How will Nigeria’s 500BPS CRR hike impact banks?

Nigeria's Monetary Policy Committee (MPC) recently announced a hike in the Cash Reserves Requirement (CRR) for banks to 27.5%, a move aimed at curbing monetary-induced inflation while maintaining the benefits of the Central Bank's Loan-to-Deposit Ratio policy. This decision has sparked discussions about how it will impact the country's banking sector moving forward. Wale Olusi, Sub-Saharan Macro and Consumer Analyst at United Capital, shared insights on the potential ramifications of this policy shift during a CNBC Africa interview. Olusi pointed out that the increased CRR poses challenges for banks, primarily by limiting their liquidity and reducing interest income on deposits. With the previous LDR regulation already affecting banks' balance sheets, this additional regulatory pressure is expected to further squeeze their profits. The liquidity constraints could also lead to higher fixed-time deposit rates, increasing banks' cost of funds and subsequently impacting their net interest margins. Despite the unfavorable operating environment, Olusi suggested that banks must get creative in 2020 to maintain profitability. He emphasized the importance of exploring alternative revenue streams, especially amid lower yield environments and tighter regulatory controls. Non-interest income avenues such as ATM charges and online transfers have seen a decline, necessitating a volume-driven approach to sustain revenue levels. To stay compliant with the LDR ratio and uphold asset quality while meeting regulatory thresholds, banks will need to focus on loan origination and deployment at competitive rates. Olusi highlighted the recent trend of aggressive lending strategies by banks, such as offering quick credits at 1.33% per month, to boost loan portfolios and drive credit growth. Despite the near-term market segmentation in terms of yield impacts, Olusi anticipated potential inflation moderation due to the reduction in system liquidity. He noted that constraining money supply could alleviate inflationary pressures, thereby aligning with the CBN's goal of maintaining single-digit inflation figures. Additionally, he acknowledged that banks' reserve requirements have effectively exceeded regulatory minimums due to existing obligations related to CRR compliance and LDR regulations. This surplus liquidity management will likely compel banks to engage more with differentiated CRR windows, albeit subject to stringent sector-specific lending criteria. Looking ahead, Olusi expressed optimism regarding banks' full-year earnings for 2020, expecting improved performance compared to earlier predictions. He cited recovery from previous bad loans and regulatory adjustments set to impact profitability positively. While revenue growth trajectories may vary, overall profitability outlook remains favorable, given the sector's adaptability to changing regulatory landscapes. As Nigeria's banking sector navigates the implications of the CRR hike, industry players like United Capital are poised to strategize and innovate to sustain growth amid evolving market dynamics.