Omodele Adigun
Topping the industry gross credit by over N829 billion within four months was not enough for the banks to escape regulatory wrath as the Central Bank of Nigeria (CBN) slammed 12 banks with N499.1 billion penalties early this month.
Their offence was breaching the “Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy” as prescribed by the apex bank last July. The penalties ranged from over N100.7 billion for Citibank to SunTrust Bank, which got a penalty of over N1.7 billion.
According to the approved debit instruction by their regulator, the banks will lose the money at source from their Cash Reserve Requirement (CRR) with the CBN. The CRR is a portion of the banks’ deposits kept with the CBN for regulatory purposes.
Implication
On the implication of this on the banks’ financials, the CBN’s Director of Banking Supervision, Mohammed Abdullahi, said the only implication is that the amount debited would not be invested in money market instruments by the banks. Once the affected banks raise their lending to the deposit threshold, their accounts will automatically be credited.
“The deductions were only proportionate to the levels of default and banks are not losing the money. It is wrong to say the deductions are fine because the banks are not losing the money to the CBN. CBN never said there is going to be a fine. The circular said at the cut-off point in the event of banks not meeting the threshold, funds would be debited from them and added to their CRR. What you have there is not a fine, neither is it a levy, but a shortfall based on the parameters set by the CBN. It is going to be a continuous process,” he added.
In the July 3 circular, which was the precursor to the recent development, Abdullahi had said: “In order to ramp up economic growth through investment in real sector, the Central Bank of Nigeria (CBN) has approved the following measures: all Deposit Money Banks (DMBs) are hereby required to maintain a minimum Loan-to-Deposit Ratio (LDR) of 60 per cent by September 30, 2019. This ratio shall be subject to quarterly review.
“To encourage SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under this category.
“Failure to meet the above minimum LDR by the specified date shall result in levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR. The CBN shall continue to review developments in the market with a view to facilitating greater investments in the real sector.”
As at the end of June, the LDR of some of the banks were as follows: Stanbic Bank: 51.8 per cent; First Bank of Nigeria: 49 per cent; UBA: 50 per cent; Access Bank: 65 per cent; Zenith Bank: 62.7 per cent; GT Bank: 49.9 per cent.
This was part of what prompted the Monetary Policy Committee (MPC) of the apex bank at its July meeting to announce that it would begin a monthly review of Deposit Money Banks’ loan-to-deposit ratios from September 30 as part of efforts to increase lending and stimulate economic growth.
The CBN Governor, Godwin Emefiele, said the committee was of the view that there was need to boost output growth through sustained increase in consumer credit, mortgage loans and granting loans to the Small and Medium Enterprises (SMEs).
He said the committee also observed that while the management of the CBN had started the prescription of using benchmark loan-to-deposit ratios to redirect the banks’ focus to lending, there was a need to mitigate credit risk.
To achieve this, Emefiele explained that the committee enjoined the management of the CBN to de-risk the financial markets, through the development of a reliable credit scoring system, similar to the arrangement in the advanced countries as this would encourage the DMBs to safely grow their credit portfolios.
He put the loan-to-deposit ratio of Nigeria’s banking industry at 57 per cent, adding that this was low when compared to countries such as Brazil (70 per cent), the United States (75 per cent), China (71.2 per cent), India (75 per cent), South Africa (91 per cent) Kenya (76 per cent), and Japan (70 per cent).
He had said if there was no improvement in the loan-to-deposit ratio of banks, the CBN would from September 30 begin a monthly review of banking sector’s loan-to-deposit ratios.
But an expert warned that the current loan policy could worsen the financials of the banks.
An analyst with Afrinvest, Adedayo Bakare, said in a chat with a news website that non-performing loans in the money lending sector was 10 per cent to 100 per cent above the CBN’s threshold of five per cent. This, he feared, would only get worse with the apex bank’s insistence that banks should make 65 per cent of their deposit loans to the real sector. The CBN in another circular on October 1 had raised the LDR to 65 per cent and required that all deposit money banks (DMBs) must attain a minimum LDR of 65 per cent by December 31, 2019 and this ratio shall be subject to quarterly review. The CBN further explained that its intention is to encourage SMEs, retail, mortgage and consumer lending. The apex bank stressed that these sectors would be assigned a weight of 150% in computing the LDR for this purpose.
It said that failure to meet the minimum LDR by the specified date would result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.
It urged DMBs to continue strengthening their risk management practices particularly with regards to their lending operations, stressing that it would continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe, sound and resilient financial system.
Bakare, reacting to this said: “The CBN threshold is five per cent, but the actual performance is 10 per cent. The bad loans in the system are already too much. The CBN is saying you cannot do above five per cent, the industry is doing above 10 per cent. It could get worse for banks if they are not careful or relax their risk management.”
