DMBs Preferring Investment in Bonds Over Lending –Report
Deposit Money Banks (DMBs) in Nigeria showed a strong preference for investing in government bonds and other fixed interest securities over lending amidst increasing risks of delinquent loans in the sector.
Local lender loan appetite switched despite Central Bank of Nigeria’s (CBN) 65% loan-to-deposit ratio, FitchSolutions hints in a new report on Sub-Saharan Africa banking outlook for 2024.
Growing uncertainties in the economy weakened lending appetite as a number of banks geared efforts towards balance sheet repairing. MarketForces Africa reported that stage 2 loans are fast growing into problem loans. Some banks reported increased impairment charges on credit losses.
While a higher interest rate environment has strengthened banks’ net interest margins, operators have witnessed default risk growing on the back of worsening macroeconomic indicators. Analysts are also predicting some level of credit migration for some banks in the fourth quarter of the year, especially lenders with high foreign currency exposure in volatile sectors.
In the report, analysts noted that Nigerian banks have been more risk-averse, prompting the Central Bank of Nigeria (CBN) to enforce the minimum loan-to-deposit (LDR) requirement.
In July 2023, the CBN announced that it will more strictly enforce the minimum LDR of 65.0%, as many banks are failing to utilise their funds, which should provide a tailwind to lending and stimulate economic activity.
FitchSolutions said it is unlikely to see Nigerian banks go above the 65.0% threshold too aggressively, for fear of loan delinquencies and as banks continue to favour investing in high-yield government bonds as opposed to riskier lending.
“We also think that Nigeria’s reform drive is unlikely to regain momentum in 2024, weighing on banking sector activity”, analysts said in the report. The devaluation of the currency in June 2023 failed to address imbalances in the currency market which exacerbated dollar shortages and significantly weighed on capital ratios by inflating banks’ risk weights.
“As we do not expect the official exchange rate to converge towards the parallel market rate anytime soon, dollar shortages will continue to affect banks in 2024”, FitchSolutions said. Nigeria Eurobond Slumps after CBN Resumes OMO Auction
Analysts said on top of this, a number of other challenges facing the banking sector, including deteriorating capital, worsening loan quality; struggle to attract cash to the official banking sector. At 85.1% as of June 2023, the report noted that the majority of money in circulation remains outside the banking sector and a high-operating-cost environment.
“That being said, Nigeria’s banks continue to perform well despite these challenges, posting strong profits in recent years. We expect that this trend will continue in 2024 due to high net interest margins and strong revenues from high yields on government bonds”, analysts said in the latest report on Sub-Saharan Africa.
