Will CBN's hawkish screech keep banks in liquidity limbo?
A 150-basis point hike in policy rate and 5 per cent increase in the Cash Reserve Requirement for banks are ways the Central Bank of Nigeria is deploying to rein-in inflation in Nigeria which has risen by 280 basis points in the past 4 months to cross the 20 per cent mark. CBN Governor Godwin Emefiele says all banks must fund their accounts by Thursday for the anticipated CRR debit and banks may also be precluded from the FX market by Friday. Muyiwa Oni, Regional Head of Equity Research West Africa at Standard Bank Group joins CNBC Africa to discuss the implications for banks.
Wed, 28 Sep 2022 13:06:00 GMT
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AI Generated Summary
- Banks face liquidity constraints and increased non-interest assets due to CBN's policy changes
- Reduction in interest income and rising expenses could lead to lower earnings for banks
- Preclusion from the FX market poses challenges for banks' fee revenue and asset yields
The Central Bank of Nigeria's recent decisions, including a 150-basis point hike in policy rates and a 5% increase in the Cash Reserve Requirement for banks, have sent shockwaves through the country's banking sector. The move, aimed at curbing inflation that has surged by 280 basis points in the past four months to exceed the 20% mark, has left many financial institutions grappling with liquidity constraints and uncertainty. CBN Governor Godwin Emefiele has directed all banks to fund their accounts by Thursday in anticipation of the CRR debit, which may also see banks being barred from the FX market by Friday.
The implications of these moves for banks are significant, with many facing potential sterilization of funds and increased non-interest assets on their balance sheets. Muyiwa Oni, Regional Head of Equity Research West Africa at Standard Bank Group, shed light on the immediate and short-term impacts that these policy shifts may have on banks. One key concern is the reduction in interest income coupled with rising interest expenses, which could lead to lower earnings for banks. This could result in banks needing to pass on the increased costs to customers by adjusting interest rates on loans and advances to offset the negative impact.
Furthermore, the prospect of being precluded from the FX market poses additional challenges for banks, particularly in terms of lost fee revenue from FX-related transactions. While the immediate impact may not be as pronounced due to fixed fees, the long-term implications on asset yields could be more severe. The overall effect on banks' profitability and ability to navigate these changes remains a point of contention among industry experts.
The ripple effect of the CBN's decisions is also being felt in the equity markets, with investors showing less interest in equities as they seek out safer options in fixed income securities. The increase in treasury bill yields, which have already surpassed the 10% mark for one-year bills, is prompting a shift away from equities towards fixed income instruments. This shift is reflected in the performance of equity markets, which have seen a decline in returns as investors reposition their portfolios.
The effectiveness of the CBN's tools in taming inflation is a subject of debate, with the central bank taking a proactive stance to address the cost-push inflationary pressures that have gripped the economy. Factors such as the global energy crisis, geopolitical tensions, and currency devaluation have all contributed to the inflationary environment, prompting central banks worldwide to adopt a hawkish monetary policy stance. While the impact of these measures may be limited in the face of external factors driving inflation, the CBN's decisions reflect a commitment to maintaining price stability and economic resilience in Nigeria's financial ecosystem.