Report: Relaxing CRR May Unlock N1.7tn Bank Deposits

By Obinna Chima

Analysts at RMB Nigeria Stockbrokers have estimated that the normalisation of the effective cash reserve ratio (CRR) for six Nigerian banks, namely – Access Bank, FBN Holdings, Guaranty Trust Bank Plc, Stanbic IBTC, United Bank of Africa and Zenith Bank Plc – has the potential to release N1.7 trillion of deposits into the banking system.

The analysts at the Lagos-based firm, which is a subsidiary of South Africa’s RMB Holdings, stated this in their latest report that focused on the six banks, made available to THISDAY.

Although the Central Bank of Nigeria pegged banks’ CRR at 22.5 per cent, the report revealed that effective average CRR for the aforementioned banks is 33 per cent.

CRR is a monetary policy tool used to set the minimum deposits commercial banks must hold as reserves rather than lend out.

To this end, the report pointed out that relaxing the policy for the banks, “has the potential to release N1.7 trillion of deposits (11 per cent of our coverage banks’ deposits), which could be used to generate interest income of N200 billion. This is assuming an effective interest rate of 12 per cent on government securities.”

It added: “Effectively, the disparity between regulatory and effective CRR of our coverage banks implies that customer deposits are sterile and offer no immediate potential for conversion into interest-bearing assets. This leads ultimately to a negative contribution to earnings, as banks incur funding costs on these deposit liabilities.

“Broadly, we find that Access Bank is the most impacted by the effective CRR arrangement, sterilising N420 billion of deposits, with Stanbic IBTC the least impacted.

“Consequently, Access Bank could benefit most from a relaxation of the effective CRR. We estimate the opportunity costs of the trapped deposits as N51 billion ‘lost’ incomes for Access Bank, assuming a 12 per cent effective interest rate. On our estimates, a relaxation of the CRR is less beneficial to Stanbic IBTC relative to most of its peers that we cover.”

According to the report, the combination of a hike in CRR and an unchanged computation model, leading to an ‘effective CRR’ higher than the regulatory benchmark, was a major risk to its coverage banks’ earnings outlook. This is in addition to other unanticipated regulatory directives might turn out to be counterproductive for the sector, the report stated.

The firm predicted sluggish loan growth of five per cent year-on-year for the banking sector in 2019 and 11 per cent by the end of 2020.

It anticipated that non-interest revenue (NIR) could also be under pressure from CBN swaps, stating that while it had accounted for lower trading income year-on-year in its forecasts, “we point out that in the event of the CBN not renewing its swap with Nigerian banks, the NIR is likely to come under pressure.

“Also, Nigerian banks might struggle to deploy the resulting foreign currency (FCY) liquidity from the maturing swaps into risk asset creation. This, given the benign outlook for loan growth in 2019, on the other hand, the bank is likely to lose some of its naira liquidity at the maturity of these swaps. This may further weigh on earnings as naira liquidity (usually deployed into fixed income instruments) or naira lending would decline as the bank repays the naira portion of these swap transactions,” it added.

It recalled that in recent times, there have been calls from Nigeria’s legislative arm for the cancellation of ATM card-maintenance fees, noting that the N65 ATM withdrawal charge has also been under scrutiny.

The N65 fee applies only after the third use of an ATM card at another bank’s ATM machine within a month. Over the past few years, e-banking has become an appreciable part of banks’ income.

“While we acknowledge that the composition of banks’ e-banking fees consists of more than ATM fees alone, based on available data, we see a high correlation between the number of active ATMs, ATM cards and banks’ e-banking income.

“With FBN Holdings’ penetration at 70 per cent, there is a material risk to the bank’s annuity income if the fees are cancelled. A material devaluation of the naira has the potential to increase FCY loans, in naira terms, leading to higher risk-weighted assets and potentially to lower a capital-adequacy ratio for our coverage. A weaker-than-expected earnings and dividend could lead to a de-rating in share price and dampen market sentiment,” it stated.