CBN Debits on Banks to Rise as Economic Condition Prevents Lending
The Central Bank of Nigeria debits on banks is expected to rise in the second half of 2020 as weak economic condition prevents lending, some analysts have said.
It was gathered that the current economic condition is hostile to the Nigeria’s central bank policy decision targeted at driving credit to the real sector.
As such, many banks will rather settle for increased cash reserve ratio punishment than to create risk assets amidst unsettled economic situation.
Lenders have been faced with threat of increase cash reserve ratio debits as the apex bank seeks to stimulate economic growth.
In the second quarter of 2020, the Nigerian gross domestic product nosedived 6.1% due to impact of covid-19 on global economic environment.
Nigerian banks have also had their share, though their results indicated that lenders were able to salvage the remnant of the economy with higher than expected profitability.
Underlie, analysts spotted that assets quality weakened as a greater number of banks booked higher than usual impairment on credit losses.
It has been projected that the third quarter result may follow the same pattern, with impacts of expected credit losses and loan to deposit ratio combined.
Appraising the developments in the economic space, analysts think Banks credit growth may have peaked already in the first quarter of 2020.
CardinalStone said banks under its coverage reported gross loans increase of 7.5% in the first half of 2020 and accounted for 15.3% of total asset growth as against 60% for restricted deposits with CBN.
It said Q1:2020 accounted for 95.6% of the gross loan growth with only 4.4% attributable to Q2:2020, highlighting the impact of COVID-19 on credit creation during the period.
“Although the MPC’s latest decision to slash the policy rate signals its intention to stimulate growth, we are skeptical that the move will materially propel bank lending in light of the prevailing macro frailties stoked by the COVID-19 pandemic”, CardinalStone said.
Analysts stated that even though the gradual reopening of the economy should ordinarily ignite optimism and lead banks to cherry-pick for quality obligors, lenders are likely to remain conservative in risk asset creation even if it implies higher LDR related CRR debits.
This conservative stance could reflect a wariness occasioned by higher expected credit losses (ECL) provisions and their impact on capital buffers in light of the lingering COVID-19 uncertainty.
CardinalStone said conditions largely hostile to asset quality but impact may be softer than feared.
“Our analysis of banks’ first half numbers leads us to hypothesize on the impact of the pandemic on credit quality.
It said consensus may have magnified asset quality concerns, possibly cued by the more than two-fold jump in NPLs in the period leading to the 2016 recession; played down the extent and efficacy of banks’ efforts to improve and strengthen their credit risk management frameworks following the reality check induced by the 2015 – 2016 crisis.
The firm explained that regulatory forbearance measures may have masked underlying credit weaknesses as stage 2 loans rose 60 bps to 17.5% on average, while restructured loans accounted for 21.0% on average for our coverage banks’ exposures.
Meanwhile, a sustained weakness in the economy could lead to a lagged manifestation of higher ECLs and NPLs for banks.
Though analysts said it is unclear how subsequent quarters are likely to unfold in terms of the economic consequences of COVID-19.
Nonetheless, analysts at CardinalStone said they do not expect a potential pass-through of the resulting macroeconomic fallout to banks’ numbers to be drastic in the second half of 2020.
“We continue to keep an eye on the Construction, Real Estate , ICT , Oil & Gas , General Commerce and Manufacturing sectors which recorded the most notable shifts in NPLs in the first half of 2020, according to NBS data”, CardinalStone stated.
On possible drivers for second half 2020 earnings, analysts pointed to lower deposit repricing.
The recent monetary measures such as the slashing of the minimum savings rate to 10% of MPR (from 30% of MPR previously) and the subsequent 100 basis points cut in MPR to 11.5% portends earnings accretive opportunities for banks in the second half, according to analysts.
For context, CardinalStone estimated the potential interest cost savings on savings deposits alone to be as much as 49.2% off first half 2020 numbers.
Improved operating efficiency is also expected to push lenders earnings in the second part of the year.
In the second half of 2020, analysts stated that earnings could receive support from much lower regulatory costs (notably AMCON charges and NDIC premiums) as banks alluded that they had already expensed their annual AMCON charges as at H1’20.
On average, regulatory costs accounted for 24.1% of first half 2020 operating expenses.
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CBN Debits on Banks to Rise as Economic Condition Prevents Lending
