CBN’s 5-Year Plan: Same Direction; More Dimensions

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Wednesday, July 10, 2019    /    06:14PM    /    By  CardinalStone Research

  

 

Although the nation still awaits ministerial appointments and more direction from the fiscal authorities, the Central Bank of Nigeria (CBN) had ensured that its policy targets for the next five years did not remain uncertain for long when it released its five-year plan in June 2019. In line with our expectation (click here to read our note on Emefiele’s re-appointment and macro implications), the CBN’s proposed policy thrust centered around exchange rate stability and targeted interventions in non-oil economic sectors.

 

Godwin Emefiele Unveils The 5-Year Policy Thrust of Nigeria’s Central Bank 2019 - 2024

 

Precisely, the apex bank is aiming to 1) maintain macroeconomic and financial stability, 2) improve financial system stability 3) work with Deposit Money Banks (DMBs) to improve access to credit 4) diversify the economy through targeted intervention programs and 5) foster financial inclusion.

 

Although the plan is largely a mirror image of CBN’s first term strategy under Emefiele, the resolve to pursue the improvement of financial system stability appears to be stronger. In addition to this, the apex bank has wasted no time in rolling out new modalities and initiatives towards the attainment of the set objectives.

 

In the sections below, we assess the core objectives for the next 5 years with a view to assessing the potential implications.

 

 

Kindly click here for the full report from CardinalStone Research.

 

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What is new?

 

CBN wants to improve financial system stability and may recapitalize banks to achieve the objective.

 

A standout of CBN’s 5-year plan is its focus on improving financial system stability, and central to that objective is the potential recapitalization of banks.

 

Godwin Emefiele Unveils The 5-Year Policy Thrust of Nigeria’s Central Bank 2019 - 2024

 

This objective is likely driven by the need to ensure that Nigerian banks have enough buffers to withstand systemic shocks. Since the last recapitalization exercise in 2005, a 183.0% depreciation of the naira has led to a significant plunge in the minimum capital requirement of banks to $70.0 million in 2019 compared to $193.8 million in 2005.

 

To our minds, CBN’s concern about a possible inadequacy of the current minimum capital may have been motivated by higher non-performing loans in the balance sheet of banks, principally stoked by the collapse of global oil price in 2014. To this point, we note that the oil and gas sector accounted for c.30.4% of the total loan portfolio of banks in Q1’19 (vs. 24.0% in 2018).

 

Other core exposures of the Nigerian banking sector from a loan portfolio standpoint include manufacturing (14.7%), government (9.0%), and finance, insurance & capital markets (7.4%). Clearly, the decline in oil price may have had a second order effect on the non-oil loan portfolio that drove further pressure on the sector loan book. In line with this, NPL ratio deteriorated from 3.5% prior to the oil price collapse in 2014 to 10.8% in 2019.

 

Historical NPL in Nigerian banking sector (%)

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Kindly click here for the full report from CardinalStone Research.

 

 

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