Reforms: Banks grappling with regulatory pressure

Central Bank of Nigeria

The spate of recent measures announced by the Central Bank of Nigeria (CBN) to boost economic growth and promote financial inclusion is giving deposit money banks (DMBs) in the country sleepless nights, writes Tony Chukwunyem



ith the Q4 earning season about to commence, speculation is rife in financial circles that deposit money banks’ (DMBs) profitability might be affected by the spate of measures introduced by the Central Bank of Nigeria (CBN) in the last six months, in its bid to get lenders to increase credit to the real sector of the economy.



LDR policy

Specifically, the consensus among analysts is that of all the measures introduced by the apex bank in  recent months,  the Loan to Deposit Ratio (LDR) policy is likely to have the most impact on the banking industry.



The CBN had in a letter to all DMBs, dated July, 03, 2019, mandated them to maintain a LDR of 60 per cent by September 30, 2019. The LDR is the portion of customers’ deposit that is given out as loans. The CBN further stated that failure to meet the regulatory requirement by the stated date would result in charge of an additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR.



At the expiration of the September 30 deadline, the CBN debited the accounts of 12 DMBs to the tune of N499.18 billion for failing to comply with its directive. It then went ahead to announce that it had raised the LDR target upwards to 65 per cent and directed lenders to comply by December 31, 2019 or be charged an additional CRR equal to 50 per cent of the lending shortfall of the target LDR.



In addition, to ensure that DMBs complied with the LDR policy, the CBN, last October, barred individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions. This meant that only banks and foreign investors are allowed to participate at such auctions.



The development resulted in fixed income securities yields plunging to single digits due to huge demand, a situation, analysts predicted,   would hurt  lenders’  profits  since  investment in fixed income securities has in the last few years been a major source of income for DMBs.



In fact, the CBN’s “Half year activity report 2019”   indicates that DMBs in the country invested a total of N6.5 trillion in T-bills in the first six months of last year. The figure is N1.73 trillion higher than the N4.83 trillion that the lenders invested in treasury bills in the corresponding period of 2018.


The report further stated:  “The outstanding NTB holdings structure indicated that DMBs accounted for 41.69 per cent of the total at end-June 2019 compared with 27.59 per cent in the corresponding period of 2018. Mandate and internal account customers (parastatals) accounted for 45.51 per cent, merchant banks 0.81 per cent, while the CBN accounted for 11.99 per cent.”


A breakdown of the data shows that in January 2019, commercial banks invested a total of N1.10 trillion in treasury bills, constituting 41.37 per cent of the outstanding NTB holdings structure for that month.



Similarly, in February and March, the lenders invested a total of N1.09trillion (41.47 per cent) and N1.05trillion(39.77 per cent) respectively.


The trend continued in the months of April and May as DMBs’ investment in treasury bills amounted to a total of N1.16 triilion (43.88 per cent) and N1.05trillion (39.48 per cent) respectively.


Retention of 65% LDR


Even as speculation mounted over the likely impact of the LDR policy on banks’ performance, there were indications that the CBN planned to further increase the LDR.



Indeed, at the workshop for Business Editors and Finance Correspondents organised by the Nigeria Deposit Insurance Corporation (NDIC), which took place in Yola last month,  the Deputy Director, Financial Policy and Regulation Department, CBN, Dr Hassan Mahmoud, hinted  that the apex bank was  considering increasing the LDR to 70 per cent by the end of  this year


He said: “The central bank increased the minimum loan-to-deposit ration to encourage banks to lend and de-risk the real sector, particularly the SMEs. This is to encourage employment. Now, we are thinking of doing 70 per cent by the end of next year. Within the period that we have increased the LDR, industry lending has increased by over N1.1 trillion.”


However, citing what it said is the “remarkable increase in the size of gross credit by  Deposit Money Banks (DMBs) to customers,” the  CBN last week announced that  it had decided to  retain the minimum 65 per cent LDR “in the interim.”



The regulator said: “The CBN has noticed remarkable increase in the size of gross credit by the DMBs to customers. Accordingly, the CBN has decided to retain the minimum 65 per cent Loan Deposit Ratio (LDR) in the interim. All DMBs are required to maintain this level and are further advised that average daily figures shall be applied to assess compliance going forward.


