Tighter monetary conditions and tougher regulations in the Nigerian banking system will impact negatively on banks’ earnings this year, a report has shown.
The report pointed out that the 50 per cent Cash Reserve Requirement (CRR) imposed on public sector deposits by the Central Bank of Nigeria (CBN), was biting hard on banks.
It also noted that the reduction in Commission on Turnover (CoT) fees and increase in the Asset Management Corporation of Nigeria (AMCON) levy would impact banks’ cost base.
The Renaissance Capital Limited (RenCap), a Lagos-based financial advisory and research firm stated this in a report titled: 'Nigerian Bank – Killing Me Softly: The Impact of Tougher Regulation,' obtained yesterday.
The CBN had in August, withdrawn about N1.2 trillion from the banking system as a result of the increased CRR for public sector funds. Also, the AMCON levy was recent paid by banks into the sinking fund.
Among others, the central bank recently outlined plans to phase out the collection of CoT in the industry.
Therefore, in view of the prevailing environment, RenCap argued that Nigerian banks would be left with little choice but to pursue revenue growth by raising lending rates on their loan books.
“All in all, high earnings growth is likely to be challenging to achieve, in our view. We expect it will become harder for some of the banks to deliver returns in excess of their cost of equity, especially some of the smaller banks. Our preference in this environment is for big-balance-sheet players, with excess liquidity,” it stated.
A comparison of the CRR in four African countries, according to the report, showed that Nigeria has the highest CRR at 12 per cent for private sector customer deposits and 50 per cent for public-sector deposits, with Kenya at 5.25 per cent, Rwanda at five per cent and Ghana at nine per cent.
“What the above suggests is that Nigerian banks are setting aside over twice (2x) the cash set aside by Kenyan banks for every $1 (in local currency) of customer deposits. In addition, Nigerians are setting aside 10x (10 times) the cash set aside by Kenyan peers for every $1 of public sector deposits.
“From our discussions with the banks, the average exposure to public sector deposits is about 13 per cent. Using this figure, we estimate our weighted/blended CRR for Nigeria at about 17 per cent – well ahead of regional peers. We estimate that the increase in the public sector CRR to 50 per cent will reduce annual interest income for the banks by one to six per cent, holding all other factors constant,” it declared.
According to the report, a further increase in CRR should not be ruled out, saying that the regulator appears to be using the CRR as the primary monetary tool for mopping up excess liquidity.
“Lower commission on turnover is now a reality, and will have a growing impact on non-interest revenues over the next four years. Banks are allowed to charge a commission on customer debit transactions on current accounts (i.e. total monthly withdrawals). Banks are not allowed to charge CoT on intra-bank or intra-client accounts,” it stated.