Banks Borrow N8trn from CBN to Boost Liquidity
Yemi Cardoso, CBN Gov

Deposit money banks (DMBs) borrowed N8 trillion from the Central Bank of Nigeria’s (CBN) standing lending facility (SLF) as the need for funding became necessary for lenders. The fresh credit support from the window lifted liquidity levels in the financial system, and short-term interest rates adjusted downward, data from FMDQ platform shows.

With double digits short term benchmark interest rates, banks have started to increase lending rates on credit creation, reflecting the CBN hawkish position. Money market rates have come under pressure recently due to large auction tickets sold by the authority. This is on the notion that there’s higher level of money in the economy, supporting inflation surge.

Standing Lending Facility rate has increased to 23.75% from 19.75% previously, Afrinvest Limited said in its February note. The investment firm said due to CBN’s tough sterilization of liquidity, banks are heavily reliant on the standing lending facility for liquidity, tapping ₦8.6 trillion so far in 2024 – as of Feb 29.

The investment banking firm stated that this was 11.6x higher than the average borrowings from the window in the comparable period of 2022 and 2023. … Sustained mopping up of excess liquidity would force banks to reprice accordingly. For the primary market, clearing rates at auctions would be recalibrated higher to successfully roll over maturing issues and raise new debt financing”, Afrinvest said.

Last week, the settlement of the Treasury bills auction further intensified liquidity tightness within the system, contributing to sustained elevated levels in interbank rates.

Due to higher yield, Nigeria’s lenders are raising their investment securities in the bonds, and treasury bills market. On this analysts are projecting slowdown in lending as lenders seek to optimise earnings performance at minimum risk.

Generally, money market rates have adjusted upward after the CBN hiked its benchmark interest rate by 4% to 22.75% in February 2024. On account of FX liqudity challenge, the CBN sold one year bills for 2145% as it seems to attract foreign inflows.

Meanwhile, Braodstreet analysts believe elevated yields could reduce lending appetite. Some investment banking firms have predicted that high interest rates could drive default rates higher. Banks are expected to seek balance between lending to the real sector and investing in government borrowing instruments.

Reflecting high interest rate environment, the rate at which deposit money banks borrow from the standing lending facility of the CBN has increased, nearing upper band of monetary policy rate. In an update, Cardinalstone said the banking sector experienced a material shift in its operating environment in February.

This shift was due to aggressive policy decisions, which were mostly inspired by efforts to contain the currency crisis and surging inflation and improve banks’ capacity to withstand unexpected changes in key variables

Cardinalstone Partners said adverse macroeconomic conditions are likely to increase the risk of non performing loans, NPLs, in 2024, with sectors that rely on imported raw materials and equipment maintenance such as manufacturing likely to be badly hit by the short-term cost implications of ongoing reforms.

Also, Afrinvest Limited revealed that system liquidity rose by 4.5 times to ₦2.6 trillion buoyed by borrowings at the Standing Lending Facility valued at ₦8 trillion as paper sales outstripped repayments by ₦2 trillion. Data from the FMDQ platform showed that money market rates, including the open repo and overnight lending rates, concluded at 29.82% and 31.00%, respectively.

The weekly comparison showed that the overnight rate expanded by 281 basis points to 31.0%, according to Cordros Capital Limited. The short-term interest rates increased as debits for last week’s OMO auction dragged liquidity.

The financial system was reduced by N1.06 trillion outflow for OMO auction sold by the CBN, The system was further dragged by net NTB issuances totalling N979.79 billion and the transfer of NNPC’s remittance obligations from commercial banks to the CBN’s Treasury Sales Account (TSA) impacted the system.

However, due to DMBs’ utilisation of the CBN’s SLF facility, the average system liquidity settled higher at a net long position of N1.37 trillion as against a net long position of N642.18 billion in the previous week.

“Barring any liquidity mop-up action by the CBN, we envisage the overnight rate to trend southwards as the principal and coupon payments for the maturing FGN MAR 2024 bond worth N771.11 billion are expected to support system liquidity” Cordros Capital said.

At the primary market auction, the CBN issued instruments to mop up ₦337.9 billion maturing bills, the CBN sold 91-day worth N14.4 billion against ₦66.6 investors’ demand. The CBN sold 182-day worth N10.6 billion from ₦51.5 staked by investors. The apex bank offered 364 days bills worth ₦312.9 billion, investors’ subscriptions came at ₦1.5 trillion and the CBN sold ₦1.3 trillion.

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