Banks Place Funds at SDF as Lending Appetite Tightens
A growing number of deposit money banks (DMBs) enhance their placement at the Central Bank of Nigeria (CBN) Standing Deposit Facility (SDF) amidst shrinking lending appetite.
The average non-performing loan in the Nigerian banking sector climbed in the third quarter over a slow loans recovery pace, raising concerns of asset quality.
With the monetary authority’s expansionary policy focus, analysts said commercial banks are more likely to see their earnings shrinking until the cycle completes.
Industry’s net margin has already dropped following downward loan repricing after September benchmark interest rate cut. The Central Bank is more likely to cut rates further in 2025, which would add additional pressure points on earnings.
Last week, money market data showed that banks’ placement at the SDF window averaged ₦4.17 trillion, representing an increase of 5% from ₦3.96 trillion the prior week.
Elevated borrowing costs have raised the default rate in the banking sector. This, including the recent unwinding of forbearance granted by the Apex Bank, stoked pressures on DMBs’ balance sheet quality.
Many commercial banks’ stage 2 loans were moved to stage 3, according to the latest financials released on the Nigerian Exchange, with a strong focus on oil and gas lending.
To boost earnings at the time FX gains reduced as a result of a firmer naira, banks stepped up investment in government securities, a pattern common among top lenders with a robust deposit base.
Small lenders were on the borrowing side, though activities at the Standing Lending Facility have moderated sharply in the absence of significant funding pressure.
“SLF activity stayed muted, with only minimal funding requests recorded,” TrustBanc Financial Group Limited confirmed in a note, noting that excess liquidity in the banking system reached N6.17 trillion last week.
Analysts said despite potential outflows in the new week, financial system liquidity is expected to remain buoyant in the near term, supported by strong system inflows.
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