“The incentive which assigns a weight of 1503 in respect of lending to SMEs, retail, mortgage and consumer lending shall continue to apply while failure to achieve the target shall continue to attract a levy of additional Cash Reserve Requirement (CRR) of 50 per cent of the lending shortfall of the target LOR on or before March 31, 2020.”


According to the letter, which was signed by the Director of Banking Supervision, CBN, Ahmad Abdullahi, the regulator will “continue to monitor compliance, review market developments and make further alterations in the LDR as it deems appropriate.”


In fact, in the days preceding the announcement, there were reports that the CBN deducted N650 billion from the accounts of some DMBs as CRR, the levy for failing to meet the 65 per cent LDR by the end of last month. The move resulted in a scarcity of funds which caused interbank lending rates to shoot up by 313 percentage points.


Reduction in bank charges


But apart from its LDR policy, CBN recently made another key announcement, which analysts believe would negatively impact DMBs’ earnings.


Describing the move as part of its efforts to make financial services more accessible and affordable to various stakeholders in the economy, the regulator, on December 22 last year, unveiled a new “Guide To Charges By Banks, Other Financial and Non-Bank Financial Institutions,” which took effect from January 1, 2020 and saw it significantly reducing a lot of   charges and fees that financial institutions are allowed to impose on their customers. 


For instance, the withdrawal fee charge on extended use of other banks’ Automated Teller Machines (ATM) was reduced from N65 to N35 and the Card Maintenance Fee on all cards linked to current accounts was scrapped.


Commenting on CBN’s action, analysts at CardinalStone Research said the move would particularly hurt DMBs because the lenders  have been expected  to increase  their fee-based earnings to make up for the looming drop in interest income occasioned by lower treasury bill yields.


The analysts said: “On a broad basis, the new guideline is likely to be negative for Nigerian banks given its potential drag on fee-based earnings. Prior to the new guideline, we had expected banks to boost fee-based earnings in order to offset the potential compression in interest income that could be stoked by lower yields.


“This view was aided by recent investments in e-business channels and greater focus on retail strategies across our coverage banks. Notably, as at 9M’19, fee and commission income accounted for 57.0 per cent of total non-interest income (on average) across our coverage. An adjustment for potential non-recurring gains increases the contribution of fee-based income to about 74.0 per cent on average, highlighting its criticality to non-interest income (NII) growth,” they added.



Similarly, in a recent note, analysts at Cowry Asset Management Limited predicted that the reduction in bank charges coupled with the slump in T-Bills yields would impact DMBs’ capacity to pay higher dividends.



They, thus, advised that “investors should make cautious investment in banks, especially Tier – 2 banks, as their capacity to sustain or pay higher dividend may have been dented.”



They, however, said they expected lenders-especially the Tier 1 banks- to have the capacity to survive the tough environment.


The analysts said: “It appears that the banks have been caught in the middle of their regulator’s unending policies, which it has continued to churn out in order to support the Federal Government in its quest to boost economic growth. Also it’s a friendly fire on the banks as CBN feels there is an urgent need to protect customer’s purse in order to bring to bear its financial inclusion objective.


“In the middle of this regulatory shake up, deposit money banks’ (DMBs) income lines would be hit at almost every end. Banks’ interest income is set to decline amid lower yield environment; more so, their non-interest income lines should suffer the same fate as bank charges are cut – beginning from January 1, 2020. However, not all hope is lost given the nature of banks, especially Tier-1 banks, in finding a way to navigate tough environment.”


Staff retrenchment



But industry sources told New Telegraph that DMBs were worried about the impact of CBN’s measures on their bottomline.


An Assistant Manager at a Tier I bank, who asked not to be named, said that aside from hurting lenders’ profitability, the reduction in bank charges could lead to DMBs’ scaling down investment in infrastructure for electronic banking such as ATMs and Point of Sale (PoS) terminals.


The bank official said: “I hope the CBN knows the impact the reduction in ATM charges would have on banks.  The fact is that banks pay far more to other banks for extended use of their ATMs than the N35 they are now allowed to recoup from their customers.”


Indeed, New Telegraph learnt that the retrenchment of staff carried out by some banks in the last few days was an indication that some lenders are taking steps to ensure that they remain profitable.






The consensus in industry circles at the weekend was that although CBN should be commended for trying to ensure that DMBs effectively promote economic growth and financial inclusion, it should not forget that lenders are owned by shareholders who will only leave their funds in investments that guarantee them  what they consider to be, adequate returns.

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