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CBN policy on standing deposit facility to fuel demand for FGN Bonds

By on November 13, 2014

There are indications that auction demand for FGN bonds will hit an all-time high as banks and discount houses now earn only the 10 per cent interest rate under the CBN’s standing deposit facility (SDF) on placements up to N7.5 billion.

The CBN had in a circular last week added the use of interest rates to its policy tools. Consequently, it announced that banks and discount houses will henceforth only be paid the 10 per cent interest rate on the first N7.5 billion under its standing deposit facility (SDF). The apex regulator also stated that larger balances will not be “remunerated.”

In a report made available to THISDAY, analysts at FBN Capital stated that banks and discount houses will now become heavy buyers of FGN paper, particularly at the shorter end, as they sought to replace the diminished revenue stream from the SDF.

“The yield (bid) on the Aug’16s narrowed by 57bps on Friday, and yield compression was also evident for Nigerian Treasury Bills (NTBs). This trend should continue into the auction, “they stated.

THISDAY gathered that one Money Policy  Committeee (MPC) member has been calling for an asymmetric corridor (+2 per cent/-5per cent) around the 12.0 per cent policy rate, which implies a 7 per cent SDF rate.

The circular and the member’s proposal, THISDAY investigation revealed, both seek to boost credit extension.

“We suspect that they will have limited impact. CBN data show that the growth in DMBs’ total credit (other than to the FGN but including state governments) accelerated from 22.7 per cent year on year in December 2013 to 30.1 per cent in June 2014.

“We do not see much further acceleration for several reasons.
Firstly since the twin bank bailouts of 2009 the CBN has tightened its regulation of the industry beyond recognition. Secondly, the banks have not developed the skill-sets to lend across the economy. In their defence, we would say that the number of viable credit proposals is fewer than the regulator thinks.

“Thirdly, the banks are more comfortable buying FGN paper yielding 12 per cent to 13 per cent than lending to borderline credits at more than 20 per cent. Finally, banks worldwide do not always respond to changes in official rates designed to boost lending. The ECB’s negative rate for banks’ deposits (-0.20per cent) has had a negligible impact on lending volumes, “the analysts said.

According to the analysts, there has been an additional liquidity overhang since the maturity of Asset Management Corporation of Nigeria (AMCON) bonds totalling close to N900 billion on 31 October. “The holders opted to take about 30 per cent of the redemption proceeds in cash. Only offshore portfolio investors with a very high risk appetite are likely to bid on Wednesday.

Mounting pressure on the naira exchange rate as a result of falling oil revenues has led to increased CBN intervention, reserves depletion and the exit of some foreign investors (both equity and fixed-income), “they said.

Meanwhile, THISDAY gathered that in day’s monthly auction of FGN bonds, the Debt Management  Office (DMO) looks to raise N65 billion ($390 million), and offers the same issues as the four previous months (13.05 per cent Aug ‘16s, 14.20 per cent Mar ‘24s and 12.15per cent Jul ‘34s).

The total bid in October fell to N116 billion ($700 million), its lowest level for more than one year but attributable to a delay in the monthly distribution by the Federation Accounts Allocation Committee (FAAC).

This time, however, analysts said they expect a rebound following last week’s CBN circular on SDF.

 

[ThisDay]