COT Returns as a Phoenix

Proshare

Saturday, January 223 2016 5:01 PM / ARM Research

On Thursday, the Central Bank of Nigeria (CBN) released a circular (see attached) which guided to the phasing out of Commission on Turnover (COT) charges but in a surprise move the apex bank announced the introduction of a new Negotiable Current Account Maintenance Fee capped at N1/mille.

 

 

Considering the COT was scheduled to drop from N1/mille in 2015 to nil in 2016, the measure effectively amounts to a name swap in our view but one which helps the banks extend the last leg of COT perhaps indefinitely.

 

Regulatory capture in full effect?

Interestingly, the development comes despite the apex bank noting in the circular that some banks were not in compliance with the 2015 fee schedule which ordinarily should have resulted in a reprimand.

 

Coming on the heels of last week’s Bankers committee meeting and noting (then) surprisingly strong comments by a Tier I bank CEO during conference call in 2015 that suggested the progression to zero COT would not happen, it would appear that, faced with a weaker macro environment, lower rates and asset quality issues, the banks stiffly resisted the CBN in terms of following through on its intention to get rid of the COT.

 

For evidence, the circular cites the effect of TSA implementation and impact of oil price shocks on banking sector performance as rationale for providing some reprieve to banks.

 

Nonetheless, by deciding to go back on a set schedule established in 2013, the COT re-invention eats further into what is left of CBN policy credibility following the spate of policy somersaults on the currency in recent times. In 2013, while revising bank charges, the apex bank stated that the goal was to align domestic banking architecture with global norms, thus by retaining COT, the goal remains unattained. In that sense, the current effort does not push Nigerian banks away from a rentier model and even as it leaves an incentive for banks to remain averse to loan creation.

 

Policy reversal provides modest reprieve to sector earnings

Nonetheless, in terms of impact, the move removes a pillar of earnings pressure for banks over 2016 which should ensure stability on the item relative to 2015 levels. Across coverage banks, COT is on track to shrink 31% YoY to N75.4 billion using annualized 9M 15 numbers. Nonetheless for banks still operating under the old N2/mille, phasing out of COT and implementation of the new charge could crystallize in a reduction in the line item over 2016.

 

Whilst the move is broadly positive, banks still have to grapple with a weak macro environment, low oil prices, impact of FX restrictions on non-interest revenues and asset quality issues which provide greater offset to the gains from the COT reprieve.

 

Furthermore, the recent introduction of stamp duties on electronic transactions and teller deposits on non-savings accounts should induce greater switch to savings account for retail customers which reduces impact of the benefits from the COT re-invention.

 

Our conclusion is that the move is mildly positive for banks but at greater cost to the regulator and perhaps places greater scrutiny on decisions that might materialize from next week’s MPC.

 

 Figure 1: COT/NIR

 

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