The continuing headwinds in the economy may be
defining the sustenance of the resilence banks have demonstrated in their 2014
operations. A consecutive year of severe negative operating environment may end
up signposting both 2015 and 2016 as seasons of locust after signficant rises
in performance indicators in the previous three years.
Much cannot be understood in the study of Nigeria’s banking industry in
the last two years without the background provided by the first major regulator
induced consolidation in the industry under Prof. Chukwuma Soludo led Central
Bank of Nigeria, CBN, in 2004 – 2009.
lndustry analysts believe Soludo was set to build a better banking
industry by share size in all respects especially capital base. By that the
banks would be in better position to support economic development and less
susceptible to the risks of bank failures, which had almost become the common
phenomenon of Nigerian banks. Up until then banks were challenged with issues
of persistent liquidity, poor asset quality and undetrcapitalisation. Banks
also depended majorly on public sector deposits.
*File Photo
Soludo thus pursued vigorously the agenda of recapitalisation banks by
increasing the minimum capital base from N2billion to N25 billion, an
unprecedented 1150% jump.
Landmarks in the industry under the regime includes:
- Elimination of fringe players and establishment of relatively
bigger banking institutions with solid capital base.
- Strengthening of regulation of the banking system thereby creating
healthier banks
- Establishment of a strong universal banking model which transformed
most merchant banks into commercial banks with healthier competition.
- Entrenchment of electronic banking including online transfers,
Automated Teller Machine (ATM) and other interbank platforms.
- Increased capital bases encouraged banks to diversify into many new
products and services which further drew more customers into the financial
system.
But many analysts believe the banks at this time were carried away by
the euphoria of their sizes and balance sheets which grew astronomically
post-capatilisation. The total assets of commercial banks in December 2006 (one
year after consolidation) had grown by approximately 60% to N7.2 trillion from
N4.5trillion. The huge resources soon found itself into bad businesses at
the same time global financial crises was seeping into Nigeria. The combined
effect was a bubble burst.
The bubble burst and the Sanusi phenomenon.
The 2008/2009 global financial crisis brought new dimension into
financial system regulation of the CBN following the events that played out.
The year 2009 was a transition year between the administration of Soludo and
the Mallam Sanusi Lamido Sanusi led CBN. The Nigerian banking system and
financial market experienced a major shock arising from the contagion effect of
the 2008 global financial crisis and decline in global oil prices on the
international side and poor corporate governance, weak risk management
framework and significant exposure to margin loans on the domestic front.
These factors led to the insolvency of eight banks which were classified
as being in grave situations. The total toxic assets that were absorbed by
AMCON at this time was N5.7trillion. Against the backdrop of these
challenges, the monetary policy anchor of the CBN following the entry of Sanusi
as governor was anchored on four pillars of banking reforms namely:
- Enhancing the quality of banks
- Establishing financial stability
- Ensuring the financial sector evolution
- Ensuring the financial sector contributes to the real economy
Though many observers believe the risk management and corporate
governance focus of Sanus’s CBN was relatively commendable stability in the
sector was more of a transient effect of a relatively stable economy of the
time as things began to go bad with reversal of oil revenue inflow into the
economy in the second half of 2014. Also despite the CBN’s attempt to
ensure the banks remain responsive to activating a financially driven real
sector, the impact has not been too significant.
However due to other circumstances Sanusi’s tenor at CBN ended abruptly
and controversially few months to the full statutory term haven been
suspended by the government. This formed the backdrop for the new CBN
administration under the leadership of Godwin Emefiele which rolled out plans
in 2014 geared towards running a people focused Central Bank with deliberate
effort to reduce interest rate, maintain price and exchange rate stability and
stimulate domestic growth.
Major highlights of the planned policies include the pursuance of
gradual reduction of interest rate with its attendant impact on both deposits
and lending rates comparable to the pattern in other emerging and African
economies. It also seeks to maintenance of exchange rate stability and
sustenance of managed float regime so as to preserve the value of the domestic
currency given its import dependent nature through the conservation of external
reserves.
