Policy Rate Cut to Reduce Nigerian Banks’ Profitability –Comment
Nigeria’s policy rate cut will weigh on domestic banks profitability, Moody’s Ratings said in a commentary note released after the Central Bank committee decision last week.
The CBN lowered its monetary policy rate by 50 basis points (bp) to 27%, and reduced the cash reserve requirement (CRR) for commercial banks to 45%.
It was the first policy rate cut since 2020, reflecting improved macro indicators and the need to drive economic growth. The CBN also adjusted the standing facilities corridor around the monetary policy rate to plus or minus 250 basis points, kept the liquidity ratio unchanged at 30%.
The Apex Bank also maintained the cash CRR for merchant banks at 16% and introduced a 75% CRR on public sector deposits held outside the treasury single account.
“The lower monetary policy rate and cash reserve requirement for commercial banks will support economic activity but modestly compress Nigerian banks’ net interest margins”, Moody’s said.
Specifically, the ratings agency said it expects the lower policy rate to weigh on banks’ profitability and be only partly offset by the lower CRR’s increased income-generating capability – notwithstanding the indirect benefit from policy loosening on growth, credit demand and borrower quality.
It emphasizes that net interest income is a key driver of profitability for Nigerian banks, accounting for 62% of their operating income in 2024.
“We expect the lower policy rate to drive a decline in yields on loans and government securities that will outpace the related decrease in the cost of deposits”.
Moody’s stated that slower repricing in funding costs than in asset yields will reflect the limited pass-through of policy rate changes to deposit pricing.
It noted the sensitivity of the cost of deposits to declining policy rates will be similar to their limited sensitivity to the recent policy rate tightening cycle, when few alternatives for depositors and the noninterest-bearing nature of a notable portion of deposits constrained monetary policy transmission.
This asymmetry in sensitivity to policy rates was on show during the CBN’s recent policy rate tightening cycle, when the increase in deposit costs was more muted than the rise in asset yields, Moody’s said.
Banks’ net interest margins increased to 6.2% in 2024 from 3.8% in 2022 after the CBN raised the policy rate to 27.5% in March 2025 from 11.5% in April 2022.
The reduced cash reserve requirement for commercial banks will free up a portion of the customer deposits they collected, but warehouse without remuneration at the central bank, Moody’s said.
“These freed up deposits will become available to deploy into income-generating loans and debt securities, and will therefore contribute to income generation.
“We expect banks’ net interest margins to decrease to varying extents. For banks with the highest proportion of low cost deposits, margins will weaken the most”.
Moody’s stated that the extent of margin weakening will also depend on other factors, such as the extent of asset repricing, the proportion of the bank’s balance sheet hedged against rate fluctuations, the deployment of excess liquidity and the evolution of the mix between various funding sources.
Other factors will also pressure Nigerian banks’ profitability this year, including the banking system’s exit from regulatory forbearance in relation to credit exposures and single obligor limits.
Following the recent central bank directive requiring banks to exit forbearance, banks have significantly increase provisioning for the portions of their loan books facing credit performance challenges.
The nonrecurring nature of the sizeable foreign-exchange gains generated amid material currency devaluation in 2023 and 2024 will also cause banks’ profitability to decline, Moody’s said.
