CBN’s decision on securities to hurt banks


There are indications that deposit money banks in the country may find it difficult maintaining current levels of profitability due to new measures introduced by the Central Bank of Nigeria (CBN), which aim to compel lenders to increase lending to the real sector by restricting their investment in government securities.


As part of such measures, the CBN had barred DMBs from buying Treasury bills for their own accounts at an open market auction held on July 18.

According to traders, the apex bank told lenders that their bids must be backed by customer demand. In the past, banks bought government debt rather than assume risk by lending.


Also, before that move, the CBN had limited the size of interest-bearing deposits it would hold for banks via its Standing Deposit Facility (SDF).


Although CBN Governor, Mr. Godwin Emefiele, told journalists at the end of the Monetary Policy Committee (MPC) meeting, last Tuesday that the apex bank did not intend to bar DMBs from Treasury bills auctions and Open market Operations (OMO), he, however, did reiterate that the regulator was not pleased that lenders continue to prefer investment in government securities   to lending to the real sector.


He announced that, going forward, the CBN would be introducing special auctions to provide special signal and direct the focus of actors in the financial market to where it wants them to go.


Analysts believe that CBN could decide to bar banks from participating at such special auctions, a development, they predict would  negatively impact lenders’ profits, given that financial results in the industry in the last few years showed that income from investment in government securities accounts for a significant part of banks’ earnings.


New Telegraph’s findings, for instance, show that Tier 1 banks-GT Bank, Zenith Bank, FBN Holdings, Access Bank and UBA- posted   combined earnings of about N451.8 billion from treasury bills and government bonds in their 2017 nine-month results compared to N270 billion earned same period in 2016.


Specifically, while the five lenders made a combined N1.4 trillion in interest income for the first nine months of that year, compared to N1.1 trillion in the same period in 2015, 33 per cent of the amount was from Treasury Bills and Government Bonds compared to 25 per cent in the same period in 2016.


Furthermore, an analysis of the 2018 full year results of four of the Tier 1 banks-UBA, GT Bank, Zenith Bank Plc and FBN Holdings Plc- reveals that they raked in a total sum of N309.48 billion from Federal Government securities, which was higher by N40.7 billion, when compared to N268.78 billion interest generated from Treasury Bills and bonds in the financial year ended December 31, 2017.


In a report  it issued in October 2017, one of the world’s leading credit rating agencies, Fitch Ratings,  had disclosed  that  Nigerian banks averaged a 7.5per cent margin on treasury bill (T-bills) yields in the first half of 2017 (1H17).


According to the rating agency, banks had been investing heavily in T-bills since second half of 2016 improving interest income and maintaining margins.


It noted that:  “High yields on T-Bills are part of the Nigerian authorities’ attempts to control inflation and manage demand for foreign currency. By providing a remunerative, relatively low-risk, naira-denominated investment (interest payments are tax-free), they (CBN) hope to encourage naira retention and dampen demand for US dollars.”


It would be recalled  that following the CBN’s publication of its first quarter 2018 treasury bills issuance programme in early January last year, which indicated that the apex bank was slowing down on T-bill issuance, Fitch issued a report predicting that the development could hurt banks’ profits.


Significantly, the agency stated then that the CBN’s action would make it more difficult for Tier 1 lenders to sustain profitability in 2018.


According to Fitch, “we expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows N1.1trillion of rollovers in first quarter of 2018 against N1.3trillion of maturing bills. In 2017, rollovers fully covered maturing bills.


“Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains and rising loan impairment charges, but the largest banks are best placed to withstand these challenges.”


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