Banks 65% LDR target marks yields crashing unsustainable – FBNQuest |
FBNQuest Capital www.fbnquest.com has stated that the crashing yield in the fixed income market may not be sustainable because of banks’ loans to deposit ratio requirement.
The firm stated this having observed that banks strategy guided by two recent CBN circular pose new challenges.
According to FBNQuest analysts report, the first ruled that domestic non-bank investors could no longer take part in the CBN’s open market operations (OMO), which are essentially its issuance of short-term bills for purposes of liquidity management.
This ruled out the Pension Funds Administrators (PFAs), for example, but not the foreign portfolio investments (FPIs).
Analysts noted that the second set a minimum loan-to-deposit ratio (LDR) for local banks of 60%, subsequently raised to 65% as at end-December.
According to the firm, while expanding their loan books, the banks have been buying NTBs on a large scale in recent weeks.
It then observed that yields at the CBN’s primary auctions have fallen to single-digit levels for all three maturities.
“We are unclear where these two trends leave the banks’ compliance with LDR requirements. They can miss the ratio and pay the penalties or they can trim their positions in FGN paper”, FBNQuest said.
FBNQuest see banks choosing to allow the CBN to sterlised their funds in the fourth quarter of financial year 2019.
“Brushing aside their bravado, we suspect that they will tend towards the second direction. We doubt therefore that the current yields on NTBs are sustainable”, FBNQuest analysts positioned.
Analysts at the firm do not rule out still tighter CBN regulation of the LDR, having noted that the market strategy of the local banks has been influenced by two recent CBN circulars.
The CBN has long been pushing for a sizeable boost to private-sector credit extension, which has settled below 20% of GDP.
Meanwhile, the banks have responded by boosting their loan books. This is evident from their guidance and from data collated by the NBS showing a quarter on quarter rise of 7% in their lending to N16.3 trillion at end-September.
“If they are to meet the LDR target of 65% and avoid the CBN’s large penalties, they will have to increase their lending further and live with what they see as the consequence of rising non-performing loans.
“While expanding their loan books, the banks have been buying NTBs on a large scale in recent weeks.
“The yields at the CBN’s primary auctions have fallen to single-digit levels for all three maturities”, FBNQuest noted.
“We are unclear where these two trends leave the banks’ compliance with LDR requirements. They can miss the ratio and pay the penalties or they can trim their positions in FGN paper.
“Brushing aside their bravado, we suspect that they will tend towards the second direction. We doubt therefore that the current yields on NTBs are sustainable. Also, we do not rule out still tighter CBN regulation of the LDR.
“In our view, the crashing of yields, particularly for NTBs, is unsustainable because of the banks’ loan-to-deposit ratio requirements. We see FGN bond yields back in a range of 12.25% to 12.75% at the end of first quarter of 2020”, FBN Capital projected.
