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Banks to surpass Q1 positive outlook on back of new CRR policy

By on May 23, 2015

Banks’ stellar performance in their first quarter outing despite headwinds may be consolidated and improved upon by the recent harmonisation of Cash Reserve Ratio (CRR) by the Central Bank of Nigeria, (CBN) analysts have said.

With cumulative net profit of 15 bank’s which have released their first quarter earnings, increasing by 18.88 percent, to N178.13 billion, compared with the industry’s 8.51 percent earnings growth in the earlier period, analysts say the new policy may have provided enough funds for real intermediation by the lenders, which had previously been lacking.

They argue that the consequence of the policy would be higher earnings for banks in the full year, on account of the positive impact from the lowering of cash reserve ratios by the CBN.

“The decision of the CBN to harmonise the CRR on private and public sector deposits to 31 percent is broadly positive for banks’ earnings in the coming quarters,” said Tajudeen Ibrahim, analyst with Chapel Hill Denham, in a May 19 e-mail to BusinessDay.

“We expect banks to have more funds available for lending to drive interest income growth, as about N500 billion will be freed in terms of banks reserves with the CBN, by our estimates. Thus, we could see bank stocks rally over the next couple of days,” Ibrahim explained.

Kayode Omosebi, equity research analyst with United Capital, in an e-mail statement to BusinessDay said, “There was a modest growth in loans, higher yield on assets, stable accretion of fee and trading income and growth in volume of business in the first quarter.

“This led to a higher net interest margin with a major impact of interest earnings assets and moderated funding cost.”

The cumulative cost-to-income ratio which shows the efficiency of a firm in minimising costs while increasing profits, also reduced to 54.18 percent, from 58 percent in 2014. The lower the cost-to-income ratio, the more efficient the firm is running.

The Monetary Policy Committee (MPC) of the CBN, on May 19, left the benchmark interest unchanged at 13 percent point. But inflation increased to 8.7 percent in April, close to the top of the bank’s 6 percent to 9 percent target band.

The CBN also decided to set a unified cash reserve ratio for public- and private-sector funds at 31 percent to improve the transmission of monetary policy. Previously, the rate for private-sector funds was 20 percent and 75 percent for public funds.

However, the cumulative operating expenses of the 15 commercial banks increased by 8.1 percent to N325.67 billion, compared to N301.08 billion last year.

Industry loan to deposit ratio jumped to 66.66 percent in 2015 from 58.78 the previous year. The higher ratio means Nigerian lenders were aggressive about lending in the period.

Loans and advances to customers also increased by 17.73 percent to N12 trillion, from N10 trillion the previous year, as banks focus on risk management through portfolio diversification.

The total assets of lenders in the first quarter of 2015 was N26.4 trillion, which is 32.5 percent of Nigeria’s rebased GDP of N80.22 trillion.

The CBN also devalued the naira, as falling oil price overwhelmed foreign exchange and consequently the foreign reserves. And the naira had lost more than 13 percent of its value against the dollar in the past six months, and was trading 0.2 percent stronger at 199 to a dollar by 3:47 p.m. in Lagos.

“Further devaluation of the naira is clearly what should be done; the currency should be allowed to move to its equilibrium level which is around N210-N220. The relative stability we have witnessed in the FX market is not likely to be sustainable,” said Omosebi.

Nigeria’s foreign reserves stood at $30 billion on May 15, down 20 percent from a year ago. Analysts say policy makers could also raise the interest rate to curb inflation.

“A hike in interest rates would be positive for banks,” said Saheed Bashir, equity research analyst with Meristem Limited, a research firm in an emailed statement.

 

[Business Day]

One Comment

  1. busy bee

    May 23, 2015 at 11:31 am

    I do not agree with analysts who believe the CBN harmonized 31% CRR will boost liquidity. The introduction of the single Treasury window amidst dwindling government revenue will definitely work against this. CBN has given with the right hand and taken more with the left.