Implications of CBN's Downward Review of the Interest Rate on Savings Deposit

Proshare

Tuesday, September 01, 2020 /02:12 PM  / By FBNQuest Research / Header Image Credit: PAYMNTS

 

Proshare Nigeria Pvt. Ltd.


Event: CBN reviews the minimum interest rate on savings deposit to 10% of MPR.

 

Implications: Slight reduction in banks' funding cost. The negative real interest rate on customer deposits widens.

 

Late yesterday, the CBN in a circular to all banks directed that the minimum interest rate on savings deposit be reduced to a minimum of 10% of MPR, or 1.25%, from the previous minimum of 30% of MPR, or 3.75%. According to the circular, the new interest rate regime is to take effect from today, September 1, 2020. The CBN "noted with satisfaction the recent declining trend in market rates in the banking sector, following the implementation of policies aimed among others at stimulating credit flow to the real sector". We note that two of such policies rolled out by the CBN - the exclusion of non-bank corporates from participating in OMO auctions and the increase in banks' minimum loan-to-deposit (LDR) ratio to 65% - have been particularly effective in exerting downward pressure on interest rates.     

 

Broadly speaking, given that savings deposits account for around 20% of the deposit liabilities of commercial banks, the new directive should be positive for banks in terms of a slight reduction in their overall cost of funds. All else being equal, our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around c.50bps in Q4. In terms of earnings impact, we estimate an average increase of around +8% in the 2020 PBT for our banks universe. Banks with already low cost of funds such as GT Bank and Zenith will benefit the least from the interest rate reduction. However, given the stringent rules around interest on savings, we doubt that the impact will be that material. Our reason is simple. Statutory provisions indicate that customer savings accounts will be ineligible for (monthly) interest rate payments in any month where a customer makes more than 4 withdrawals. Typically, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts on a monthly basis. Consequently, for most banks, the average funding cost for savings deposits is much lower than the 3.75% implied by the MPR.

 

Potential impact of CBN's reduction of minimum interest rate on savings deposit

 

 

Potential impact on NIMS (BPS)

Potiential impact on COF (BPS)

Forecast PBT   (N million)

PBT post rate cut  (N million)

Impact on PBT

Access

10

-30

111,563

115,127

3%

Fidelity

10

-60

22,248

24,447

10%

FCMB

30

-100

20,310

24,280

20%

GTB

0

-20

233,377

234,931

1%

Stanbic

10

-30

91,072

92,623

2%

UBA

30

-50

109,501

124,547

14%

Zenith

30

-50

256,912

270,513

5%

Average

17

-49

 

 

8%

 

Sources:  FBNQuest Research

 

For banks' customers, given an inflation rate trending above 12% (12.8% July 2020), the negative interest earned on savings deposit accounts will widen to -11.5% from the -8.7% rate implied by the former interest rate regime. Despite limited investment outlets due to the subdued interest rate environment, we believe that some bank customers might be encouraged to take a second look at alternative asset classes such as equities.

 

In our view, with most banks trading below book value, we believe that a significant portion of banks' credit risks is already reflected in their share prices. Despite the deterioration in the macro environment, GT Bank and Zenith, our preferred names within the sector, have adequate capital and liquidity buffers to withstand potential shocks. Their valuations are also supportive with GT trading on a P/B multiple of 1.0x for 24.2% ROAE in 2021E, and Zenith on a 0.5x multiple for 21.8% ROAE in 2021E. Finally, although their dividend outlook is unclear at this time, we believe that both banks will still pay a dividend on their 2020 results.  We believe that their dividend yields will still be better than the 1.25% implied interest on savings deposits and the c.2% yield on T-Bill instruments.   

 

Proshare Nigeria Pvt. Ltd.


Related Link

  1. Guide To Charges By Banks Other Financial And Non-Financial Institutions


Proshare Nigeria Pvt. Ltd.


Related News

  1. Interest on Local Currency Savings Deposits Subject to a Minimum of 10% per annum of MPR
  2. CBN Issues Consumer Protection Regulations
  3. CBN Reviews Charges On ATM, Card Maintenance and Others
  4. CBN and Banking Charges In Nigeria - A Regulator Gone Rogue?
  5. House Of Reps Urge CBN To Suspend New Charges On Deposits And Withdrawals
  6. How Not To Major in Minor - Key Issues Arising From Recent Cashless Directive
  7. CBN Issues Approvals-In-Principle To Three Payment Service Banks
  8. CBN Approves Charges On Withdrawals And Deposits; Unbundles Charges on Electronic Merchants
  9. Bank Charges: Role, Responsibilities and Rights
  10. Bank Charges & Recent Regulatory Guidelines
  11. CBN reiterates its resolve to enforce the provision of the revised guide to bank charges
  12. CBN to Review Guide to Bank Charges; Request List of Existing Products and Services
  13. CBN commences revision of bank charges
  14. Bank Charges, Others Put AP in the Red

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd. 
READ MORE:
Related News
SCROLL TO TOP