Rates Continue to Decline as Banks Struggle to Meet CBN's 65% Minimum LDR


Friday, December 20, 2019 / 11:42 AM / CSL Research / Header Image Credit: Tony Walsh

Over the last few days, there have been notices from a couple of banks advising a downward review of deposit rates. Banks have continued to lower their lending and deposit rates as they struggle to comply with CBN's 31 December 2019 deadline to achieve the 65% minimum loan-to-deposit ratio (LDR). The industry-wide rate reduction is also coming on the heels of CBN's recent policy which bans individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions. According to a news paper report, the average monthly deposit rates for banks which was about 4% on Monday has been further reviewed by banks to about 3%.

We recall that in July, the CBN announced a minimum loan to deposit ratio (LDR) of 60.0% with a September deadline for compliance. This was later increased to 65.0% (with a December deadline) following observed compliance from banks. This development has resulted in steep competition for loans as strong borrowers seek to refinance existing loans at lower rates, leading to a decline in lending rates. With returns on risky assets and liquid assets down, average yields are on the decline and should remain so going into 2020 as the CBN plans to increase the minimum LDR to 70%, according to media reports.

Deposit rates have also been on the decline as banks are reluctant to retain expensive deposits. The CBN's minimum LDR policy also means that banks are not enthusiastic about sourcing deposits, resulting in a significant decline in deposit rates. We hear that some banks are accepting deposits at about 2% compared to c.10% previously. Also, CBN's policies restricting individuals, PFAs and corporates to Nigerian Treasury Bills (NTbills), fixed deposits and FGN bonds have resulted in increased demand for NTbills, forcing down rates. There has been a sharp decline in NTbills rate over a one month period from 11.5% to 5.49% at Wednesday's auction. Some corporates are issuing commercial papers for as low as 9.5% interest rates cf. Flour mills commercial paper.

Though banks are allowed to buy OMO bills, the volume of liquid assets that can be deployed to such bills continue to decline considering CBN's policies mandating banks to maintain LDR at 65% currently, planned to be increased further to 70% next year.

Overall, we believe Net Interest Margins (NIMs) in the short term will be negatively impacted for many banks but may become net neutral in the long term. While we expect yields on both risky assets and liquid assets to continue to decline, we expect a corresponding decline in funding cost to counter the effect of lower yields. However, lending rates are subject to a faster decline than deposit rates given that banks cannot revise rates downwards on deposits that have been locked in for a tenor but borrowers can seek to refinance existing loans amidst a need for many banks to grow their loan books.

While the objective of the CBN is clear in terms of improving the flow of credit to the private sector to stimulate growth, we are concerned that the fragile conditions in the macroeconomic environment, and the huge dearth of infrastructure may hinder the effectiveness of these policies and may not lead to a material improvement in the standard of living of the consumers.


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