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How N2.14trn CRR Deductions Will Impact Banks’ Earnings



CBN Governor, Godwin Emefiele

Amidst the COVID-19 pandemic which is already impacting businesses and profitability, commercial banks in Nigeria now have an added concern as the Central Bank of Nigeria (CBN) now debits them for not meeting with Cash Reserve Ratio requirements. BUKOLA IDOWU, looks at the implications of the deductions.

Commercial banks in Nigeria have been under the heavy radar of the Central Bank of Nigeria (CBN) which had debited them to the tune of N2.144 trillion between April and June this year for failing to meet the 27.5 percent Cash Reserve Requirement (CRR) targets.

The Monetary Policy Committee (MPC) of the CBN in January this year raised the CRR which is the minimum percentage of total customer deposit banks are allowed by law to keep with the monetary authority at zero interest rate by five basis points from 22.5 per cent to 27.5 per cent.

According to the MPC, raising the CRR had been crucial to curtail surplus liquidity in the banking system. Members of the committee expressing concerns over the rising inflation in the country which had surpassed the target single digit rate that has  consistently risen since August last year to stand at 12.4 per cent as at last month.

The MPC had attributed the rising price level to a combination of structural and supply side factors, expansionary fiscal policy and growth in money supply arising from rising liquidity surfeit in the industry due to changes in the Bank’s Open Market Operations (OMO) policy.

“In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing OMO bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system. 

“The Committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards,” it had stated in the January MPC Meeting communique.

The apex bank also instituted several other policy measures to boost the economy and make credit available to the real sector before the COVID-19 pandemic began worldwide. One of the measures is for DMBs to maintain a Loan to Deposit (LDR) of 65 per cent.

For banks which do not meet the 65 per cent LDR, the CBN had introduced a sanction of debiting erring banks with an increase in their CRR to the tune of the difference in the new LDR as a way to force banks to keep more funds idle with CBN instead of trading in foreign exchange, treasury bills and other OMO instrument rather than lending to customers.

In April this year, had debited 29 Deposit Money Banks (DMOs) a total of N1.469 trillion for failing to meet the 27.5 per cent Cash Reserve Requirement (CRR) targets. Three tier 1 banks suffered the largest debit of over N760 billion with Zenith Bank debited the highest with N355.95 billion, FBNH with N208.1 billion and UBA with N204.76 billion.

Others are Stanbic IBTC with N143.98 billion, Standard Chartered with N120.65 billion. GTBank was debited with N65.6 billion, Union Bank with N49.86 billion, Ecobank with N43.05 billion, Access Bank with N41.34 billion, Citi Bank with N38.33 billion, Fidelity Bank with N32.15 billion and First City Monument Bank (FCMB) with N27.26 billion.

In the first week of this month, it had debited 26 banks including merchant banks, to the tune of N459.7 billion for failure to meet their CRR obligations. Among the banks that were most affected are United Bank for Africa Plc which was debited N82.3 billion, First Bank of Nigeria with N59.3 billion, Zenith Bank Plc with N50 billion, FCMB with N45 billion, and Guaranty Trust Bank  with N40 billion.

Two weeks later, it debited 26 banks including merchant banks the sum of N216.1 billion as part of its CRR compliance requirement. The most affected banks include Zenith Bank which was debited N46.3 billion, Stanbic IBTC debited N30 billion, GTB which was debited N25 billion. Others include FCMB with N15.5 billion, FBN with N15 billion, Citi Bank with N11 billion and Standard Chartered Bank with N10 billion amongst others.

Bankers and analysts commenting on the deductions noted that it had become a regular occurrence as a way the CBN cuts down banking sector liquidity. A banker noted that “what we’ve seen in recent times is that the CBN debits banks, usually towards the stale-end of every week. They will look at your bank account and if your liquidity is plenty, they will debit you.

“The Central Bank also does what we call retail foreign exchange intervention, that is when they sell forex to corporates. Now, because they don’t want banks coming with huge demands, what they do is that a day before the forex sales, they debit the banks so that the naira you have available is small and you cannot put them under pressure because of your forex demands.

“We understand that the central bank had set up a special CRR team that is supposed to monitor banks’ CRR once a month. But now, the team monitors banks’ CRR on a weekly basis. This is why the central bank is effectively debiting banks on a weekly basis. Some weeks ago, they debited some banks about N1.4 trillion. That was one of many. Between that time and now, there have been more debits that have happened. But the debits that are huge/significant are what is troubling the banks.”

In an emailed note on the implications of the deductions on banks and their earnings, FBN Quest analysts said they expected an uptick in funding cost of smaller tier 2 banks which would invariably affect their earnings.

The analysts said the implications of the CRR debits would be a downward pressure on banks liquidity ratios. “We also expect to see an uptick in funding cost of smaller tier 2 banks. However, we see limited impact on the overall level of interest rates expected due to the sizable system liquidity,” they said,adding that it would be a hit to earnings more significant for tier 2 banks compared to the tier 1 banks. “Given the size and timing of the debits before forex auctions), it is hard to argue that the debits are not being employed as an administrative tool for forex management.”

“Nigeria’s foreign reserves have held steady in recent months, thanks to the International Monetary Fund (IMF) disbursement of $3.4/billion in May. Regardless, the reserves, and by extension, the exchange rate are still under significant pressure. It is telling that the CBN has not supplied the NAFEX market since late March, resulting in a growing backlog for foreign portfolio investors among others.

“Banks under our coverage already have effective CRRs north of 35 per cent. As such, the exact criteria for the debits are unclear. The latest round of debits underscores the negative shift in the regulatory landscape for the banks.

“One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios. Excluding Stanbic and GTB whose liquidity ratios increased materially for the former and flat for the latter, all the banks under our coverage have seen their liquidity ratios fall. On average, they have declined by almost -500bps since the CBN commenced its CRR debits in H2 2019 . Excluding Stanbic, the average decline for our coverage worsens to over -1,000bps. In absolute terms, Zenith and UBA have been the worst hit with liquidity ratio reductions in excess of -3000bps and -1,600bps respectively.

“Tier 2 banks like FCMB and Fidelity have seen their ratios fall to close to the regulatory minimum of 30 per cent. Consequently, banks with lower levels of liquidity are likely to see an uptick in their funding costs (and downward pressure on their NIMs) as they seek to replenish their deposits to enhance their liquidity buffers.

“All else equal, a 50-100bp increase in the cost-of-funds may result in a -25 to -60 per cent reduction to the PBT of both tier 2 banks. For tier 1 banks like GT Bank and Zenith, the impact to earnings is less significant at between six and 20 per cents respectively under the same set of assumptions. Despite these debits, there is still significant liquidity in the system. As such, we do not foresee a material pickup in interest rates. We still see a subdued interest rate environment in the near-to-medium term.

“In addition to minimum regulatory liquidity, loan-to-deposit, and cash reserve ratios of 30, 65 and 27.5 per cents respectively, Nigerian banks have to navigate a volatile operating environment due to external and macroeconomic factors. Year-to-date our universe of banks stocks has sold-off by -18.0 per cent.

“A stable, predictable and more transparent regulatory/policy regime would help improve sentiments. Our preferred names within the sector are GT Bank and Zenith Bank.We believe that both banks will fare.  than others because of their scale, adequate capitalisation and liquidity positions,”they added.