CBN’s loan to deposit ratio requirement credit negative for Nigerian banks - Fitch

Fitch Ratings has recently warned that the new requirement for Nigerian banks to maintain a loan-to-deposit ratio of at least 60% by the end of September could have negative implications for the country's banking sector. In a recent interview on CNBC Africa, Muyiwa Oni, the Regional Head of Equity Research at Standard Bank Group, shed light on the potential challenges and implications of this new regulation. According to Oni, the central bank's aim with this policy is to spur credit growth in the economy. However, Nigerian banks are facing significant hurdles in meeting this requirement while maintaining their earnings and overall financial stability. One key issue highlighted by Oni is the lack of clarity regarding the definition of certain types of loans, such as retail, SME, and consumer loans. Different banks have varying definitions for these categories, which could impact how the loan-to-deposit ratio is calculated. Additionally, the method of calculating this ratio, whether using net loans, gross loans, or including other forms of funding beyond deposits, could also have varying effects on the banks' positions. With the central bank yet to provide a clear definition, Nigerian banks are facing uncertainty and potential pressure to comply with the new regulation. The lack of clarity and the stringent nature of the requirement are raising concerns within the banking sector. Historically, banks aimed for a lower loan-to-deposit ratio to demonstrate liquidity. With the new minimum requirement of 60%, banks are now under pressure to increase their loan portfolios to meet the threshold. This shift in regulatory environment has led to a reevaluation of the sector by investors, who are concerned about the increased risks and potential impact on bank valuations. Despite the perceived undervaluation of Nigerian banks, the uncertainty surrounding the new regulations has cast a shadow of doubt on the sector's outlook. The controversy surrounding the CBN's new lending policies reflects the challenges faced by banks in navigating this regulatory landscape. While the central bank's intention may be to stimulate lending to the real sector of the economy, the reality for banks is that they may be forced into a corner, prioritizing the quality of loans over quantity. This could lead to increased competition for high-quality loans and a shift away from costly deposits. While this may benefit institutions focused on quality lending, the overall impact on earnings and profitability for banks remains uncertain. The tightening regulatory environment poses risks for the banking sector, with potential implications for solvency and capital adequacy ratios. As the deadline for compliance approaches, Nigerian banks are bracing for a period of uncertainty and adaptation to meet the new requirements, which could have lasting effects on the sector's performance and stability.