MON, 22 AUG, 2022-theGBJournal| The Central Bank of Nigeria, in a circular last week, mandated Nigerian Banks to raise lending rates on all intervention loans from 5% to 9%, effective 1 September 2022. Banks were also mandated to increase the minimum savings deposit rate from 10% to 30% of the Monetary Policy Rate (currently 14%), effectively increasing it from 1.4% to 4.2%.
We find the timing of these two reversals surprising, given the precarious economic conditions and the continued low real interest rates in the economy (the 364-day Tbill was issued at a yield of 7.45% during the primary market auction on 10 August vs. an annual inflation of 19.6% in July).
‘’While, we find it surprising, we think these developments in conjunction with two consecutive rate hikes during the past two monetary policy meetings could be yet further evidence that the CBN is gradually normalising the policy environment,’’ analysts at EFG Hermes said in a note to theG&BJournal.
EFG Hermes added, ‘’further normalisation of monetary policy resulting in higher lending rates and potential refund of banks’ excess CRR deposits could be a significant positive for banks and a catalyst for re-rating.’’
Intervention loans are long-term loans lent by the CBN to banks (at a subsidised rate of 2%) for onward lending to various priority sectors in the economy (like agriculture, power, etc.). Following the outbreak of COVID-19, the CBN mandated banks to reduce the lending rate on these facilities from 9% to 5%. The subsidised rate was initially introduced for 12 months. However, this was extended by a further year in March 2021 and March 2022.
Again, given the recent twelve-month extension in March, we find the sudden reversal by the CBN surprising as the economy remains in a precarious positon.
Based on disclosures, amongst banks EFG Hermes focused on, the biggest beneficiaries of the higher lending rates could be Access and Zenith, while the impact on FBNH and UBA will be negligible.
The savings rate was reduced from 30% of MPR to 10% in September 2020 in response to declining trends in market interest rates. According to the aforementioned article, the CBN cities a “return to full normalcy” of economic activity as the key reason for re-adjusting the savings rate back to 30%.
Based on our banks’ disclosures, the banks most negatively impacted by the higher deposit rates are Zenith, FBNH, and GTCO, while Stanbic IBTC will likely be the least affected.
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