Banks Lending Appetites Reduce as Stage 2 Loans Spike

Banks Lending Appetites Reduce as Stage 2 Loans Spike

Tracking below 65% loan-to-deposit ratio targets, Nigeria’s big banks’ loan appetite moderated in the first quarter of 2023, and analysts believe the pattern could be sustained as the market awaits earnings results to be posted.

Despite higher net interest margin on lending, local lenders appetite reduced appetite for credit creation amidst uncertainties in the economy spoked by the Central Bank of Nigeria’s failed demonetisation policy.

Big banks’ loan portfolios accounted for more than 70% of the banking sector businesses, according to a review of their balance sheet positions.

In a report, Fitch Ratings said Stage 2 loans which have been inflated by foreign currency pressures are high across the Nigerian banking system. It said these bad loans were dominated by restructured loans often syndicated to borrowers in the oil and gas and power sectors, often in grace periods on principal repayments.

Recently, the apex bank moved to reverse cash reserve (CRR) ratio normalisation after spotting a declining appetite for lending to the real sector of the economy. Amidst a flurry of reforms, the Central Bank of Nigeria (CBN) hinted that it would normalise the use of the CRR as a monetary policy tool.

MarketForces Africa reported that stage loans across the banking sector have begun to rise as corporate borrowers, and individuals contend with a higher interest rates environment – which some analysts believe would raise default risks.

In its commentary note, CardinalStone Research said the proposed normalisation of CRR maintenance processes, which analysts assume also implies strict compliance with regulatory requirements as opposed to the legacy issue of having banks’ effective CRR higher than required, could strengthen coverage banks.

In particular, the banking sector is likely to start earning on the portion of the difference between effective and regulatory CRR it does not currently earn on, according to the investment firm. 

“We note that the unorthodoxy of the previous monetary policy regime, manifested by frequent and disruptive discretionary CRR debits on the liquid assets of banks, created challenges to bank operations, such as asset sterilisation and uncertainty of liquidity management. With the return to normalcy, we see legroom for improvement in the capacity to embark on proper liquidity planning”.

In a circular sent to banks, CBN reaffirmed its commitment to not only retain the minimum Loan to the loan-to-deposit ratio (LDR) at 65.0% but also resume its enforcement of this directive effective 31 July 2023.

Accordingly, DMBs failing to comply with the requirement from the effective date will be liable to an additional Cash Reserve Requirement (CRR) of about 50.0% charged on the lending deficit.

The apex bank said that the policy aims to moderate the financial system’s excess liquidity. Amidst sluggish economic growth, the apex bank seeks to bridge the credit gap and support Nigeria’s real sector.

The recent move to re-enforce 65% loan-to-deposit ratio benchmark for deposit money banks is expected to have a mild impact on net interest margin in 2023, according to Cordros Capital Limited. 

The firm said its analysis of deposit money banks’ compliance with the CBN’s 65.0% minimum LDR directive reveals a consistent breach by all the banks under its coverage universe.

For context, in the 3-year period since the CBN introduced the directive (2020), tier 1 banks’ LDR averaged 50.0%, paling in comparison to the overall industry average of 65.9%, Cordros Capital said in an update.

Also, preliminary numbers for 2023 underscore the preceding.

The investment firm said FBNH emerged as the frontrunner among its Tier 1 peers, with the highest LDR of 64.5%.  In contrast, ZENITHBANK did 59.4%, ACCESSCORP achieved 49.4%, UBA scored 37.9%, and GTCO recorded 33.4% LDRs well below the 65.0% threshold.

“We attribute this to the moderate loan growth across tier 1 banks as of Q1-2023”, the firm said. Evidently, GTCO has consistently maintained its conservative stance to grow its loan book with a 5-year historical average of 6.0% with a 1.5% decline in Q1-2023”

Analysts said banks had faced a tough time growing earnings under the previous administration of loan-deposit ratio as a result of 32.5% additional CRR on their lending deficit.

Cordros Capital said the 3-year historical average of Tier 1 banks’ restricted cash with CBN as a proportion of total deposits settled at 22.2% – GTCO (25.0%), FBNH (24.0%), ACCESS (22.6%), ZENITH (22.2%), and UBA (17.0%).

“We highlight that the proportion of restricted cash to total deposits is lower compared to the lending deficits due to the combined impact of the CBN allowing banks to request funds from their CRR debits through the differentiated cash reserve ratio (DCRR) to finance Greenfield and brownfield projects, and lower CRR in other countries where our coverage banks operate”.

However, in an effort to drive compliance and enhance its liquidity management mandate, the CBN increased the additional CRR to a maximum of 50.0%.

Utilising the additional CRR of 50.0% and applying this to banks’ current lending shortfalls, analysts said they estimate that Tier 1 banks’ restricted cash with CBN as a proportion of total deposits will settle higher at an average of 28.8%.

These are specifically related to GTCO (41.7%), ACCESS (31.0%), ZENITH (27.3%), UBA (27.0%), and FBNH (17.1%).

Cordros Capital said the preceding indicates that the increase in the additional CRR will put further pressure on DMBs’ earnings growth and pose challenges to their liquidity levels. The investment firm said it anticipates DMBs will be torn between considerably increasing their loan books and reducing their deposit growth.

“We expect the impact of the re-enforcement of this policy will be mild on DMBs’ NIMs expansion in 2023E. On average, we estimate net interest margin across our coverage banks will increase by 200 basis points relative to our previous estimates (+250bps) prior to the LDR re-enforcement.#Banks Lending Appetites Reduce as Stage 2 Loans Spike

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