Emefiele was set to creating financial system stability by managing
factors that create liquidity shocks and zero tolerance practices that
undermine the health of financial institutions. He seeks a zero tolerance
policy on fraudulent borrowers and he also reinforced the cashless policy which
was introduced in 2012 to help strengthen the payment system. Major policy
actions of the Emefiele led CBN points towards the continuation of hawkish
policy.
His CBN appeared ambitious with its plan to simultaneously pursue lower
interest rate and exchange rate along steady price level given the challenges
of the time when the new Governor came on board. However, the gradual
winding up of the US Quantitative Easing program, slowing inflows into emerging
and frontier market, the build up to 2015 elections, fiscal fragility due to
falling oil prices, dwindling external reserves and fiscal policy uncertainties
were some of the more daunting issues requiring a hawkish strategy than a
finance agenda.
It is noteworthy that every CBN Governor in the last 3 administrations
has had one form of global or national challenge to contend with. While
Soludo’s CBN battled with issues of banking consolidation, the Sanusi was
confronted with the fallout from global financial crisis and shaky financial
system with extremely cost of risks. The major issues now confronting
Emefiele’s tenure is the depletion of external reserves and simultaneous
pressure on FX rates.
Subsequently, the CBN has remained actively engaged on multiple policy
fronts designed to curb speculative attacks on domestic FX market while also
seeking to preserve reserves. The frequency and inconsistency of such policies
have contributed to weakening investors’ confidence and triggered outflows and
banks are extremely uncomfortable as the books in 2015 are already in stress.
The culmination of the emergent challenges of fiscal and monetary policy
environment under which the banks struggled through in 2015 could be summed up
in the November Monetary Policy Meeting, MPC, decisions. In its
6th and final meeting for the year on 24th November presided over by
Mr Godwin Emefiele the MPC emphasized the need to focus on financial system
stability while taking proactive and administrative measures needed to support
the environment in which market institutions operate.
However it noted that close coordination between the monetary and fiscal
policy, was necessary for sustainable growth in the banking industry and the
economy in general. At the meeting, the Committee considered the present
challenges that pervade the macroeconomic space namely the expected rate hike
by the USA Federal Reserve Bank, the continuously declining oil prices and the
gloomy outlook on global growth.
The Committee also considered the present macroeconomic challenges in
the country noting that although headline inflation has been on a persistent rise,
the observed moderation in October on a month-on-month basis provided some room
for monetary easing to support output in the short to medium term while keeping
focus on price stability. The MPC also considered the bullish trend in the
fixed income space of the bear run in the capital market.
Finally, the MPC reviewed and assessed the impact of the current policy
to leave the market awash with liquidity in a bid to foster credit expansion by
banks to the real sector. However, the committee noted that the expected impact
was yet to be met and it was against this backdrop that the MPC made the
following policy pronouncements;
- Reduction of Monetary Policy Rate (MPR) from 13.0% to 11.0%
- Cash Reserve Requirement reduction from 25.0% to 20.0%
- Asymmetric corridor of +2.0% and -7.0% around the MPR Afrinvest
Group of financial analysts summarised the impact of the accommodative
policy tweaks by the MPC against many analysts’ expectations as follows:
Lower rates in the credit and fixed income market. The 200bps cut in MPR and introduction of an asymmetric corridor around
the MPR at +200bps and -700bps is the most significant of the policy decisions
reached as this brings the Standing Lending Facility, SLF, and Standing Deposit
Facility, SDF, rates to 13.0% and 4.0% from 15.0% and 11.0% respectively. Prior
to the MPC decision, there has been a regulatory maximum on the remunerable SDF
placement by each bank at N7.5bn. The MPC’s decision to complement this by a
further 5.0% cut in CRR will add approximately N771.4 billion to liquidity
level in banks based on October data from the CBN.
