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Banks profit set to fall over TSA

By on September 18, 2015

The cash shortage occasioned by the commencement of the Treasury Single Account policy will make banks’ profits to decline, it has been learnt.

Top bank executives told our correspondents on condition of anonymity on Wednesday that the lenders had moved substantial part of their funds to the Central Bank of Nigeria in compliance with the TSA policy.

As such, they said most of the banks’ treasuries had been depleted, leaving them with lower amounts of cash to engage in trading and other transactions that would have yielded higher profits.

One of the bankers said, “There is lesser amounts of cash in the banks’ treasuries to buy Treasury Bills, bonds and other assets. This will lead to lower profits for the banks at the end of the day.

“However, the impact of the implementation of the TSA as directed by the Federal Government, which has led to the withdrawal of up to N1.2tn from the banks, can be minimised by a reduction in the Cash Reserve Ratio.”

Analysts at Renaissance Capital said on Wednesday, “Considering that federal deposits, which left the banking system, were estimated at N1.2tn, we compute the CRR release at N202bn, which implies a net system debit of N1tn post TSA implementation.

“This is still significant, partly due to the fact that FX federal deposits on which there was no CRR also left the system. On our estimates, system naira deposits should be lower by five per cent, FX deposits by 12 per cent, total deposits by seven per cent and CRR at CBN (post release) down by five per cent.”

The analysts said for a reduction in the CRR to have the desired impact, it had to be moved down to 23 per cent.

On the back of comments by CBN officials that they would do what they could to minimise the impact of the TSA on the banks, including reducing the CRR, the Renaissance Capital analysts said, “We run some numbers to deduce what the CRR number would release sufficient cash back into the system to offset the net liquidity debit from the system of N1tn post TSA. Ceteris paribus, we deduce this figure at 23 per cent CRR.

“Essentially, we deduce that if CRR is maintained at 31 per cent at next week’s MPC meeting; the banking system will remain under liquidity pressure, significantly hurting banks’ funding costs and earnings. Reuters today (Wednesday) indicates that the interbank market remains shut from yesterday (Tuesday), with no trading going on, though some banks are quoting indicative rates as high as 50 per cent.”

The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu, explained that the implementation of the TSA would “further tighten the available liquidity in the system and that will lead to uptick in lending rates. In fact, the banks are actually refusing to lend. What that means is that you will have very little credit flowing to the real sector and economic activities will further slowdown.

“It simply means that despite the fact that stocks have very low prices now, we are not going to see additional liquidity because if interest rates are going up, the pension fund managers will put their money into fixed income instruments instead of equities, because return on fixed income will be better than equities’ returns.”

A financial expert at WSTC Financial Services Limited, Mr. Tola Oni, said, “Banks will have lesser amount to push into the real sector and it means that the cost of credit will be higher. Now, for the money market, because they will be lower level of liquidity, it is going to increase the money market rates.

“For the equities market, the banks constitute conveniently a third of the market; so, whatever affects them will affect the market. Businesses thrive on credit. So, if the cost of credit is higher, it is going to affect costs generally. I don’t know if the Monetary Policy Committee of the CBN will compensate them by reducing the CRR.”

 

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