Analysts: OMO restriction threatens banks’ profitability



The decision by the Central Bank of Nigeria (CBN) to bar non-bank locals (individuals and corporates) from participating in its Open Market Operations (OMO) at both the primary and secondary markets, could make it difficult for the banks to comply with the apex bank’s Loan to Deposit Ratio (LDR) requirements, thereby affecting their profitability, analysts at Comercio Partners have said.


In a report obtained by New Telegraph at the weekend, the analysts noted that the OMO restriction had resulted to a decline in yields at the CBN’s primary market auction as well as a significant drop in lenders’ fixed deposit rates.


According to the analysts, the latter development will hinder DMBs’ ability to comply with the LDR requirement, thus making them liable to being hit with debits by the regulator.


As part of what it said were its efforts to compel banks to increase lending to the real sector of the economy,  the CBN had in a letter dated, July 3, 2019, directed all lenders to maintain a minimum LDR of 60 per cent by the end of September 2019.


The LDR is the portion of customers’ deposit that is given out as loans.


The apex bank also warned that failure to meet the LDR requirement would lead to a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR. This means 50per cent of a bank’s deposit will be immediately sent to the CBN.


At the expiration of the September 30 deadline, the CBN debited the accounts of 12 banks to the tune of N499.18billion for failing to comply with its directive even as it announced that it was raising the LDR target upwards to 65 per cent and which lenders must achieve by December 31, 2019.


However, according to the analysts at Comercio Partners, while the OMO restriction is in line with the CBN’s desire to drive more lending to the real sector, the move may impact DMBs’ balance sheet.


The analysts said: “CBN claims this new policy directive is to drive more lending to the real sector, we see this play out in different ways in banks’ balance sheets. During Q3 results presentation some banks revised their deposit growth forecast downwards by as much as 10 per cent to 20 per cent and revised upward the loan growth assumption, this speaks directly to the loan to deposit threshold of 65 per cent.


“However, this is unlikely to happen as the new CBN circular has created a wall of money (Due to the paucity of investment outlets) which will sit with the banks making it difficult to meet the LDR requirement- this would easily see further debits in December, crimping the banks’ profitability. The possible upside to this new policy for banks is, will see a possible decline in interest expenses, therefore, increasing interest income.”


The analysts also pointed out that since the OMO restriction was announced, yields at the CBN’s primary market auction have declined quite significantly even as the market remains thin on volumes.


They further noted that bond yields had dropped significantly across the curve, saying “with the five-year declining by 158bps to 12.05 per cent, 10-year bond yields have shrunk by 103bps to 13.14 per cent and the yield on the 30-year bonds is down by 81 bps to 13.68 per cent.”


“We expect yields to decline further on the back of the resolution of the CBN to stay true to their new policy and the anticipated OMO maturities repayment. The question here is how far can these yields fall off to make a plunge into risk assets worth the while of market participants.


“We have also seen a significant drop in Fixed deposit rates with tier 3 banks offering single digit fixed deposit rate as opposed to the over 14 per cent they were offering prior to the policy pronouncement. This is clearly reflective of the general paucity of investment outlets as participants scramble to deploy investible funds in limited outlets,” the analysts said.




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