The Nigerian banking sector finally has some breathing space after the country’s central bank lowered capital reserve requirements (CRR) for banks from 31% to 25%.
It is hoped the measure, introduced by the Central Bank of Nigeria on September 22, will boost liquidity to a banking sector that has been under severe stress since the collapse of the global oil price, which also led to the collapse of government revenues in the oil-reliant country.
| There is a lot of speculation as investors had previously assumed the currency will be further devalued|
NPL ratios have been on the rise since the oil price fall, and there has been a substantial reduction in trade volumes and profit margins across the board as corporates in the oil and gas sector fail to meet bank obligations.
“When you adjust for dollar deposits and only consider CRR eligible (in other words, naira) deposits, the reduction in CRR for the Nigerian banking sector makes an additional 4% of bank deposits available to work with and invest,” says Judd Murigi, banking analyst at African Alliance.
“This should have a positive effect on bank earnings this year. We predict that First Bank of Nigeria could see up to 6% earnings upside and other tier one banks in Nigeria have 2%-4% earnings upside potential,” he says.
A West African banking analyst based in Lagos adds: “The lowering of the CRR in Nigeria is a positive step, however some banks would expect to see even lower requirements at around 15%, given the ongoing liquidity pressures on the banking system.”
Meanwhile Kato Mukuru, partner and head of equity research at Exotix, says the central bank should offer additional relief to banks, perhaps by cutting OTC charges or reducing the levy to the Asset Management Corporation of Nigeria. Amcon is the state-owned agency tasked with cleaning up the bad debt that overwhelmed Nigeria’s banking sector following the financial crisis in 2009. Banks pay 0.5% of their assets each year to help fund Amcon.
“The central bank needs to do a lot more to support banks if it wants them to start lending in this environment,” says Mukuru.
The reduction in CRR comes just a week after the central bank introduced the Treasury Single Account (TSA) designed to channel all government revenue into one account held with the central bank, away from Nigeria’s commercial banks, prompting some analysts and bankers to argue that this would further damage liquidity in a stressed banking environment. Supporters of the TSA, however, argue that the measure was intended to tackle crippling corruption and boost transparent reporting in Nigeria.
According to data compiled by Renaissance Capital, around N345 billion ($1.7 billion) worth of naira deposits were moved to the TSA as of September 21. Although the investment banking and research house does not have data to show the total amount of federal deposits in naira combined with foreign exchange moved so far, it has calculated that total federal deposits that could be moved to the TSA would be around N1.2 trillion.
“Nowhere near N1.2 trillion has been moved into the TSA up until now so combined with the lower CRR that has just been introduced, liquidity in the banking sector has been increased significantly,” says Mukuru.
The TSA directive is still unclear, however. The bank analyst says: “The central bank states that all public sector-related accounts will need to be transferred to the TSA, whereas the accountant general [Ahmed Idris, responsible for the management of all receipt and payments of Nigeria] believes that certain accounts will be exempt for the rule.”
He says banks are waiting for more clarity. “I believe that this is the excuse that banks are using in order to limit the amount transferred to the TSA for now.”
While banks in Nigeria continue to contend with the low liquidity environment, the collapse in energy revenues has also hit the currency and triggered flows of capital out of the country.
|The change in the CRR is one positive step in what remains|
a very difficult macroeconomic environment for Nigeria
Kato Mukuru, Exotix
In response, the central bank has devalued the naira twice since the fall in the oil price, once in November 2014 and then again in February this year, accounting for a 22% decrease against the dollar to N199.
However, calls by some to further devalue the naira have fallen on deaf ears. On September 17, Nigerian central bank governor Godwin Emefiele ruled out any further naira devaluation, citing inflationary risks and the prospect of economic instability.
Annual inflation hit 9.3% in August, above the central bank’s target band.
“There is a lot of speculation going on in the market as investors had previously assumed that the currency will be further devalued,” says Yinka Odeleye, executive director at Union Capital in Nigeria. “Indeed, because the central bank seems to be struggling to meet demand for dollars and has banned certain items from the official foreign exchange market, this has resulted in sizable demand for the dollar in the parallel market which has seen rates go as high as N240 recently.”
Since taking office in May, President Muhammadu Buhari has promised to tackle institutionalised corruption and diversify Nigeria’s economy away from the oil sector. The economy remains highly reliant on oil, accounting for 90% of foreign currency earnings and 70% of government revenue. But initial enthusiasm for the new president has started to wear thin, as Buhari has yet to appoint a cabinet or properly tackle the country’s economic woes.
“The change in the CRR is just one positive step in what remains a very difficult macroeconomic environment for Nigeria. We are still waiting for a minister of finance – and for the cabinet – to be appointed. I doubt we will see any substantial changes to the overall economic outlook until then,” says Mukuru.