Four Tier-1 Banks to increase loan books by ₦1.2 trn in 90 days
Godwin Emefiele, CBN Boss

Four Tier-1 Banks to increase loan books by ₦1.2 trn in 90 days

Despite the fact that they have big sizes, four banks in Tier 1 class have failed to convert 60% of their deposits as loans and advances to customers, the first quarter 2019 results have shown.

Given their current loans as a proportion of total deposits, United Bank for Africa, Guaranty Trust Bank, First Bank of Nigeria Holdings and Zenith Bank Plc would need to create additional credit assets required to meet the new apex bank directive of 60% loan to deposits floor.

GTB is expected to create additional loans book of about N145 billion before the target date.

Also, Zenith Bank must create more than N133 billion loans and advances, just as FBNH needs about N466 billion and UBA must book about N431 billion loans to avoid CBN’s sanction.

Meanwhile, Access Bank, Fidelity and FCMB Plc would be unscathed by the CBN directive as these banks already have a significant chunk of their deposits converted to loans and advances.

 It would be recalled that the Central Bank of Nigeria (CBN) released a new guideline for Deposit Money Banks (DMBs) via a circular on regulatory measures to improve lending to the real sector.

The highlights from the circular indicated that with effect from September 2019, DMBs are mandated to maintain a minimum loan to deposit ratio (LDR) of 60% compared to sector LDR of 58.5% as of May 2019 and a regulatory maximum of 80%,  which is subject to quarterly review.

In a bid to encourage lending to SMEs, retail, mortgage, and consumers, the apex bank assigned a weight of 150.0% to these sectors in the computation of LDR.

The CBN also disclosed plans to provide guidelines for the classification of businesses that fall under the named sector categories.

According to the apex bank, a failure to meet the minimum LDR of 60.0% by the specified date will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50.0% of the lending shortfall of the target LDR.

Although bank lending to the domestic economy rose by 8.2% year on year to about N21 trillion as at April 2019, an increasing need to encourage greater allocation to strategic segments within the private sector necessitated CBN’s recent move.

In addition to this, the apex bank may have been concerned that the decline in LDR to 58.5% in 2019 from 67.4% as at May 2018 may negatively impact credit to the real sector if not checked.

Cardinalstone Partners said, “In our view, the new requirement is unlikely to come as a surprise to banks given CBN’s previous references to the need to boost credit to the real sector.

“Notably, the new floor for LDR represents an attempt to move some banks closer to the relatively higher LDR levels recorded historically”.

“For context, banks such as Stanbic, GTB, and FBNH experienced significant deterioration in LDR in the last five years.

“Put together, our coverage banks boasted a five-year average LDR of 72.1% relative to 62.3% in the first quarter of 2019.

“We also highlight that our coverage LDR ratio for first-quarter 2019 was significantly flattered by higher ratios from a few banks within our tier 2 coverage (our coverage Tier 1 banks had average LDR of 54.4% in the first quarter of 2019”, Cardinalstone stated.

The firm said that based on first-quarter numbers, only ACCESS, FIDELITY and FCMB meet the new regulatory requirement within its coverage banks.

“Assuming deposits are unchanged from Q1’19 levels, non-compliant banks within our coverage (GTB, Zenith, FBNH, UBA, and Stanbic) would likely have to grow loans by a mean of 14.3% to meet the requirement”, Cardinalstone stated.

By implication, these banks may be required to create an additional N1.3 trillion in credit assets by September 2019. Our analysis suggests that UBA may likely have to grow loans by 19.4%, while ZENITH could require the least loan growth of 6.2%.

“Notably, the estimated loan growth that may be required by GTB and Zenith to meet the regulatory requirement already falls within their FY’19 guidance.

“Overall, we believe the September 2019 timeline may be too short for non-compliant banks given the unfavourable macro-economic environment.

“This may force the CBN to extend the current timeline”, Cardinalstone reckoned.

Cardinalstone is of the view that its estimates assume that the new requirement applies to the entire group of balances for the banks.

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However, it is likely that CBN’s new measures may only apply to the banks’ operations in Nigeria, given its Nigeria-centric aim of stimulating domestic growth.

In that latter case, first-quarter LDR would be lower for banks like UBA (FY’18 – 46.8%) with huge African operations.

Our estimates also utilise gross loans in the computation of the LDR. Computations with net loans will lead to a much lower LDR and an increase in the additional credit assets required by non-compliant banks to meet the shortfall.

Tellimer, a London headquartered developing market financial institution, said, “We could see an outcome where banks choose a much higher CRR over rushing to achieve the loan/deposit threshold, to manage asset quality headwinds.

“Bearing in mind that the CRR peaked at 50-60% for some well-capitalised banks (according to IMF Article IV, April 2019), there is bound to be pressure on margins and profitability due to this.

“We could also see banks showing less interest in taking deposits, in order to limit the loan growth required to meet the new loan/deposit threshold”, Tellimer stated. 

The CBN’s directive favours SME, retail and mortgage loans, which would have a 150% weighting in computing the regulatory loan/deposit ratio.

“This segment has been an area of recent focus and has been identified as a growth area by many banks in the financial year 2019.

“This would ideally raise the ‘regulatory’ loan/deposit ratio close to the benchmark and could help banks catch up a bit more easily, although the CBN maintains the right to define what constitutes such loans”, Tellimer stated

At the end of the first quarter, Access Bank recorded a loan to deposits ratio of 66%, FBNH 48% and FCMB 74%. GTB 53%, Stanbic 56% and UBA 48% and Zenith did 50%. 

The penalty for not meeting the threshold by the set deadline is an additional CRR levy equal to 50% of the lending shortfall of the target threshold, which would be likely to restrict banks’ ability to invest in government treasuries.

Four Tier-1 Banks to increase loan books by ₦1.2 trn in 90 days