He noted that the penalties on the 12 banks was not necessarily good for the health of the lenders as the volume of cash they could lend to customers had been depleted.
He said that the commercial lenders are already forced to keep 22.5 per cent of their deposit with the CBN, adding, “This means the banks can only draw on 77.5 per cent of their deposit on paper which is actually lower in practice. For every N100 deposit that bank’s collect from the public, you must keep N22.50 with the CBN and CBN does not give them any interest on that. It is out of the remaining N77.50 they must do their lending.”
Bakare explained further: “In practice, it is actually higher than 22.5 per cent. Deposits will fluctuate on a daily basis, when deposits reduce, CBN is not going to give them more money. If you are taking an extra N500 billion from these banks, it means you are reducing their liquidity. They might start relaxing their requirements and taking on more risks, which means there is more potential for loans to go bad. Banks will lend more but I don’t think they are going to meet their 65 per cent target.”
Bakare noted that the market for lending to high-risk clients was still weak as credit worthiness remains an issue.
He stated: “The plan is not necessarily bad because every economy requires credit to be able to grow. Before banks lend to the real economy, there must be an improvement in terms of the credit worthiness of the people. The agricultural sector, which the CBN thinks they want to encourage lending, the farmers are not paying back. In a bid to improve the chances that a small business holder will gain access to loans from banks, President Muhammadu Buhari signed the Secured Transactions in Movable Assets Act, 2017. This allows small businesses to use items of value other than buildings.” However, Bakare, noted enterprises have not taken advantage of the law.
Analysts at Cardinal Stone Research, in a recent report on the latest development said: “In line with its recent drive to stimulate domestic growth the fact that the CBN did not only increase the minimum LDR requirement but also penalized banks that failed to meet the initial deadline suggests that the CBN is very deliberate about its plan to support growth. With CBN’s body language suggesting limited scope for rate cuts in the near term, we believe that the apex bank is being strict on the enforcement of regulatory measures to enhance credit creation. The CBN’s assessment is likely based on overall net stable funding, not just deposits. It appears that the CBN uses a broader definition of the LDR, which encapsulates other sources of funds such as borrowings, shareholders’ funds, and deposits.
“This, possibly, explains why a bank like FCMB, which had an LDR of 75.1per cent at the end of H1 2019, was also penalized. As at H1 2019, the bank’s loan to funding ratio was at 51.7per cent. This may also partly explain Zenith Bank’s early redemption of part of its $500 million Eurobond in September. Banks will likely be antsy in their strategies to grow loans. The new measures are also likely to force banks to anxiously re-evaluate their loan growth strategies. Based on the H1 2019 numbers of our coverage banks, only Access Bank (+37.8 per cent – reflecting the impact of its merger with Diamond Bank), Fidelity Bank (+15.8per cent), and Stanbic IBTC Holdings Plc (+six per cent) reported YTD loan growths. Unsurprisingly, none of these banks were negatively impacted by the recent sanction.
“Asset quality concerns may re-emerge. We see this as a possibility given the prevailing weakness in macro fundamentals, which likely explains banks’ cautious approach to loan growth. With the near term outlook for most consumer and manufacturing firms looking largely unfavourable on the back of recent fiscal measures, we believe that a desperate push to increase lending could lead to growth in non-performing loans
“Net interest margins (NIM) are likely to be depressed on banks’ reaction. We see this as a possible negative consequence of CBN’s latest push as banks may be forced to re-price loans lower in competition for scarce quality obligors.
“This implied weakness in NIMs as well as the opportunity cost of relinquishing 50per cent of the lending shortfall to the CBN could also negatively impact earnings. We expect that banks, who have already been punished will be unwilling to get caught up in the storm again, as that will be a negative signal to investors.
“All in, we believe this development is largely negative for the banking sector, which has only just recovered from the weak asset quality issues prevalent since 2016. We also believe that the macro-environment is still too fragile to support strong growth in lending.”
Effect on stock market
The share price of five banks out of the banks plunged a day after the sanction on the floor of The Nigerian Stock Exchange (NSE). The share price of FBN Holdings declined by 1.82 per cent to close at N5.40 from N5.50. It was followed by FCMB with 1.25 per cent to N1.58 from N1.60 it opened for trading on Wednesday. Zenith bank was down by 0.82 per cent to N18.25 while share price of GTBank traded flat on Thursday at N27.00.
The Chief Executive Office of Standard Chartered Lagos-based subsidiary, Lamin Manjang, told a foreign news service earlier this month that the short notice given to banks to comply with the rule, as well as desperation to avert sanctions, probably led some of the lenders to trim the interest rates they charge on loans and compress margins.