Banks in Precarious Times Again, Left with Only 25% of Public Funds to Play With

It might seem a joke to very many that the total funds, banks in Nigeria could play with has been reduced from over N7 trillion to above N3 trillion. The bank’s level of profitability relied on how much funds the bank has to play with. The Macro aspect of it is that, economic growth mostly relies on the level of lending by banks to the economy. So the banks are not the only ones in precarious times, but the whole of the economy.
“The impacts of this policy on the banks is better understood when the total government deposit with the DMBs (N3.5 trillion) is paired to the total deposits in the banking system (N7.1 treillionn) as at September 2013. (Public sector deposits accounts for 50.1 percent of the total deposit in the banking system). The hike in CRR will effectively quarantine an additional N875.0 billion from the banking system, said analysts at Afrinvest.
Analysts foresaw a marginal decline in the third quarter of 2013 earnings of most banks, which could be partly attributed to the July 2013 hike in the CRR. For instance, average pre-tax profit of the Tier-1 banks dipped by 9.2 percent for nine months during the year.
“We expect this policy to further dampen the first quarter of 2014 earnings of banks. We also anticipate a marginal increase in the cost of funds as competition for funds intensifies in first quarter of 2014.
As competition for deposits stiffens within the banking space, banks might offer higher rates on deposits. This should consequently translate to an increase in the lending rates, that is banks will demand higher rates from borrowers in order to sustain a fair Net Interest Margin”, said Afrinvest.
It expects an average increase of 200 basis points (bps in the lending rate in the first quarter of 2014, just as observed in July 2013, adding that this may affect the productivity and profit of companies that are unable to borrow at the prevailing higher rate.
Bloomberg also adds that a gauge of Nigeria’s biggest banks dropped the most since July after the nation’s regulator raised the amount of capital lenders must set aside as a buffer against shocks, threatening to curb profit.
The Nigerian Stock Exchange Banking 10 Index retreated 2.8 percent to 438.68 yesterday in Lagos, the commercial capital. The 193-member NSE All-Share Index declined 0.7 percent.
The Central Bank of Nigeria increased the amount of federal, state and local government deposits that must be held as cash to 75 percent from 50 percent, Governor Lamido Sanusi said yesterday, warning about risks to price stability from excess liquidity in banks. The regulator left its benchmark interest rate at a record high of 12 percent to bolster the naira, which has weakened 2.1 percent since the start of 2012.
“On an aggregate level, we estimate industry 2014 gross earnings to take a potential N110 billion ($690 million) annual hit, assuming a 12 percent yield on the newly sterilized deposits,” analysts at Lagos-based Vetiva Capital Management said in e-mailed note. “The impact will vary from bank to bank depending on how much public sector deposits on their books.”
Guaranty Trust Bank Plc, the nation’s biggest lender by market value, declined as much as 5.2 percent and traded 2.9 percent lower at N27.99, giving it a value of N 823.8 billion. Skye Bank Plc declined 8.9 percent to N4.01, the most since June 24.

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