DISSECTING CARDOSO’S PRESENTATION TO CIBN

Last week, the Central Bank of Nigeria Governor, Mr Olayemi Cardoso was at the annual dinner of the Chartered Institute of Bankers of Nigeria, where he shared the policy trusts of CBN. In a discussion group coordinated by Mr Foluso Phillips, Chairman of Phillips Consulting, the CBN governor’s speech was in focus following a summary by a member. Enjoy the summary and the thread of discussions.

SUMMARY OF CBN’S GOVERNOR’S PRESENTATION
BANK RECAPITALISATION

We must evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system at the present moment, as we have already established that the current assessment shows stability. However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy.

As a first step, we will be directing banks to increase their capital.

1 TRILLION ECONOMY IN 7 YEARS, NOT 2-3 YEARS

The administration, as outlined in the widely circulated Policy Advisory Council report on the national economy earlier this year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years, with clearly defined priority areas and strategies.

BANKS MIGHT NOT PASS A PROPER STRESS TEST

Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges.

CBN GOVERNING BOARD APPOINTMENT DELAYED THEREFORE NEW MPC ALSO DELAYED

THE NEW FX SYSTEM IS NOT READY, SO FOR NOW NFEM

REFOCUS ON CBN CORE MANDATE AND PROPER GOVERNANCE

COMMENT # 1: WE NEED TO LOOK DEEPER
This is a good summary, but my reading on the state of the bank is more like current capital levels cannot support the $1 trillion economy the government aspires to.

Capital ratios are indeed lower on account of recent devaluation as well as historically high unremunerated reserves, which has kept industry ROE below inflation, but loan growth has also been moderate.

The pathway to attracting the capital we want into the banks goes through discontinuing some of the exoteric taxes like sterilising a third of bank’s deposits with zero interest or even penalising banks for falling short of 65% loan-to-deposit ratio when we already have 62.5% un-lendable deposits (30% liquidity ratio and 32.5% CRR).

The nearly impossible equation of 127.5% of deposits has contorted many in us, especially where, due to lowered CAR, you cannot continue to lend.

In the same way, the CBN is unwinding some of its stranglehold on its balance sheet and reserves, it has to let the banks breathe so that potential investors can forecast the future of the companies that they might be investing in.

And there’s a need to rebuild CONFIDENCE with investors, too. The capital has to come from somewhere.

Of course, financial services are overburdened across the world due to sharply rising interest rates, and that pressure is about to be felt by Nigerian banks.

But no other country has tested the impact of 32.5% unremunerated CRR with a sharp rise in interest rates and a call to raise capital.

Yet I don’t see a universe where we return to the traditional CRR anytime soon – the government just can’t afford to give up the N2 trillion it saves in interest-free OMO (that’s what the CRR is).

We can’t keep squeezing the oranges and hoping to excite investors in what is left. Capital is scarce, and Nigeria can be scary. We need to spice up banking stocks to raise the capital we need to achieve our $ 1 trillion economy.

COMMENT #2: NEED FOR TRANSPARENCY

As much as one agrees that the determination of the CRR debits to banks by CBN needs to be more empirical and transparent, I don’t quite agree that both Liquidity Ratio and CRR cumulatively sterilise 62.5% of Loanable Deposits.

This is predicated on the fact that most of the components for determining the two ratios are overlapping like cash and bank balances, T-Bills, other qualifying assets, etc.

In this circumstance, the determination of the two ratios does not cumulatively suck out 62.5% of Loanable Deposits as the banks’ narrative tries to make us believe.

The determining components are largely overlapping, interwoven and interrelated, and therefore, well below the touted percentage cumulatively in reality.

Indeed, if we assume without conceding that 62.5% of Loanable Deposits are sterilised, the question will be: From what sources are the banks funding their Loan Books and consistently declaring mouth-watering profits despite the downturn in the real sector of the economy?

COMMENT # 3: WE NEED TO LOOK AT THE BIC PICTURE

I sympathise with the banks here, but we also need to look at the big picture. It is not the fault of the banks, but we have had almost nine years of CBN printing money excessively for FG. Unwinding a substantial amount will take time, and the cost has to be shared around.

This means FG must pay higher interest on its debt, CBN must bear higher costs of open market operations, and banks will have to forgo some profit in the form of interest on deposits and reserves with CBN.

These are the costs of irresponsible management of money supply, which all must bear to rein in inflation and stabilise the exchange rate.

So long as inflation is running north of 25%, it will take those kinds of interest rates plus a premium on gilt to convince investors to switch from dollar to naira assets. In the absence of substantial dollar reserves, there is no hope for us if we cannot attract private sector dollars into the market, and the key to that is a lower inflation rate differential between Nigeria and the US, which provides an incentive for switching to naira-denominated holdings.

Banks are making less profit than they would like to but they are still making good money relative to most other sectors in the economy.

By the way, we need to watch this idea of big capital for banks and the banks being the basis for the $1 trillion GDP in a short period so that we do not repeat the errors of the past famous “consolidation”, which created paper tigers with fake and bubble capital that collapsed on us in just two years. Safety before size.

COMMENT # 4: FINANCIAL SERVICES RETURNS NOT ATTRACTIVE

Mouth-watering is a Nigerian investment analysis term rarely used elsewhere. It’s either the return on equity that is competitive (and this is/can be seen via the trading multiples or the inflow of new investment), or it is not.

If we believe the return on investment in banking is great (mouth-watering), we need not bother – once the new capital requirements are determined, investors will jump in to capture some water.

I believe that referencing risk-free yield/inflation is the better way to establish if we are likely to attract the capital we need.

As for whether or not the sterilised deposits add up to 60% of local currency deposits, the data is public. Not much to debate.

I am of the view that capital currently does not find financial services return attractive, especially foreign capital facing our recent history of currency devaluation.

COMMENT #5: CBN AND OUR $1trillion ECONOMY*

As much as one endorses the long overdue change in policy deposit back to orthodox monetary policy, inflation control and price stability; and the aspirational statements towards a $1 trillion economy; there is still a question hanging: where will he get the $20bn-$30bn that I suspect he needs right away to balance his accounts and give him (and the country) a breather?

That said, even if he somehow obtains the funds he needs so urgently, our path to a $1 trillion economy is very much rough and filled with potholes unless we can get our energy and transportation infrastructure base truly sorted out and away from being the disablers that they are today …issues that he can do little directly to affect.

COMMENT # 6: ACCESS OF THE 43 ITEMS TO FOREIGN EXCHANGE: NEED FOR BALANCE

Over the years, import substitution created positivity: Rice Mills all over the country including the involvement of some state governments, but when the import pipes were opened, these rice mills were strangulated. Some of them must have accessed funds from the money market. The eventual fallout would be job losses.

I remember in the 80s when the Ibrahim Babangida Administration banned the importation of vegetable oil. Some investors, notably Ferdinand Enterprises, took advantage of this ban to set up vegetable oil factories with funds borrowed from Union Bank. Within two years of this investment, with the lobby of some local and international “hawks”, the administration unbanned importation. The rest is history as Ferdinand’s securities used for the loan were FORECLOSED.

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