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Central Bank of Nigeria credits sector loan growth to LDR directive; raises threshold to 65%

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    2 October 2019
    Published by

    Deposit money banks in Nigeria are now required to maintain a minimum loan/deposit ratio (LDR) of 65% by 31 December 2019. The latest Central Bank of Nigeria (CBN) directive follows a review of the September 30 deadline to meet its 60% threshold. The regulator acknowledged that not all lenders achieved the 60% threshold, although all banks are said to have 'strived to meet it'.

    According to the CBN, gross loans for the sector picked up by 5% between 30 May and 26 September 2019 to NGN16.4tn, which the regulator credits to its efforts to boost bank lending. The CBN aims to sustain the current momentum through the higher LDR benchmark, particularly for preferred segments (SME, retail, mortgage and consumer loans), which will continue to have a 150% weighting. We understand that the CBN’s 65% minimum LDR floor applies to Nigeria deposit money banks specifically rather than the banking groups, and is subject to a quarterly review.

    Most banks that we cover were below the 65% threshold as at H1 19, as shown in Table 1 below (not adjusting for non-corporate loans). The directive will likely restrict banks’ ability to invest in government treasuries since the penalty for not meeting the threshold by the deadline is an additional CRR levy (equal to 50% of the lending shortfall of the target threshold). As banks push to comply, potential implications include: 1) margin contraction in the absence of loan growth opportunities and the imposition of the CRR levy; and 2) asset quality issues if banks lower their risk criteria to aggressively increase volumes.

    UBA and FBNH are most vulnerable, while Fidelity, FCMB and Access exceeded 65% as at H1 19. UBA and FBNH had significant LDR shortfalls at end-H1 19, as well as the highest cost/income among the affected banks, which suggest a comparatively high earnings sensitivity to margin weakness. Further, in the event that the CBN’s forced lending results in asset quality issues, both banks could also face the most pressure, based on their relatively weak provisions coverage over stage 2 and stage 3 loans. That being said, UBA’s relatively strong CAR provides a cushion to its capital base, unlike FBNH’s bottom-range CAR as at end-FY 18 (fully adjusting for IFRS 9). Our top picks, although also at some risk, should show resilience – GTB and Zenith’s relatively low cost/income ratio should help cushion some of the impact of any margin weakness, while Stanbic should be supported by its very profitable wealth segment. Our preferred banks also have superior NPLs provisions coverage and CAR compared with peers.

    We currently have Buy recommendations on most of the sector, with the exception of FCMB where we have a Hold. Our top picks are Zenith, GTB and Stanbic. The sector currently trades at median FY 19f PB of 0.5x, a c50% discount to frontier banks.

    Table 1 below shows key ratios relevant to the directive for our covered banks. Notably, the LDR presented is for Nigeria and is not adjusted for the 150% weighting on the CBN's preferred segments, as banks have not disclosed a breakdown of the loan book for Nigeria alone. At the group level, consumer loans accounted for c7% and all non-corporate loans accounted for c26% of loans for our covered banks in H1 19. 

    Table 1: Key ratios, H1 19 

    Headline LDR (Nigeria only)Provisions/Stage 2+Stage 3 loansCARCost/incomeROE
    Source: Company accounts, Tellimer Research; *Q2 19 post merger with Diamond; **based on last audited results for FY 18.