CBN’s LDR, CRR Debits Diametrically Opposed Policies - Analysts

CBN’s LDR, CRR Debits Diametrically Opposed Policies – Analysts

Cardinalstone, a leading multi-assets investment firm, has explained that the Central Bank of Nigeria’s (CBN) discretionary cash reserve ratio debits is diametrically opposed policies.

The investment firm which made this submission known in a mid-year report said it views CBN’s discretionary CRR debits as diametrically opposed to the LDR measure pushing for increased credit creation.

The firm said while it recognize the rationale for these incessant debits -to stymie currency speculation and ease FX pressure—there is bi-faceted consequence.

The consequence of the CRR debits, according to Cardinalstone include rising interbank borrowings with its associated costs, and plunging liquidity ratios.

Analysts stated that for context, FCMB grew its interbank borrowings in 2019 by nearly two-fold, with STANBIC up 55.3% and UBA +52.8% to lead the heavy borrowers.CBN’s LDR, CRR Debits Diametrically Opposed Policies - Analysts

In the first quarter of 2020, FBNH with interbank borrowing surge at +37.9%, STANBIC +78.8% and UBA +50.3%.

Analysts said these banks were among the heaviest reliers on interbank borrowings to support liquidity levels.

Already, the CBN has hinted that it is aware of these risks and knows the level of liquidity needed to both drive growth and ensure systemic stability.

“Our assessment is that given the considerable amount of banks’ cash sitting with the CBN, it is unlikely the regulator will let banks slide beneath its defined liquidity threshold.

Read Also: Analysts Predict CRR Debits for Banks after July Bond Auction

“We also expect that at some point, the monetary authorities may take a softer stance in its LDR-related and discretionary CRR debits given considerably weaker macro conditions, currency devaluation and the slow pace of inflation uptrend”, Cardinalstone stated.

Analysts explained that while current circumstances suggest that banks’ earnings are likely to be challenged in 2020, the latest cut in the policy rate could portend positively for banks’ funding costs.

“Our analysis suggests that FBNH, with the largest savings deposit base in the industry, is likely to be the biggest winner with over N3.5 billion in potential interest cost savings”, analysts stated.

Also, UBA cost savings has been estimated to be around N2.4 billion, while Access Bank is also pegged at N2.4 billion and ZENITHBANK N2.1 billion.

Analysts said Access Bank most notably benefitting from its low cost deposit acquisition from the now defunct Diamond Bank.

However, higher loan losses and the foreign exchange impact on risk-weighted assets are likely to put a dent on banks’ capital adequacy ratios in 2020.

“Other than FBNH (15.5%), FCMB (17.2%) and FIDELITY (18.3%), all other banks in our coverage are at least 500 bps above the regulatory capital adequacy ratio requirement, per latest audited numbers, increasing their likelihood to absorb potential losses”, analysts said.

Cardinalstone said: “Assuming a 10% rise in risk-weighted assets (RWA), banks within its coverage can potentially absorb N62.3 billion on average in potential losses based on 2019 numbers, with GTB (N172.3 billion), ZENITHBANK (N153.9 billion) and STANBIC (N89.5 billion) having the largest buffers.

In contrast, Cardinalstone explained that FBNH would need to capitalize as much as N31.8 billion in retained earnings and qualifying tier 2 capital to achieve regulatory minimum levels.

Also, additional N66.4 billion would be required to create a 200 bps buffer which Cardinalstone dubs its minimum comfort level.

“Likewise, though likely to stay above regulatory minimum in our scenario, ACCESS, FCMB and FIDELITYBK would need to capitalize N32.1 billion, N17.0 billion and N4.9 billion, respectively, in retained earnings and qualifying tier 2 capital to achieve a 200 bps CAR buffer”, the firm stated.

“We evaluate that STANBIC (+800 bps), GTB (+750 bps), ZENITHBANK (+380 bps) and UBA (+350 bps) would have considerable capital legroom (in excess of 200 bps over minimum capital requirements) in the event of a 10% and 15% rise in RWAs”, Cardinalstone stated.

CBN’s LDR, CRR Debits Diametrically Opposed Policies – Analysts