Analysts at Cordros Securities, a Nigerian investment banking group, on Monday, warned that the cocktail of policy measures adjusted at last week’s meeting of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPR) could be counter-productive at the end, when considered against the backdrop of decisions already made by the apex bank, such as the 65% Loan-Deposit Ratio, among others.
In their review of decisions taken at the MPC’s first meeting of the year, published by the company, the analysts- Jolomi Odonghanro, Mustapha Wahab and Olaolu Boboye, recalled in their Economic Report, that by a 9-11 majority decision, the committee members “sprang a hawkish surprise on the market” on the nation’s financial markets.
They accused the MPC of trying to eat its proverbial cake and still have it, judging by its decision to adjust the Cash Reserve Requirement (CRR) of Nigerian banks upward to rein in on excess liquidity, while maintaining the LDR. The CRR at 30%, which would sterilize as much as N1.5tr in liquidity from the system, the report noted, has a “negative impact on banks’ ability to lend to the real sector appears counterintuitive in our view.”
Besides seeing the little benefits from the CRR hike, the report estimated that about N7.16tr worth of maturing OMO bills in the first half of 2020, out of which about 26% will no longer participate in the OMO market owing to restrictions on local non-bank investors, with the committee hoping to curtail speculative pressures resulting from the maturating bills.
The hike in CRR, according to the Economic Note, titled “the outcome of the MPC Meeting: A cause for concern?”, further raises “questions about the seriousness of the apex bank’s policy actions towards driving credit extension to the private sector.
“Theoretically, there is a trade-off between economic growth and inflation protection. Nigeria’s monetary authority would have to consider building on either the mandate of growth stimulus or price stability. Trying to eat its cake and equally have it sent an ambiguous policy signal to the investing community, the impact of which could drive continued aversion towards naira assets,” it noted.
Rather than the desired improvements, the report warned that the CBN’s “credit growth mandate will now take a backseat until the end of the elevated maturity cycle, after which the MPC will be forced to make a U-turn towards the previous dovish stance in our opinion.”
The clear shift in policy direction will likely be short-term, according to the report, even as it has obvious implications for the market, even as the CRR hike has significant implications for banks in 2020, given that the sterilized funds attract no interest.
For the banks also, the report estimates that the banking industry’s gross earnings growth will be pressured by 6.5%, following which banks need to significantly grow their asset bases to generate more income in 2020. Also, minimum LDR has increased competition resulting in compressed yields on assets from loans, with banks having to reprice loans to attract clients.
“We now expect additional pressure from the increase in the non-interest yielding portion of capital. This should immediately impact net interest margins as the adjustment to the cost of funding will take a relatively long period as banks aggressively re-price deposits to maintain margins,” the report added.
In summary, Cordros Capital warned that the “increased CRR is counter-intuitive to the CBN’s LDR policy, in that there should be less capital available to be channeled towards risk asset creation. While the LDR measures loans to deposits, regardless of CRR, the fact that there is also a minimum liquidity ratio (30.0%) means that the available capital to maintain an LDR of 65.0% would be less than required.”
Cordros Securities was among the top 10 stockbroking companies by transaction value last year, trading company shares worth N55.266bn or 2.3% of the cumulative trades.