Banks Margin to Remain Pressure as Lending Rates Plunged
Indicative of the apex bank continuous dovish stance on interest rate, lending rate plunged in October and analysts said banking sector margin will continue to remain pressured.
This projection is anchored on the decision of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) to hold benchmark interest rate.
Analysts believed that the reduction of the benchmark interest rate at the previous MPC meeting exerted significant downward pressure on risk assets yield.
In the third quarter earnings season, Tier-1 banks that account for significant chunk of the industry’s loan book saw decline in net margins.
Commenting after the meeting, Meristem Securities Limited said this was consistent with its expectations.
Data from the apex bank shows that prime and maximum lending rates in the banking sector fell to 11.31% and 28.36% in October, from 11.55% and 28.45% in September respectively.
The decline in interbank call rate to near 0% in October from 2.00% in September is also indicative of high liquidity of the sector and consequently lower yield.
Nevertheless, analysts reckoned that banks have managed to stay resilient by playing the volume game and supporting performance with non-interest income lines such as trading and FX gains.
Read Also: Nigerian Banks Make Gradual Shift to Universal Banking Model
“Today, our views remain unchanged, especially as the MPC has decided to maintain status quo.
“We continue to hold that growth in interest income will increasingly depend on the capacity of banks to sufficiently grow loan book even as macroeconomic conditions do not favor loan growth due to the potential negative impact on asset quality over the short-to-medium term”, Meristem Securities explained.
Analysts added that Banks will therefore have to continually make the tradeoff decision between achieving higher margins and maintaining asset quality.
Recent developments such as the creation of a special tribunal for loan recovery by the newly signed BOFIA 2020; Global Standing Instruction; and penal charge on failed direct debit transactions from an unfunded account; are however expected to help reduce non-performing loans in the sector.
Meanwhile, Meristem stated that MPC decision to hold key rates will have negligible effect in the real sector of the economy.
GDP figures according to the National Bureau of Statistics shows the economy slipped into a recession in Q3:2020.
Although eased lockdown conditions and COVID-19 interventions by the CBN helped taper the extent of contraction in the non-oil sector, low oil production and low prices impacted the oil economy heavily.
Going by November PMI statistics, Meristem said the contraction in manufacturing activities witnessed since May has been halted, driven by expansions seen in sectors such as consumer goods, non-metallic mineral products, cement, textile, and transport equipment.
However, activities in the petroleum and coal, chemical and pharmaceuticals, electrical equipment, primary metals, Paper products and fabricated metal products sectors remain subdued.
While the MPC sees a rate hike as counter-growth and a cut as inflation inducing, analysts at Meristem Securities expects the Committee’s stance to keep all parameters unchanged to have little or no effect on the level of real sector output.
Meristem explained that the fixed income space has continued to record robust patronage as investors seem to prioritize liquidity management over attractive returns.
This buying pressure, in the past week, pressed average treasury bills yield in the secondary market to a negative 0.03% as at the 20th of November 2020.
It said the bond market has also seen further compression in yields as system liquidity remains elevated amid limited attractive alternatives.
“We do not expect this decision to alter the course of the market, as we expect yields to taper further through the year amid sustained demand”, analysts said.
More so, with negative returns on the horizon, investing in short term treasuries may begin to take the back seat as investors explore other capital preservation alternatives at this time, Meristem hinted.
Banks Margin to Remain Pressure as Lending Rates Plunged
