR), banks often channel a significant portion of their liquid assets into high-yielding government securities. This gives them a massive asset base to profit from falling rates.
Banks, particularly those that are Primary Dealer Market Makers (PDMMs), actively trade these bonds. They can increase the “duration” of their portfolios (investing in longer-term bonds like the 2033s and 2035s) to maximize price appreciation as the entire yield curve shifts downward in anticipation of further rate cuts.
Strong liquidity, especially among the Tier-1 banks, allows them to participate more aggressively in bond auctions and the secondary market, capitalizing on pricing anomalies before the full effect of the rate cut is priced in by the market.
“We note that Access Holdings FVTPL bonds increased significantly by 6-fold in 9M25A to N1.4tn – this should boost bond trading income with yields expected to decline. We expect bond trading income/revaluations to be the main driver of Non Interest Revenue (NIR) in FY26F,” Absa analyst Timothy Wambu said in a Dec 01 note to clients.
Absa economists expect the monetary policy rate (MPR) to be cut by a cumulative 7 percentage points over the next twelve months, with the key rate ending 2026F at 20%.
Follow the MoneyCentral Nigeria channel on WhatsApp: Click here!
