High yield levels of over 18 percent from treasury bills investments in recent times have haemorrhaged Nigerian banks’ deposits by 8.7 percent as most depositors switched to treasury bills (T-bills) investments, according to Fitch Ratings.
“Central Bank of Nigeria (CBN) data show that volumes of naira time and savings deposits held by the banking sector fell 8.7 percent to N11.7 trillion (USD38 billion at the official exchange rate) during the 12 months to end-July 2017,” says Fitch Ratings in a statement released last Friday.
It said depositors switched to T-bill investments because yields were considerably higher than savings deposit rates, which are capped at 30 percent of the monetary policy rate, currently 14 percent.
It added that though large, systemically important banks held on to their deposits, many second-tier and smaller banks saw huge deposit outflows and that almost all banks reported increases in deposit funding costs.
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The foremost rating agency said that though the CBN raised the minimum T-bills purchase amount to N50 million from N5,000, it doubts the significant impact of the move on overall deposit flows as banks are majorly funded by corporate clients.
“The CBN recently raised the minimum T-bill purchase amount to NGN50 million (USD164,000) from NGN5,000. This should stem the outflow of small retail depositors, but is unlikely to have a significant impact on overall deposit flows because most Nigerian banks are majority-funded by corporate deposits.”
However, it noted that for now, high yields on banks’ investments in T-bills are offsetting the rise in their funding costs and compensating for the scarcity of opportunities for profitable new lending to the private sector, adding that lending opportunities have also been constrained by weak economic growth, continued soft oil prices and sluggish consumer demand.
“High cash reserve requirements (CRRs) on naira deposits, currently set at 22.5 percent, are also a constraint on lending. Naira CRRs are not remunerated. In practice, some Nigerian banks are operating with an effective CRR of about 30 percent because the CBN is not remitting rebates due to banks when deposits are withdrawn. Our conversations with banks suggest that the CBN is targeting the sector’s more liquid banks with this restriction,” Fitch noted.
It said the CRR comes on top of already stringent prudential liquidity requirements that require banks to hold liquid assets equivalent to 30 percent of short-term naira liabilities. In addition, the portion of excess CRR retained by the CBN and owed to the banks cannot automatically be included in liquidity ratio calculations.
“Earnings retention is important if banks are to continue to strengthen their capacity to absorb losses at a time of persistent fragility in the Nigerian operating environment. Banks tell us that impairments appear to have peaked, but we view this as far from certain, and the impairment metrics do not yet fully reflect the requirements to provide for expected credit losses under the incoming IFRS 9 international accounting standard,” Fitch stated.
Fitch-rated banks reported an average IFRS-calculated ratio of impaired loans to total loans of close to 8 percent in June 2017, but reporting classifications differ among the banks and regulatory forbearance is not uncommon in Nigeria.
It said oil-related lending, which represents about 30 percent of loans, has undergone extensive restructuring and borrowers’ ability to service the loans in line with the new terms is yet to be tested.
“Given these risks, we consider Nigerian banks’ capital adequacy to be weak, in general.”