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Thursday, July 4, 2019 3:30PM / Abdulazeez Kuranga & Glory Okutue of Proshare Research / Header Image Credit: BC Open Textbooks
Analysts note that as a result of high Open Market
Operations (OMO) and treasury bills yield rates as high as 17%, banks shifted
their focus from lending to the private sector to lending to the Government
through investments in treasury bills. For example, in FY 2018, ZENITHBANK
invested N1 trillion on treasury bills alone, which represent 27.11% of the
total customers’ deposit of N3.69tln. During this period, loans and advances
were N1.82tln, which represents an LDR of 49.40%. However, the LDR of ZENITHBANK
was 76.73% in FY 2016 as loans and advances during the period was N2.29tln
while customers’ deposit was N2.98tln with a sum of N557.36bln invested in
treasury bills.
Table 1: Q1 2019 LDR of Deposit Money
Banks
Of the 15 listed Deposit Money Banks (DMBs) reviewed, FIDELITYBK
had the highest LDR of 95% in Q1 2019. Surprisingly, only one tier-1 bank has an
LDR above the minimum 60% regulatory requirement as the tier-2 banks dominated
with higher loans to deposit ratios. With the exception of UNITYBNK,
four out of the FUGAZ banks were below the 60% LDR minimum requirement; FBNH, UBA, ZENITHBANK
and GUARANTY
need to increase their current loans and advances to customers by 12%, 12%, 10%
and 7% respectively over the next 3 months in order to meet the new regulatory
requirement of 60%.
Chart 1: Q1 2019 LDR of Deposit Money
Banks
Source: Proshare Research
Eight banks fell into the red LDR gap with UNITYBNK
taking the lead with a deficit of 36%. The large LDR gap implies that at
current customer deposit level, UNITYBNK
needs an additional retail loan growth of N91.47bln between now and 30th
September to meet up with the minimum LDR requirement. So also, seven other
banks need to adjust their customers’ loan books to meet up with the LDR
requirement within the given deadline.
FIDELITYBK, STERLNBANK, FCMB, WEMABANK and ACCESS are within the safe zone with ACCESS having the least surplus of 6%, which is still above the 60% minimum requirement.
Chart 2: Q1 2019 DMBs LDR
Surplus/Deficit
Source: Proshare Research
Chart 3: DMBs Below 60% Vs DMBs Above
60%
Source: Proshare Research
In Q1 2019, FIDELITYBK
had low customer deposits compared to their Tier 1 rivals, with customer
deposits of N1.02trn, but it, the bank had the highest LDR at 95% of its
deposit (N966.25bn). ETI, on the
other hand, had a total customer deposit of N5.48trn but only gave out 56% of
deposits as loans amounting to N3.09trn in Q1 2019.
Chart 4: Q1 2019 DMBs Loan Vs Deposits
Source: Proshare Research
Economic Implication
The economic implication of the new regulatory
requirement is that DMBs will have to reduce their investment in debt
securities while diverting funds to higher risk loan assets. However, this is
perceived to mixed consequences as it would increase risk assets and potential
income but at higher levels of potential impairments, which would reduce bottom
line profit. The new requirement would create a pull-push effect on profit
depending on the quality of new assets created.
Chart 5: Q1 2019 DMBs Loan to Customers
Vs Investment in Debt Securities
Source: Proshare Research
NB: Investment in debt securities also
include debt securities financial assets of the various banks.
What the Analysts are Saying
According to Tola Abimbola, a fixed income and
currency specialist, “the regulation is probably targeted at some tier-1 banks
who do not bother to lend because of the low cost of the fund as most tier-2
banks lend as they require higher yield on their assets to offset their more
expensive cost of fund. But as the experiences of tier-2 banks show, retail
lending comes with the risk of poorer asset quality”.
According to a recent report by SBG Securities, “By
our estimates, and if the ratio of retail and SME loans of FY 18 is maintained,
weighted LDR should increase to 56.5%, for GTB, 55% for Zenith Bank, 54% for
UBA and 50% for FBNH. Banks can ramp up loan exposure to the CBN target
sectors, increase exposure to sectors they are comfortable with or reduce their
deposit book to meet the guideline.
FBNQuest notes that by ignoring the CBN’s weighting
for LDR computation for its preferred sectors, a straight application of the
60% LDR ratio for the affected banks implies that Zenith and UBA both have to
increase their loan books by over N350bn before the stipulated 30th September
deadline. GT Bank and StanbicIBTC Bank will have to make net loan additions of
around N165bn and N30bn, respectively. To put the implied loan growth into
context, this would suggest absolute loan growth of 20% Q-o-Q (18% for 2019E)
for Zenith using it as a read-across for the affected banks. It is unusual
these days for banks to grow their loan books by more than 10% in a year not to
talk of 20% in one quarter. However, given the magnitude of the 150% weightings
for the targeted sectors, the net loan growth should be lower, perhaps half the
20% estimate above. Notwithstanding, given concerns around new NPLs, banks may
choose to reduce their deposits to enhance their LDR ratios or rather have a
higher effective CRR.
As far
as CSL Stockbrokers are concerned, forcing banks to lend under the current
macro-economic conditions will result in;
However, with a more favourable economic climate and improved infrastructure, the SME sector should see growth, and with less stringent CRR rules, the new guidelines may trigger a boost in the real economy.
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