Banks’ Liquidity Squeeze to Drag Assets Growth, Returns – Report
Nigerian banks could see a slowdown inability to grow assets and maintain stable equity returns due to lower than expected economic performance and strained liquidity, CardinalStone, a leading investment banking firm, says in a report.
In the first quarter, Nigeria’s gross domestic products grew a minuscule while the corporate segment passed through economic healing processes.
Key indices remain weak with low private investment and a slowdown in the manufacturing segment following the pandemic-induced economic stress in 2020. Deposits in the banking sector surged above growth in credit extended to customers, an indication of weak productivity.
On the regulatory side, Central Bank has continued to keeping eyes on the interest rates on account of its pro-growth stance. Benchmark interest rate has been kept at 11.5% for the fifth consecutive policy meeting while yields in the fixed income market trend below-average growth in headline inflation.
Key earnings sources for lenders have been largely affected by low interest environment. Nigerian banks earnings from interest yielding assets have tumbled and catalysts for increased lending stay weak.
Under punitive measures of the CBN for pushing lending, there appears to be a shift into oil and gas lending. For now, analysts told MarketForces Africa that loan concentration in oil and gas is a sweetheart deal for lenders.
The oil market has continued to rally, thus reduce credit risks associated with clients in the upstream, mid-stream segment. Appraising the trend in the sector, CardinalStone said in its outlook for the second half that equity returns are reverting to their mean.
The investment firm anchored its prediction on tepid economic growth post-lockdown. The Nigerian economy saw a 0.51% GDP growth in the first quarter of 2021 after about a 2% slump last year.
On account of the low base effect, GDP has been projected to rise, albeit, slowly due to waves of COVID-19 delta variants in Europe, America among others with a spillover effect on African economic recovery.
In the report, CardinalStone said regulatory uncertainty, socio-political concerns, unfavourable operating environment, weak macros, and digital disruptions are a few of the many scares facing the Nigerian banking sector.
“Despite the earlier than anticipated resumption of major economic activities, which, we believe, offered some respite for earnings, we fear that the road to recovery and sustainable growth may still be arduous”, it said.
Then, forming an opinion, analysts at the investment firm said banks ROEs appear to be reverting to their mean, and unless banks look for ways to achieve earnings flexibility and resilience, they could well see ROEs dip below their historical mean level.
“A few banks have begun to restructure their operations in light of this new reality. However, the impact may not be immediate. The move is, however, a good start towards seeking a bit more dynamism in performance”, Cardinalstone added.
Are liquidity worries back on the horizon?
Read Also: CBN’s Lending to Deposit Money Banks Hits 2020 High
The investment recalled that since the start of the year, Nigerian banks have increasingly resorted to Central Bank of Nigeria (CBN) Standing Lending Facility (SLF) as open market operations (OMO) and primary market maturities dry up.
“For context, data from the CBN database suggest that the average monthly SLF rose by over seven-fold between January 2021 to May 2021, just as combined OMO and primary market maturities crashed by 98.0%”.
In addition, analysts said the average daily traded value of the apex bank’s Special Bills rose to N167.5 billion in March 2021, compared to a mean of N14.8 billion in December 2020.
“For us, the increased reliance on SLF and growth in the average traded value of the Special Bills may imply that a few Nigerian banks have been proactively responding to liquidity-related threats since the start of the year”, CardinalStone posited.
The firm said even though the sector liquidity ratio recovered sharply after Special Bills were introduced in December 2020, it subsequently moderated in January and February, respectively.
“This moderation in the “regulatory ratio” may have informed the scamper for SLF from the CBN amidst narrowing OMO and Nigerian Treasury Bills maturities.
In its assessment, CardinalStone also marinated that banking sector assets could suffer from heightened liquidity pressure
The highlighted concerns on sector illiquidity may negatively impact banks’ capacity to grow assets in the financial year 2021.
In 2020, as analysts at CardinalStone noted that its coverage banks grew total assets by 26.2% on average compared to a 4-year cumulative average growth rate of 13.6%.
It said the accelerated asset growth in 2020 was fuelled by a liquidity deluge amidst creeping interest rates and limited alternative investment outlets.
“The significant jump in banks’ deposits which came at 30.9% last year as against a 4-year average growth rate of 12.1% further buttresses our point.
“We believe that a potential slowdown in banks’ funding is on the cards and that the likely implications for credit creation in 2021 are not far-fetched”, the report stated.
On the one hand, analysts noted that an improving economic environment amidst easing COVID-19 concerns supports the argument for substantial loan growth. On the other hand, however, a slowdown in funding could inhibit the prospect for significant lending.
Bridging the liquidity gap could come at a cost
CardinalStone analysts said they see recovery-induced deposit growth as an upside risk to credit creation and overall asset growth as rising inflation and yields informs the firm’s less sanguine base position.
“Firstly, rising inflation could worsen the cost of living and cascade to lower savings deposit growth rate compare with last year.
“Secondly, rising yields are likely to drive a redirection of retail and institutional funds towards investments with superior returns than those on banking sector deposit products (though this could be slightly muted by the lack of depth in Nigeria’s fixed income space)”, the firm indicated.
Nonetheless, CardinalStone expressed that the recently observed moderation in banks’ deposit and funding costs could slow down in the financial year 2021.
This, as noted, could be catalysed by tight liquidity that could instigate increased competition for funds (deposits and debt issuance proceeds) among banks, upwards yield trajectory, especially in the second half of 2021 and; likelihood of an increase in MPR on the back of accelerating inflation, which could propel savings deposit rate higher.
Alternatively, analysts said sustained disposal of special and conventional bills to service obligations could further strain interest earnings assets, negatively impacting interest income.
Banks’ Liquidity Squeeze to Drag Assets Growth, Returns – Report
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