Weak banks’ earning looms amid CBN’s CRR policy, others

Analysts at Fitch Ratings have forecast that punitive policies by the Central Bank of Nigeria (CBN), especially the Cash Reserve Ratio (CRR) debits on banks, will negatively impact on their earnings.

According to the rating firm, this is coming at a time when most other countries are giving banks extra leeway to fight the economic fallout of the coronavirus.

The Senior Director for Europe, Middle East and Africa at Fitch, Mahin Dissanayake, in an interview not withLagosBusinessNews, said, “The CBN has been highly interventionist. Where peers like South Africa and Kenya followed the global trend of giving banks more room to lend, Nigeria hasn’t budged. Instead, it stuck with a cash reserve ratio that compels lenders to park 27.5per cent of their deposits with the central bank.’

“The CRR is unique and hugely punitive. The regulation is aimed at reducing the amount of money in the financial system to keep inflation in check.’’

He pointed out that keeping those huge idle cash with the CBN in a non-interest yielding account puts a lot of pressure on the earnings of the banks, as they would have been put to better use through ventures such as lending. The inability of the banks to meet the requirements of the apex bank results in the debiting of the banks’ accounts with the shortfall.

The CBN also debits the accounts of banks who fail to meet the 65per cent loan to deposit ratio (LDR) regulation, a policy which is aimed at stimulating credit in the economy.

The CRR debits on Nigerian banks have exceeded the N2 trillion mark in 2020 alone, some of which are speculated to be aimed at reducing the capacity of the lenders to participate in the foreign exchange market and as a result reducing the pressure on the naira.

Dissanayake disclosed that enforcement of these policies and penalties have caused an effective hit on capital to between 40 per cent and 50 per cent.

He said, “Nigerian banks compared to other markets operate in a volatile environment. The banks have to deal with economic shocks, short credit cycles and persistent problems in the oil sector. They also have to deal with policy actions, policy uncertainty and regulatory risks.”

He, however, said that the positive side of this is that the strong revenue-generating capacity in a large Nigerian economy allows the banks to absorb the higher cost of risk even when income from interest charges on loans deteriorate.

The financial results for the first half of the year saw Nigerian banks record trading and foreign exchange revaluation gains which had neutralized the lower yields on government bond holdings, slower loan growth and fewer transactions from customers due to the effect of the coronavirus pandemic.

Dissanayake forecasted an estimated 20 per cent decline in revenue, with a decline as well in profitability. The degree of decline in profitability will depend on the extent of loan impairment charges and the size of trading and translation gains.