However, the communique issued by the CBN added a caveat that the
additional liquidity would be released on a condition that the funds will be
channelled to the real sector. Nevertheless, the lower SDF rate and
increase in liquidity level would lower competition for deposits amongst banks
and we expect to see a decline in savings and interbank rates. The more
accommodative stance is also expected to drive yields downwards in the
secondary Bonds market as dealers are likely to bid-down on current rates in
anticipation of lower yields at the primary market auction.
We expect NIBOR rates currently at 10.1% on average to adjust to the new
SLF rate to an average of 7.1% (if the same spread is maintained) whilst
average yields on T-bills and Bonds market (currently at 4.7% and 10.5%) are
likely to also correct to 3.7% and 9.5% respectively. Given the lower
financial market rates anticipated, we expect slight reduction in prime lending
rate.
Increase in credit to private sector. In the
short term, we do not expect the ease in monetary policy to immediately
translate to increase lending to the real sector, especially given the high
risk retail/SME loans segment. Structural bottlenecks, weak quality of
infrastructure and the current slowdown in economic activities constitute high
risk to real sector lending, which would require more adjustments by the fiscal
authorities to de-risk the sector. However, with the restriction on all cheap
income lines, we expect a significant medium term expansion in Credit to the
private sector (currently at N19.1tn in October 2015 and up 6.8% Y-o-Y) by
DMBs.
This will necessitate banks to improve on their risk management
framework to identify opportunities and earn a relatively higher margin
(compared to the cheap rates in the fixed income market) and buoy assets
turnover and shareholders’ return.
Lower Net Interest Margin for Banks. Interest
income earned by banks on investment securities and loans are expected to
reduce in the first quarter of 2016 as banks adjust to the lower primary
auction rates in the bonds market and reduced interbank rates. Cost of Fund
will reduce but only marginally due to: 1) 25.0% minimum mandated interest rate
on savings deposits and 2) the 80.0% Loan to Deposit ratio regulation by the
CBN that will continue to drive demand for deposits.
Tier-1 Banks who are net placers of funds in the Interbank Market and
with higher deposit liability to fund will be impacted more in terms of net
interest margin. Tier-2 banks who are net borrowers will have their cost of
fund reduced although the lower interest income will still taper Net Interest
Margin. Overall, we expect Net Interest Margin to decline (from 6.4% in
Q3:2015) in Q1:2016. There is likelihood of a re-pricing of stocks in the
stock market in the trading sessions ahead as investors are likely to go short
on financial services and long on other value-sector equities.
Further FX restrictions and increase in black market rates. The CBN’s action to buoy aggregate demand side of the economy by
increasing liquidity levels and reducing market rates will have a feedback
effect on price and exchange stability in the short to medium term. As the CBN
has remained resolute in its resolve to keep administrative measures in place
to reduce depletion in the FX reserves and create a contrived stability in
interbank FX rates, the effects would be felt in the parallel market for FX
where rates would further depreciate.
We estimate a conservative FX rate of N255.00/US$1.00 at the parallel
segment. This may create a vicious cycle of additional tightening of exchange
rates rules by the CBN If accrual to external reserves does not strengthen. The
strong pass-through of lower exchange rate on consumer prices in Nigeria suggests
high inflationary pressure is inevitable in the short to medium term.
The relaxed monetary stance of the MPC after its last meeting for the
year, though positive for stimulating short-term economic growth, may not come
without negative implications for the economy in the medium term. With the
reduction in interest rate, Nigeria is likely to face increased capital flight
consequences in the medium to long term, more so with the Fed raising its
benchmark interest rate at its last meeting in last week.
Equally, the spike in financial market liquidity resulting from the
reduction in CRR to 20.0% as well as the expansionary 2016 fiscal year are
expected to further trigger inflationary pressure. While the decisions by the
MPC ensued from a need to grow the real sector through increased lending by
banks, decision of lending will continue to be governed by risk considerations
with Banks more conservative in taking risk given the macroeconomic headwinds.
Business Vanguard: By Emeka Anaeto, Economy Editor
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