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Nigeria

Nigeria Banks – Central Bank sets mandatory loan/deposit floor

  • The regulator has directed banks to maintain a minimum loan/deposit ratio of 60% by 30 September 2019

  • Most banks that we cover were below this threshold as at end-Q1 19

  • Risk to sector asset quality, as banks may have to lower risk criteria to achieve the threshold

Nigeria Banks – Central Bank sets mandatory loan/deposit floor
Olabisi Ayodeji
Olabisi Ayodeji

Equity Research Analyst, Banks (Africa)

Tellimer Research
4 July 2019
Published by

According to a letter from the Central Bank of Nigeria to all Nigerian Banks, the regulator has directed banks to maintain a minimum loan/deposit ratio of 60% by 30 September 2019 (subject to quarterly review), in an effort to improve bank lending to the real sector. Most of our covered banks were below this threshold as at end-Q1 19 (see table 1), with the exception of Access, Fidelity and FCMB. In our view, this directive poses asset quality risks to the sector, as banks may have to lower risk criteria to achieve the CBN’s threshold. 

Table #1: Nigeria banks loan/deposit*

Q1 19 loan/depositQ1 19 shortfall

Access 

66%

6%

FBNH

48%

-12%

FCMB

74%

14%

Fidelity 

95%

35%

GTB

53%

-7%

Stanbic 

56%

-4%

UBA

48%

-12%

Zenith 

50%

-10%

Source: Company accounts, Tellimer

*The ratios presented are based on the net loans and total customer deposits as disclosed by banks, and the CBN’s definition of ‘regulatory loan/deposit’ might vary from ours when the 150% weighting on SME/retail loans is applied.

The regulatory environment remains a key risk to our mostly Buy ratings on the sector, as we discussed here and here. In addition to negative consequences for banks' performance, this move by the regulator could be seen as interference with free-market risk taking, which would further erode the already weak market sentiment. Our top picks in Nigeria banks are Zenith, GTB and Stanbic, which we still believe are best positioned to weather any sector-wide headwinds. Nigeria banks trade at a median P/B of 0.4x FY19f, a c50% discount to frontier peers.

The penalty? An increase in the Cash Reserve Requirement (CRR). The penalty for not meeting the threshold by the set deadline is an additional CRR levy equal to 50% of the lending shortfall of the target threshold, which would be likely to restrict banks’ ability to invest in government treasuries. We could see an outcome where banks choose a much higher CRR over rushing to achieve the loan/deposit threshold, to manage asset quality headwinds. Bearing in mind that the CRR peaked at 50-60% for some well-capitalised banks (according to IMF Article IV, April 2019), there is bound to be pressure on margins and profitability due to this. We could also see banks showing less interest in taking deposits, in order to limit the loan growth required to meet the new loan/deposit threshold. 

The CBN’s directive favours SME, retail and mortgage loans, which would have a 150% weighting in computing the regulatory loan/deposit ratio. This segment has been an area of recent focus, and has been identified as a growth area by many banks in FY19. This would ideally raise the 'regulatory' loan/deposit ratio close to the benchmark and could help banks catch up a bit more easily, although the CBN maintains the right to define what constitutes such loans.