By Emeka Anaeto

Last week across the money market there was a consensus report of improvements in credit conditions through the fourth quarter of 2020.

Market sources say that broad-based growth in secured, un-secured and corporate facilities indicate an improvement in macroeconomic conditions. This has been confirmed by the latest Survey of the Central Bank of Nigeria (CBN) released last week.

Market dealers point to aggressive push by credit suppliers to increase their market share.

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According to the CBN, demand for loans is expected to bounce back, as the economy reopens, and businesses creep out of the hands of the ravaging Coronavirus pandemic.

Responses to CBN’s survey suggest that, the availability of secured and unsecured facilities to households rose in the fourth quarter 2020, Q4’20, when compared to third quarter 2020, Q3’20, and both are expected to remain bullish in the first quarter Q1’21.

However, owing to tighter credit score criteria, loan applications for secured lending dropped in Q4’20, but unsecured lending saw a pick-up in approved total loan applications for the period.

Reflecting on this development, financial analysts at Greenwich Merchant Bank stated: ‘‘We allude the decline in secured lending to severely dampened sentiment of lenders closely tied to the pandemic, as higher returns are demanded to compensate for the risky business environment. Due to this, lenders are expected to maintain strict lending policies in the next quarter.

‘‘It is noteworthy that default rates on secured loan performance worsened in Q4:2020 and will persist through Q1:2021 (except for bank secured loans which should fare better).’’

Notably, household demand for consumer loans rose in the period, even as house purchase loans decreased. This reflects the reprioritization of consumer budgets to delay heavy spending, amid the economic downturn induced by COVID-19.

The demand for mortgage/remortgaging from households increased in Q4’20, nonetheless. Thus, the positive outlook for the economy in 2021 has raised optimism for better household borrowing across the board next year.

In terms of the cost of borrowing, new loans were cheaper for households, as the spread between secured and unsecured lending rates and the Monetary Policy Rate, MPR, further narrowed in Q4’20.

In the coming quarter, analysts believe the spread is expected to narrow further for new unsecured lending but remain unchanged for secured lending.

For corporates, there was an increase in the availability of credit, following better macro-conditions, improvements in certain sectors, accommodative policy stance, increase in system liquidity, reach by credit suppliers for greater market share, backed by a shift in investors’ risk appetite.

However, the demand for corporate lending decreased across the board, except for small businesses and Other Financial Corporations (OFCs) in Q4’20.

According to the CBN, the increase in mergers & acquisitions and balance sheet restructurings during the period, weighed on demand for corporate loans, but as economic activities pick-up in the first quarter of 2021, Q1’21, inventory finance and capital investment are expected to fuel demand for more corporate lending.

In terms of default, small businesses, and medium-sized Public Non-Financial Corporations (PNFCs) loan performance worsened in Q4’20. Industry observers believe this is more likely as a result of the constraining terms for smaller firms, while that of large PNFCs and OFCs improved.

Outlook for 2021

Looking into 2021, analysts at Greenwich Bank said, ‘‘Outlook for first quarter 2021 is that default rates will reduce given better economic prospects.

‘‘Unlike household loans, the divergence between bank lending rates on approved new loan applications and the MPR increased across the board for corporates in Q4:2020 except for medium PNFCs. This trend is expected to be sustained in Q1:2021.’’

Although, the scarring effects on the business sector remains surprisingly limited so far, the rising second wave COVID19 infections raises the risks that businesses may struggle in the coming months without further support, with monetary policy stretched out, and fiscal support grappled with a lower revenue base.

‘‘We envisage that there might be a jump in corporate lending, buttressed by the low yield environment, chiefly for bigger firms.

‘‘Corporate loans to small to mid-sized businesses may however be quite grim, leading to an eventual credit crunch in this business segment.

‘‘We believe that a possible solution in the form of private credit industry or government loan guarantee programme, could upscale the credit scores for smaller businesses, and ease the strain on loan off takers.’’

Fixed income market, FX still pressured

Meanwhile, the outlook for the fixed income and foreign exchange markets remained tensed. In a four-day trading week to wrap up an eventful year 2020 activities in the Fixed Income market remained bearish from the previous week to settle the average yield across the market at 2.39% from 2.28% week-on-week, WoW.

Investors extended their profit booking from the Bond and OMO-bill market last week into the Treasury Bills, NT-bills, market.

Noticeable is a lot of offers across all maturities in the market for the week. Major sell offs were noticed at the belly of the NT-bill curve following the outcome of the Primary Market Auction (PMA) in the week. Thereby, average yield in the NT-bill market spiked by 8 basis points (bps) to settle at 0.46% from 0.38%.

Similarly, the OMO-bill market told the same tale as investors offered chunk of bills across the market with thinning bid-offer spread.

Consequently, average yield in the OMO-bill market spiked by 4bps to 0.58% from 0.54%.

In its scheduled Primary Market Auction (PMA), the CBN rolled over maturing NT-bill worth NGN74.8bn across the 91DTM at 0.0350% (prev. 0.0480%), 182DTM at 0.5000% (prev. 0.0500%) and 364DTM at 0.2100% (prev. 0.1390%) for the 364DTM. Average bid-to-cover ratio recorded in the the auction stood at 2.3x as investors scurried for the sparse bills offered with the expectation of a better stop rate than the previous PMA.

With the buoyed system liquidity, Money Market rates remained in single digits. Thus, the Overnight and Open Buy Back closed at 0.83% and 0.50% from 0.58% and 0.43% respectively in the prior week.

Investors continue to book profit in the Bond Market, we witnessed lots of offers across the market during the week as investors sold off positions in order to close their books on a high note as the year wraps up. Consequently, average bond yield steeped northward by 21bps to 6.12% from 5.91% at the close of trading in the prior week.

Forex tension rises

In the FX market, the Naira closed the year on a blemish theme, weakening across both the parallel market and the CBN controlled Investors & Exporters Window, I&EW, despite recent policy reforms by the Apex Bank to hasten supply from remittances.

In the Parallel market, the Naira closed at NGN470.00/USD from NGN465.00/USD in the prior week while the CBN sold USD in the I&EW at NGN410.00/USD, representing NGN16.00/USD or 3.90% higher than NGN394.00/USD in the corresponding period of the previous week.

The new year

Forging into the new year analysts at Greenwich Bank were not opmistic. They stated: ‘‘We expect the market to remain lukewarm as investors strategize and seek market direction for the new year.’’