How tight CBN’s monetary policies hit banking stocks

The tight monetary policies of the Central Bank of Nigeria (CBN) have continued to pummel the banking sector with multiplier effect on the equities market and loss to investors of N1.56 trillion in 30 trading days.

The fall in the prices of banking stocks has become a source of worry to stakeholders who urged lenders to desist from chasing a few big-ticket firms and focus more on providing loans and advances to small businesses, while keeping their non-performing loans (NPLs) under check, to guard against eroding income.

In separate interviews with The Guardian, the Managing Director of APT Securities Limited Garuba Kurfi, Head of Research FSL Securities Victor Chiazor and Chief Research Officer of Investdata Consulting Ambrose Omordion warned that if banks don’t create more streams of income within the system, the hike in the sector’s mandatory Cash Reserve Ratio (CRR), in addition to the reduction of charges on services, would ultimately trigger a rise in NPL ratio, especially for those without a framework for managing risks associated with such huge loans.

The decision by the apex bank on downward review of most bank charges and fees, coupled with the hike in the CRR, amid expectations of increasing regulatory headwinds, is currently causing a setback in the sector.

The apex bank had stated that the resolution was in furtherance of its quest to make financial services more accessible and affordable to stakeholders in the economy.

Worst hit by the new policies were the prices of stocks, which have continued to witness a free fall, thereby, depressing the all-share index and market capitalisation.

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Before the declaration, the equities market defied New Year trends as the performance indices of the market (the all-share index and market capitalisation) rose significantly for one week (from January 2, 2020), the first trading day of the year. The rally caused the value of listed equities to increase by over N816 billion or 5.9 per cent within five days, while the cumulative value of listed equities rose to N13.787 trillion as at January 8, 2020 from N12.971 trillion at the beginning of the year.

But the Nigeria equities market capitalisation, which stood at N15.261 trillion as at January 24, 2020 (the day of the pronouncement), depreciated to N13.694 trillion on Friday March 6, 2020, shedding N1.567 trillion or 11.44 per cent, while the all-share index tumbled from 3.349.23 points or 12.7 per cent to 26.279.71 from 29,628.84.

A cursory look at the performance of stocks shows that Access Bank, which had N10.25 kobo as at January 24, 2020, became N8.50 kobo as at the close of transactions on Friday, March 6, 2020. Similarly, United Bank for Africa and FBN Holdings depreciated from N8.55 kobo and N7.30 kobo to N6.90 kobo and N5.35 kobo per share. Zenith Bank declined to N18.80 kobo from N21.95 kobo, while Ecobank Transnational Incorporated and Fidelity Bank stood at N5.85 kobo and N2.00 kobo from N7.65 kobo and N2.22 kobo per share.

Even the impressive dividend yield churned out by these banks for the 2019 financial year could not reverse the free fall in share prices, as investors shunned the attractive margin over uncertainties.

Last week, Zenith Bank announced a N2.50 kobo dividend, bringing the total dividend paid for the full year 2019 to N2.80 amid a harsh operating environment.

The decline in banking stocks impacted negatively on the equities market because the sector plays a dominant role in the market.

Figures available to The Guardian show that Tier-1 banks (First Bank, United Bank of Africa (UBA), Guaranty Trust Bank (GTB), Access Bank and Zenith Bank), popularly referred to as FUGAZ, control more than 50 per cent of the total market share.

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The analysts and operators underscored the need for banks to increase lending to growing companies in the small and medium enterprises (SMEs) space, to avoid the erosion of revenue that may arise from the implementation of these new policies and ultimately boost their bottom-line.

They maintained that commercial banks must stop pursuing select firms and instead target the provision of loans and advances to small businesses. They further urged banks to diversify into financial advisory services like fund management and real estate management to enhance profitability.

They noted that if banks were unable to create more streams of income within the system, the hike in the sector’s mandatory CRR, in addition to the reduction of charges on services, would ultimately trigger a rise in NPL ratio, especially for those without a framework for managing risks associated with such huge loans.

Again, they noted that since these charges constitute a large portion of banks’ revenue, failure to devise other means to augment the adjustments would impact negatively on the financial institutions. The trend could shrink current profit levels and ultimately hamper the dividend payout of equity investors, they said.

Kurfi, explained: “Globally, banks make money by lending. But in the Nigerian context, they do not lend because they have the alternative of buying treasury bills and bonds and getting double-digit return, which is also free from risks.

“As long as that option is there, they will prefer to play it. But now that the CBN has made it compulsory that if you do not lend up to 65 per cent, they are going to be punished, it is a wakeup call. If you nurse upcoming firms, they can become big firms. We have to understand that, especially now that they are tax-exempted. Banks need to go down and nurse these growing firms.

“The other issues are that they have to be in financial services. Financial service is very wide. Banks can offer financial services, they can manage funds, they can render advisory services, and they can manage your estate. If they go into that, they can make more money.”

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Also commenting, Chiazor, said banks could generate more money amid liquidity squeeze if they increase loans and advances to customers. “The banks make income from fees and commissions, forex trading, forex revaluation gains, among others. However, the CBN is determined to drive economic activities by encouraging the banks to increase lending to the real sector and reduce their investments in FGN securities.

“The banks are expected to generate their major income from their interest income line. This can only grow if they increase their loans and advances to customers. Other income lines for the banks are limited, as the sector is a highly regulated one; hence the need to grow their loan books to drive income and boost revenue.”

He pointed out that charges by some banks constitute more than 20 per cent of their total revenue at the end of every financial year.
“These reductions from the initial figure will automatically affect banks’ revenue. The reduction is quite significant for the banks. These charges formed part of their income before now. If they cannot device other means to augment these charges, that might impact their bottom-line and profitability.”

Omordion noted that the CBN Loan-to-Deposit Ratio (LDR) policy is to make banks play their traditional role of lending to create money, since they are the engine room of the nation’s economic development.

“This is also expected to stimulate economic productivity that drives growth and development. This productivity, on the other hand, is expected to boost the macro economy and the overall earnings and performance of the banks,” he said.

“On the contrary, if the banks after struggling to meet the loan-to-deposit ratio, the economy remains in this weak and slow recovery pace, it would definitely throw the banks back to the era of high non-performing loans,” Omordion added.

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