Banks Net Borrowing from CBN Hits N1 Trillion

Banks Net Borrowing from CBN Hits N1 Trillion

Pressures by liquidity requirement, Nigerian deposit money banks’ (DMBs) net borrowing from the central bank settled at N1 trillion in the month of August, according to analysts’ note reviewed by MarketForces Africa, amidst concerns over rising stage loans in the sector.

Cash-stressed local lenders were noted to have pitched their tents at the central bank’s standing lending facility to boost their liquidity positions, with intermittent swings in money market rates.

Activities at the standing deposit facility were however unimpressive as most tier-2 lenders appeared to have liquidity issues, though cash-rich peers pushed for rates that aligned with market conditions.

Surprisingly, the money market rates dropped to single digit levels for sometime in August, a development connected to solid liquidity levels as a result of improved federal account allocation inflows. 

In its commentary note at the weekend, CardinalStone Research said strained liquidity fueled upticks in fixed-income yields last month. Analysts noted that liquidity strain was prevalent in the domestic fixed-income market, fueling increased queues at the CBN discounting window, thus, pushing DMBs net-borrowing to N1.0 trillion.

According to the investment firm, the material reduction in liquidity was also reflected in the July bond auction which clicked bid to offer at 0.64x, the lowest level in almost a year.

Auction results showed that average stop rates increased by 135 basis points. Consequently, the average bond yield in the secondary market was up by 96bps in the review month. 

Elsewhere, the yields in the NTB market increased by 14 basis points due to strained system liquidity and reaction to the first OMO mop-up since Dec 2022.

MarketForces Africa reported that the stop rate on the 1year open market operation (OMO) instrument settled at 14.5%, further catalysing bearish sentiments. The apex bank resumes OMO sales in the secondary market to attract foreign investors into the market.

On the downside, fixed income market investors have consistently earned negative interest yield on naira assets despite the accelerating headline inflation rate. However, the dearth of alternative and regulatory demand forced asset managers to keep the local debt market temperature intact.

The firm projected that after the FAAC-induced support at the start of September, liquidity will likely be strained for the rest of the month due to the modest maturity profile.

For context, CardinalStone Research said it expects the Nigerian Treasury bills maturities of N527.2 billion to probably be rolled over and bond coupon payments of N352.2 billion to be absorbed by the September bond auction.

“The combination of lower liquidity and the sustained hawkish disposition of the monetary policy committee (MPC) will likely drive higher yields”, CardinalStone said in its note.

The investment firm said nevertheless there might be some upside risk, as fiscal borrowing could be less aggressive in line with the new Minister for Finance’s disposition towards additional debt and the translation impact of the naira devaluation on dollar earnings.

This position is also supported by expected subsidy savings.  Debt Management Office (DMO) has already raised about N4.6 trillion in bonds this year and net issued NTBs worth N330.0 billion, translating to about 70.0% of the domestic borrowing target for the year. #Banks Net Borrowing from CBN Hits N1 Trillion

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