Quarterly deposit growth deteriorates to -0.6%

By Babajide Komolafe

Operators in the nation’s nascent merchant banking subsector are under pressure to reverse the declining trend in deposit growth which deteriorated in the last quarter of last year as rising yields on fixed income reduced the attractiveness of deposit placement in the subsector.

There are presently five merchant banks in Nigeria namely, Coronation Merchant Bank, FSDH Merchant Bank, FBN Merchant Bank, Nova Merchant Bank and Rand Merchant Bank.

Financial Vanguard analysis showed that the five banks ran into strong headwinds in the second half of 2018 (H2’18) which triggered decline in quarterly deposit growth.

Data from the National Bureau of Statistics (NBS) showed that the five merchant banks grew their total deposits, year-on-year, by 51 percent to N3.74 trillion in 2018 from N2.58 trillion in 2017.

The NBS data however revealed that the banks suffered quarter-on-quarter decline in deposit in the last two quarters of 2018.

Analysis showed that deposits of the five merchant banks grew by 18.5 percent, quarter-on-quarter (q/q) to N850.9 billion in Q1’18 from N718 billion in Q4’17. Deposits however grew at a slower rate of 14.5 percent (q/q) to N970.3 billion in Q2’18 from N850.9 billion in Q1’18.

The downward trend in deposit growth worsened in the third quarter of 2018 (Q3’18) when total deposits fell by 0.5 percent (q/q) to N965.1 billion. This situation further deteriorated in the fourth quarter (Q4’18) when total deposits of the subsector fell again by 0.6 percent (q/q) to N958.6 billion.

Operators who spoke to Financial Vanguard however expressed optimism that the negative trend will be reversed this year, attributing the decline in deposit growth to rising yield fixed income market as well as the sharp decline in crude oil price towards the last quarter of the year.

https://newlive.vanguardngr.com/2019/02/bankers-committee-initiates-special-fund-for-creative-industries-it/

Financial Vanguard investigations also revealed that the banks are working on various measures to reverse this trend in 2019 while also banking on improved macroeconomic performance.

Confirming this, Head of Research, FSDH Merchant Bank, Ayo Akinwunmi said: “We expect there would be better growth this year, though we see some challenges ahead. And then we see some small structured finance which is the core area of merchant banks. It is possible that companies will want to get more money to expand their operations this year, and merchant banks will be there to assist them by providing financial advisories for them.”

Continuing, he said: “A number of us are also developing innovative ways to bring up products that will attract investments from customers to enable us compete reasonably well with commercial banks. So that will pave way for us. You might began to see a number of us roll out digital platforms to enable as access more investment from the investing public, to make payment easier for them and to make transactions with us better, so that they can get better customer experience with us and they will leave their money with us more.    So the outlook is positive barring any unforeseen negative impact of the economy on the entire financial industry.”

Akinwale Olawoye Chief Compliance Officer, Nova Merchant Bank, expressed similar optimism. He said: “We have a very positive outlook for deposit growth this year. This is primarily as we expect economic activities in the country to pick up and macro-economic stability to be sustained for the period”.

Why deposit growth declined

Explaining the factor behind the negative growth in deposit suffered by the subsector in the last three quarters of the year, Coronation Merchant Bank Head of Research, Mr. Guy Czartoryski said: “Merchant banks continuously adjust their deposits according to interest rates.    During a given year we will see merchant banks’ deposits rise and fall as they choose to participate in wholesale money markets, or leave them alone.

“This is unlike commercial banks, which create retail and corporate deposit bases and need to continuously maintain a high level of deposits.

“Of course, over a long period of time merchant banks will grow their overall level of deposits in order to match their level of risk assets, in other words, as their overall businesses grow.    But even on a one-year view, the deposit level can fall.

“So, in 2018 the one-year risk-free rate in the middle of the year (late June) was represented by a T-bill yielding 13.08 percent.        It would be quite easy to take deposits at close to that rate.    But it was clear to us, at that time, that market rates were going up.    By September the one-year risk-free rate had reached 15.57 percent and in December it got to 17.64 percent.    In those circumstances it was important to use other, long-term, sources of finance in order to provide customers with affordable debt and make sure that their business lines did not dry up.”

Similarly speaking, Akinwunmi of FSDH Merchant Bank said:    “Fourth quarter of last year (Q4’18) was a period when oil price came down from all time $80 to about $50 plus at the close of the year; most of the deposits with merchant banks are for investment purposes, and if there is a decline like that in crude oil price, the companies will say let us take our money in deposits and let us invest in treasury bills.

“And we also saw the impact of this in third quarter last year (Q3’18) when treasury bills rate went a little bit up. So what happened was that investors moved their money to higher yielding instrument, which we saw happened last year.”

Akinwunmi however noted: “The period (cover by the data) is too short to establish a particular trend. The trend also does not show that the movement is peculiar to merchant banks. When compared with deposits of commercial banks, you will see that deposit of commercial banks followed the same trend during the same period.

“Also because of seasonality effect, one cannot really same there is an issue because if you are comparing Q3 of this time with Q3 of last year, that means you compare with the same period of the year.   If you compare this quarter with the last quarter, or last month, it may not really show the picture.”