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FBNQuest: Savings rate reduction’ll cut funding cost

The Central Bank of Nigeria’s (CBN) directive, late on Monday, that the minimum interest rate on savings deposit be reduced to a minimum of 10 per cent of the benchmark interest rate, Monetary Policy Rate (MPR) or 1.25 per cent from the previous minimum of 30per cent of MPR or 3.75per cent will lead to a slight reduction in banks’ funding cost, analysts at FBNQuest Research have said.

The analysts, who stated this in a note obtained by New Telegraph yesterday, however, pointed out that with an inflation rate that is above 12 per cent, the apex bank’s directive will result in the negative interest that bank customers earn on savings deposit accounts widening to -11.5per cent from the -8.7per cent rate implied by the former interest rate regime. According to the analysts, “broadly speaking, given that savings deposits account for around 20 per cent of the deposit liabilities of commercial banks, the new directive should be positive for banks in terms of a slight reduction in their overall cost of funds. All else being equal, our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around c.50bps in Q4.

“In terms of earnings impact, we estimate an average increase of around +8 per cent in the 2020 PBT for our banks universe. Banks with already low cost of funds such as GT Bank and Zenith will benefit the least from the interest rate reduction. However, given the stringent rules around intereson savings, we doubt that the impact will be that material. “Our reason is simple. Statutory provisions indicate that customer savings accounts will be ineligible for (monthly) interest rate payments in any month where a customer makes more than four withdrawals. Typically, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts on a monthly basis. Consequently, for most banks, the average funding cost for savings deposits is much lower than the 3.75% implied by the MPR. “For bank customers, given an inflation rate trending above 12 per cent (12.8% July 2020), the negative interest earned on savings deposit accounts will widen to -11.5 per cent from the -8.7 per cent rate implied by the former interest rate regime. Despite limited investment outlets due to the subdued interest rate environment, we believe that some bank customers might be encouraged to take a second look at alternative asset classes such as equities.”

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