Record N1.7trn LDR shortfall
Analysts point to dangers ahead
By Nkiruka Nnorom
A TOTAL of seven leading deposit money banks, DMBs, may now be under pressure to beef up their loan portfolio following a recent directive by the Central Bank of Nigeria, CBN, which requires banks to give out 60 percent of their deposits as loans to the real sector.
The banks include, Guaranty Trust Bank, GTB Plc, First Bank of Nigeria, Ecobank Transnational Incorporated, Stanbic IBTC Holdings, Union Bank of Nigeria Plc, United Bank for Africa Plc and Zenith Bank Plc.
Financial analysts said more smaller banks would also be affected, adding that the pressures may force the banks to sidetrack the policy and opt to stay with the penalty for non-compliance.
Penalty for non-compliance
Going by the new policy, these banks would be compelled to shore up their loan position with as much as N1.7 trillion, representing the Loan-to-Deposit, LDR, shortfall recorded by the banks as at the end of first quarter 2019 (Q1’19). This figure would go up if the banks’ deposits continue the uptrend recorded in the Q1’19 reports.
The execution of the policy, on the other hand, may also mean a forcefull lock-up of half of this amount (N844 billion) by CBN should they fail to create the new loans by September 30, 2019.
Financial Vanguard analysis of the Q1’19 financial results of the affected banks showed that they recorded 51.6 percent LDR, representing 8.4 percent shortfall of the LDR target.
Breakdown showed that the banks’ deposit stood at N20.12 trillion as at the period under review, but they disbursed N10.4 trillion loans to the customers. Under the new policy they would be required to disburse N12.1trillion loans.
However, the overflow recorded by the remaining five out of 12 banks covered by this report effectively moderated the huge gap the seven banks recorded, thereby bringing down the cumulative shortfall to N646 billion.
The banks, Fidelity Bank Plc, Access Bank Plc, Sterling Bank Plc, FCMB Group Plc and Wema Bank Plc, which aggressively pursued loan creation, overshot their expected target under the new policy by N1.33 trillion, having given out N5.5 trillion from N7.0 trillion deposits they recorded during the period.
The CBN Directive
The CBN had penultimate week mandated banks to maintain 60 percent LDR effective September 30, 2019, saying that the measure would ramp up growth in the Nigerian economy through adequate funding and investment in the real sector. The LDR is subject to quarterly review.
The apex bank, in the Circular to the banks, explained that Small and Medium Enterprises, SMEs, retail, mortgage and consumer lending, would be assigned a weight of 150 percent in computing the LDR in order to encourage them.
It noted that failure to meet the above minimum LDR by the specified date would result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall on the target LDR.
Analysts believe that the regulation is the apex bank’s way of curtailing investment in government securities by the banks.
Over time, banks have shied away from lending to the real sector, preferring, instead, to invest in government securities due to the high yield environment. Moreover, the banks considered lending to the CBN’s preferred sectors to be more risky even when the interest income is clearly higher than the yields on government securities.
Recall that at the last Monetary Policy Meeting (MPC) meeting, the CBN indicated that it is exploring ways of limiting banks’ investments in government securities in order to accelerate private sector lending.
But some financial sector operators that spoke to Financial Vanguard said the banks may choose to deposit additional reserve with the apex bank rather than undertake more risk of lending to the high risk real sector of the economy.
Banks’ LDR positions
Against the new regulatory threshold of 60 percent, First Bank recorded the lowest LDR at 47.4 percent followed by UBA at 47.9 percent. Others are Zenith Bank (50.14%), Union Bank (51.7%), GTB (53.1%), Stanbic IBTC Holdings (55.9%) and Ecobank (56.4%).
Consequently, of the 12 banks focused by Financial Vanguard, two tier-1 banks, First Bank and UBA recorded the highest LDR deficit. First Bank recorded 12.6 percent or N442 billion shortfall, followed by UBA with 12.1 percent or N428 billion shortfall. Both banks would, therefore, need to increase their lending by 12.6 percent and 12.1 percent respectively to comply with the regulatory threshold.
Zenith Bank, which ranked third in terms of LDR deficit, needs to build its loan book further by 9.9 percent or N352 billion; Union Bank, on the other hand, would build its loan book by 8.3 percent or N72.12 billion.
Others are GTB, which needs to raise its lendings by N166 billion or 6.9 percent LDR, while Stanbic IBTC and ETI need 4.1 percent or N30.03 billion and 3.6 percent or N20 billion loan allocation respectively in order to comply.
On the flip side, Fidelity Bank Plc recorded the highest LDR at 94.7 percent overshooting the new threshold by N354.3 billion after lending N966.3 billion out of N1.02 trillion deposits.
Sterling Bank followed, recording 78.9 percent LDR, overshooting the new threshold by N148.29 billion after lending N618 billion out of N783.26 billion deposits.
FCMB Group came third with 73.9 percent, also overshooting the regulatory threshold by N116.03 billion after lending N615.2 billion out of N831.93 billion deposits.
Access Bank was the next with 69.9 percent LDR. The bank overshot the LDR target by N388 billion after extending N2.74 trillion credit to customers from N3.92 trillion deposits, while Wema Bank closed as the fifth with 69.5 percent, overshooting the new threshold by N36.35 billion after lending N266.34 billion from N383.32 billion deposits.
Dangers ahead —Analysts
Ronak Ghadia, Director of Sub-Saharan African Banks, EFG Hermes Research, told Financial Vanguard in an emailed response that the regulation could be damaging for the banking industry as it would encourage banks to take risks in a volatile macro-economic environment, which could result in increased Non-Performing Loan (NPL) formation.
He posited that the banks may try to lower some of their prudential risk management measures, especially when lending to the consumer, SME and the retail segment and that could result in higher than expected NPL formation.
Also, according to him, in order to comply with the regulation, banks may try to reduce their deposit base, which would negatively affect the financial inclusion rate of the country.
Ghadia stated: “Normally banking sector regulators introduce maximum LDR thresholds to limit risk taking by banks. Conversely, in Nigeria, introduction of a minimum LDR by the CBN encourages banks to undertake more risk at a time when the macro-environment remains fragile at best. Moreover, the regulation encourages banks to lend to sectors that they have historically been uncomfortable lending to.
“I think there is a risk that the new regulation could lead to banks underwriting high-risk loans which could lead to further asset quality deterioration and destabilisation of the industry, at a time when the regulator has limited scope for further bail-outs.
“Introduction of a minimum LDR threshold is likely to result in banks substituting deposit funding for other forms of funding such as Eurobonds and local corporate bonds among others, enabling them to artificially satisfy the regulatory requirement. That is, rather than grow the numerator, banks will reduce the denominator for the LDR calculation.”
He further noted that the impact of the introduction of minimum LDR is unlikely to have a significant impact on tier 1 banks (except perhaps UBA) as they would be able to meet the threshold by either moderately increasing their loan book and/ or substituting deposits (which would reduce the financial inclusion rate) for other funding sources.
Also, speaking, Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, said that in as much as banks may try to comply with the directive, they may decide to explore the next available window, which is depositing additional reserve (Cash Reserve Ratio) with the apex bank as levy for non-compliance, which is also safer for them.
He stated: “In the absence of viable lending opportunity, the banks would rather, in the interim, allow the Central Bank to sterilise deposit while they seek out good lending opportunity. In a bid to comply, the banks may try to loosen some of their credit requirements, but that also can lead to increase in NPL level.
“I think there will be a time lag during which period the CBN will allow the banks to identify good credit and lend.”