Don't Miss

New CRR structure’ll further weaken bank earnings — WSTC

By BusinessNews Staff on May 25, 2015

The harmonization of the Cash Reserve Requirements on public and private sector deposits by the Central Bank of Nigeria will further weaken earnings in the banking industry, WSTC Financial Services Limited has said.

The Monetary Policy Committee of the CBN had on Tuesday harmonized the CRR on public and private sector deposits at 31 per cent, from 75 per cent and 20 per cent, respectively.

WSTC, in a report on Thursday, said the decision of the CBN came with an appearance of monetary easing.

It, however, said a careful analysis of the impact of the policy showed that the new CRR structure would result in a net aggregate debit, meaning a monetary tightening on the financial system rather than monetary easing as widely believed by many analysts.

Analysts at WSTC, Olutola Oni and Motunrayo Giwa, said in the report, “We believe that the net effect of the new CRR structure will further weaken earnings in the banking industry through higher cost of fund and reduced ability to earn interest income from liability generation.

“We also expect this scenario to further dampen market expectations about corporate earnings within the industry.

They said the harmonization of the CRR would have varying impacts on banks, depending on their relative exposure to public sector and private sector deposits.

“The larger the exposure of a bank to public sector funds, the lower the ‘net debit’ impact of the new CRR structure on the bank’s total deposits.

“Suffice to say that implicit in this is the fact that the harmonization of CRR may ultimately result in a ‘net credit’, in the interim, for banks holding considerable portion of public sector funds on their balance sheets.”

According to the report, a full analysis on players within the banking industry will be significantly limited by paucity of data resulting from insufficient disclosure on the part of the financial institutions.

On the Treasury Single Account recently introduced, the analysts said, “We believe that the full implementation of the treasury single account will further worsen the implication of the new CRR structure on banks.

“This is because the full impact of the treasury single account implies a 100 per cent sterilization of federal government deposits from the financial institutions.”

These deposits would have ordinarily had a dampening effect on the 11 percentage point increase in private sector CRR, the analysts said.

The TSA is Federal Government’s independent revenue e-collection initiative that has automated revenue collections of ministries, departments and agencies directly into the federal government’s consolidated revenue fund account at the CBN. It does not allow MDAs’ funds to stay in the vault of commercial banks.

[Punch]

headline