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Implications of CBN's Introduction of Its Special Bills to the Market

Monetary Policy	1865 VIEWS
Monetary Policy
1865 VIEWS

Thursday, December 03, 2020 / 3:03 PM / by FBNQuest Research / Header Image Credit: FRCN

Event: CBN introduces special bills to the market

Implications: Yesterday, the CBN through a circular to all banks introduced its "CBN Special Bills" to the financial system. Key features of the bill include a tenor of 90 days, zero coupons and a yield to be determined by the CBN at issuance. The bills will also be tradable amongst banks, institutional and retail investors. The instrument will also qualify as liquid assets in the computation of liquidity ratio for banks.

Positives: A boost to banks' liquidity ratio. Prior to the circular, excess CRR had been sterilized with the CBN on a nil return basis. Most banks have CRRs north of 40% vs. the regulatory minimum of 27.5%. Going forward, the excess CRRs will be eligible for conversion into the special bills and used in the computation of liquidity ratio. As such, banks will see an improvement in their liquidity ratio. This is quite significant, particularly for tier 2 banks because their liquidity ratios are already close to the regulatory minimum of 30%. Also, although the yield has not been determined by the CBN, the circular indicates that banks will be able to earn some return on the bills as opposed to the zero yields on their excess CRR.

Negatives: The CBN's press release mentions a 90-day tenor. However, we understand that the CBN has the discretion to roll the bills over with a view to extending its maturity. It appears that this clause is meant to address concerns around the impact of the potential excess liquidity on fx/exchange rate stability. Consequently, its utility for immediate risk asset creation is limited. Given this caveat, the bills may not be as liquid an asset as they appear initially.

Excluding GT Bank and Stanbic, Nigerian banks under our coverage are currently trading at discounts to book value. In our view, the discount the market is placing on them is excessive, particularly given the subdued interest rate environment. On our estimates, our universe of bank stocks offers an attractive potential upside of c.78% from current levels. We continue to reiterate our preference for Zenith and GT Bank because of their scale and best-in-class financial soundness indicators. We find their valuation supportive, with Zenith trading on a '20f P/B multiple of 0.7x for 17.9% ROAE in '21f and GT Bank on 1.3x for 22.7% ROAE in '21f. We also find Access Bank attractive from a valuation standpoint - 0.4x P/B multiple for 12.3% ROAE in '21f.