Banks’ Liquidity Position Improves, Rates Decline
Following improved liquidity in the financial system, borrowing activities of the Nigerian deposit banks in the Standing Lending Facility (SLF) of the Central Bank of Nigeria (CBN) have reduced drastically.
The absence of liquidity pressures signifies banks will key into more business while meeting liquidity requirements. The apex bank’s standing lending facility window affords local banks and discount houses to borrow money at a pre-specified rate, typically the benchmark policy rate plus a margin.
On the other side, banks are also afforded an opportunity to keep idle funds in the standing deposit facility. With asymmetric points of +100/-700 basis points around the monetary policy rate, banks will pay a benchmark interest rate plus 100 basis points borrow from the CBN.
Local lenders will however obtain a margin on excess cash at 700 basis points below the benchmark interest rate to encourage dumping excess cash on the CBN.
Following constant debits on banks that failed to meet the 65% loans-to-deposit ratio target, activities in the CBN standing deposit facility have reduced. Tier-2 banks have been active borrowers at the CBN window.
In the money market, Nigerian Interbank offered rate fell across the board for all maturities tracked as gauges of money market stress eased and banks with liquidity demanded lower rates, according to Cowry Asset Limited.
Broadstreet analysts told MarketForces Africa that most of the Nigerian banks will have adequate levels of cash to play around across investment securities and other interest-yielding assets.
Meanwhile, there are divergent estimates and opinions about liquidity expectations in the week. A slew of analysts are expecting liquidity flows to dry up before the week’s close. In April, local banks were faced with significant liquidity stress that pushed funding rates much higher.
Data from the apex bank showed that cash tasty banks borrowed N4 trillion at the CBN window last month to support the gap in their respective daily funding requirements.
Yesterday, system liquidity improved by 9.5% to close at ₦320.88 billion. MarketForces Africa gathered that the activities of local lenders have reduced significantly at the standing lending facility window.
According to TrustBanc Capita Limited, banks’ daily average withdrawals were above ₦400 billion in the previous weeks. This week, the borrowing level has nosedived to ₦3 billion presently.
As a result, data from the FMDQ Exchange platform show that inter-bank funding rates remain depressed at 11.50% and 11.00%, respectively. Cordros Capital explained that the positive liquidity is a result of the absence of significant liquidity pressure on the system.
“The absence of funding pressure this week will keep the system buoyant, and rates depressed”, TrustBanc Capital said in a note. Overall, banks’ treasury bill sales slow down with the improved liquidity levels. Consequently, activities in the Treasury bills secondary market were quiet, as the average yield closed flat at 7.3%.
In its note, Coronation Merchant Bank indicates an expectation that rates in the money market will tighten as the projected outflow from a potential cash reserves debit by the CBN would likely outweigh the expected inflow from an FX refund and OMO maturity.
# Banks Liquidity Position Improves, Rates Decline
