Banks Returns Projected to Rise as Rate Cut Lower Funding Costs
Following the recent drop in the monetary policy rate by the Monetary Policy Committee (MPC) of the Nigeria’s central bank, analysts have explained that deposit money banks are in better position to raise earnings.
Earlier this week, the Monetary Policy Committee of the apex bank dropped benchmark interest rate to 11.5%, a 100 basis points away from its previous pricing rate.
As result, analysts have projected that average funding cost in the sector would dropped further going forward, especially among banks with large deposit base.
In a note, Afrinvest explained that the impact of the rate cut would be felt on the savings deposit rate, which the CBN recently capped at a minimum of 10.0% of the MPR from 30.0%.
In its calculation, Afrinvest said this indicates a reduction on interest rate on savings deposit to 1.15% from 1.25%.
“This would support the profitability of commercial banks as cost of funds would fall even further, although the decision of the CBN around arbitrary cash reserve ratio (CRR) debits and OMO auctions is a key consideration”, Afrinvest stated.
The CBN has been debiting banks for failing to meet its 65% loan to deposit ratio target, analysts see this as counterproductive measure against drive to stimulate growth.
Elsewhere, the MPC noted its decision to support the FG’s ₦2.3 trillion Economic Sustainability Plan (ESP) with a contribution of more than ₦1.8 trillion.
However, analyst stated that there is lack of clarity on the nature of this contribution while concerns remain around the already high existing obligations of the Federal Government to the CBN, which was at ₦9.0 trillion as at December 2019.
In a surprising move, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) cut the Monetary Policy Rate (MPR) by 100bps to 11.5% – the third rate cut in 2020.
The asymmetric corridor around the MPR was also adjusted to +100bps/-700bps from +200bps/-500bps, signaling the CBN’s strong dovish disposition.
Meanwhile, the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) were unchanged at 27.5% and 30.0% respectively.
Voting pattern of Committee member showed that sentiment towards easing strengthened compared with the July 2020 MPC meeting.
Specifically, 6 of 10 members voted to cut policy parameters and 9 members voted to adjust the asymmetric corridor.
In reaching this decision, the MPC considered a range of policy options. The Committee noted that a tight policy stance could affect economic recovery.
Also, the MPC cited that keeping policy parameters unchanged would allow the economy to adjust to the stimulus measures introduced by monetary and fiscal authorities, allowing the Committee more time to assess the impact on the economy.
Ultimately, the decision to reduce the policy rate was driven by the need to support the economy.
In our view, the decision of the MPC remains consistent with the apex bank’s pro-growth stance and the drive to encourage lending.
Afrinvest stated that this has assumed a significant dimension especially as economic growth plunged to -6.1% year on year in second quarter of 2020, the worst on record.
The adjustment of the asymmetric corridor, which means that deposit rate with the CBN will fall to 4.5% and lending rate will rise to 12.5% also supports this growth drive.
“However, we believe the priority of the MPC should be in line with its core objective of price stability given that inflation rate was 13.2% in August, above the Bank’s 6-9% target and the highest in 29 months”, Afrinvest said.
The firm said, “While the Committee cited that non-monetary factors have driven the increase in inflation as money supply growth has been contained, we believe recent and existing FX restrictions around food imports have been a big factor”.
This is even more significant given issues such as disruptions to the agriculture value chain, insecurity and weather challenges that are likely to lead to more food price pressures.
“We are not convinced that expanding credit would resolve both the structural factors and current trade barriers and not worsen the trend in consumer prices.
“The transmission of the MPR to lending rates is also not strong while existing yields in the debt market would suggest a strong easing stance already.
“With these reasons, we are not optimistic that a rate cut would support the MPC’s growth objective”, Afrinvest explained.
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Banks Returns Projected to Rise as Rate Cut Lower Funding Costs
