Implications of CBN's Debits on Banks for CRR Compliance


Wednesday, June 24 , 2020 / 10:14 AM / by FBNQuest Research / Header Image Credit: FBNQuest


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Event: CBN debits banks N216bn for CRR breach.

Implications: Downward pressure on banks liquidity ratios. We also expect to see a an uptick in funding cost of smaller tier 2 banks.

However, we see limited impact on the overall level of interest rates expected due to the sizable system liquidity.

Hit to earnings more significant for tier 2 banks compared with the tier 1 bank names.   

Last week Friday, the CBN debited banks the sum of N216bn for breaching its CRR requirements. The latest round of debits is the third in recent times - the most recent being N 459.7bn three weeks ago, and prior to that N1.4trn in April. Given the size and timing of the debits (before fx auctions), it is hard to argue that the debits are not being employed as an administrative tool for fx management. Banks under our coverage already have effective CRRs north of 35%. As such, the exact criteria for the debits are unclear. The latest round of debits underscores the (negative) shift in the regulatory landscape for the banks.

Nigeria's fx reserves have held steady in recent months, thanks to the IMF's disbursement of US$3.4bn in May. Regardless, the reserves, and by extension, the exchange rate are still under significant pressure. It is telling that the CBN has not supplied the NAFEX market since late March, resulting in a growing backlog for foreign portfolio investors among others.

One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios. Excluding Stanbic and GTB whose liquidity ratios increased materially for the former and flat for the latter, all the banks under our coverage have seen their liquidity ratios fall. On average, they have declined by almost -500bps since the CBN commenced its CRR debits in H2 2019 . Excluding Stanbic, the average decline for our coverage worsens to over -1,000bps. In absolute terms, Zenith and UBA have been the worst hit with liquidity ratio reductions in excess of  -3000bps and -1,600bps respectively. 


Average decline in banks liquidity ratio (bp)


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Sources: Banks disclosure; FBNQuest Research; *Stanbic IBTC numbers are for H1 2019 & FY 2019 respectively


Tier 2 banks like FCMB and Fidelity have seen their ratios fall to close to the regulatory minimum of 30%. Consequently, banks with lower levels of liquidity are likely to see an uptick in their funding costs (and downward pressure on their NIMs) as they seek to replenish their deposits to enhance their liquidity buffers. All else equal, a 50-100bp increase in the cost-of-funds may result in a -25% to -60% reduction  to the PBT of both tier 2 banks. For tier 1 banks like GT Bank and Zenith, the impact to earnings is less significant at between 6% and 20% respectively under the same set of assumptions. Despite these debits, there is still significant liquidity in the system. As such, we do not foresee a material pickup in  interest rates. We still see a subdued interest rate environment in the near-to-medium term.

In addition to minimum regulatory liquidity, loan-to-deposit, and cash reserve ratios of 30%, 65% and 27.5% respectively, Nigerian banks have to navigate a volatile operating environment due to external and macroeconomic factors. Year-to-date our universe of banks stocks has sold-off by -18.0%. A stable, predictable and more transparent regulatory/policy regime would help improve sentiments. Our preferred names within the sector are GT Bank and Zenith (both rated Outperform). We believe that both banks will fare better than others because of their scale, adequate capitalization and liquidity positions.

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