Friday, July 12 2019
09:32AM / CardinalStone Research / Header Image Credit: CBN
The Central Bank of Nigeria (CBN) reviewed its guidelines to banks on accessing Standing Deposit Facility (SDF)1 . The highlights of the review are as follows:
❖ The remunerable SDF placement for banks is now capped at N2.0 billion (compared to the previous cap of N7.5 billion)
❖ Banks will not be remunerated for SDF placements above the stipulated maximum of N2.0 billion
❖ The interest rate on the SDF shall be determined by the Monetary Policy Committee (MPC) from time to time
Our Initial Assessment
We view the review of SDF guidelines as the latest in a series of measures put forward by the CBN to accelerate credit growth in the domestic economy. The CBN had previously expressed its displeasure at banks’ deployment of excess cash to the SDF, rather than lend to productive sectors of the economy.
In our view, the recent review is not likely to have a significant impact on the Net Interest Margin (NIM) of banks. To this point, we note that the SDF pales in comparison to banks’ placements in investments securities from a size and interest rate standpoint. For context, total banking sector investments in CBN bills amounted to N3.9 trillion as at March 2019 (December 2018: N3.9 trillion) compared to SDF of N68.9 billion.
The new measure is also not likely to drive real sector lending, given that banks are still able to redirect excess cash to money market instruments at the secondary market. In our view, this factor may have contributed to the bullish sentiment in the T-Bill market in today’s session (average T-bill yields: -100bps to 11.0%). Similarly, we believe that the new cap on SDF placements could also force banks to direct some excess funds to interbank placements subject to the level of system liquidity.
However, we note that sustained declines in the value and frequency of OMO sales and the implied build-up of system liquidity (as observed in the last few months) could lead to a decline in returns from such investments.
Overall, the recent revision of SDF guidelines is unlikely to drive material credit creation in isolation. We, therefore, believe that the apex bank is likely to introduce additional policies to complement the recently issued regulatory measures.