The recent decision by the Central Bank of Nigeria (CBN), to halt harmful credit expansion with the introduction of 50 per cent Cash Reserve Requirement (CRR), on all public funds in commercial banks may force some banks to seek other ways of filling the funding shortfall. Fitch Rating Agency, which expressed concern over the development yesterday, however, warned that banks were likely to experience close to 300 basis point increases in cost to income ratio. In a report, “Nigerian Banks: Strong Post-crisis Rebound but Earnings under Pressure,” published on its website, the rating agency stated that, “we expect banks to fill any funding shortfall with more expensive sources or by selling liquid assets, leading to a sharp negative impact on net interest margins. “Costs for the clean-up of the recent banking crisis are also rising. We expect a 200-300bp increase in cost/income ratios from the increase in the annual levy for AMCON – the ‘bad bank’ – in 2013 to 0.5 per cent of total assets, from 0.3 per cent.” The report, which was signed by Fitch’s media relations executive, Hannah Huntly, observed that tougher regulations, together with higher funding costs, were likely to constrain profitability over the next 18 months. Hence, the agency believes the banks could partly offset the earnings pressure by boosting volumes, widening the range of fee-based products and concentrating on low-cost deposits. “We expect new limits on bank charges imposed by the CBN to dent what have been highly profitable fees and commissions, particularly for those with large retail franchises. The most significant impact is likely to arise from the gradual phasing out of ‘commission on turnover’ – a customer transaction fee – by 2016,” the report read in part. Monetary policy continues to be tight with the central bank’s last week raising the cash reserve requirement on public sector deposits to 50 per cent effective August 7, 2013. Previously, there was a 12 per cent requirement on all customer deposits. Records show that the revision applies to around N1.3 trillion ($8 billion) of deposits and means that N500 billion of additional liquidity could be withdrawn. According to Fitch, high Treasury bill yields during 2012 boosted banks’ interest income. Although continuing tight monetary policy indicates that a sharp fall is unlikely, the yields have fallen slightly so interest income from banks’ large sovereign bond portfolios is likely to be lower in 2013, it said. The central bank has also stipulated that interest rates for savings deposits should not be lower than 30 per cent of the monetary policy rate, currently at 12 per cent. Overall, there could be at least an average 100-200bp negative impact on margins over the next 12-18 months. Further margin pressure may arise if the authorities impose caps on lending rates to nationally important sectors, such as SMEs or agriculture.
Posted on: Sat, 03 Aug 2013 22:38:39 +0000
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