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Analysts dissect CBN’s slash of interest rate on savings deposit



CBN Development Finance

Experts and financial analysts at FBNQuest have dissected the implications of the recent policy by the Central Bank of Nigerian to slash interest rate on savings deposit.

The apex bank on Monday reviewed the the minimum interest rate on savings deposit to 10 per cent of monetary policy rate (MPR).

The CBN in a circular to all banks directed that the minimum interest rate on savings deposit be reduced to a minimum of 10 per cent of MPR, or 1.25 per cent, from the previous minimum of 30 per cent of MPR, or 3.75 per cent.

According to the circular, the new interest rate regime is to take effect from September 1, 2020.

Also, the CBN had noted with satisfaction the recent declining trend in market rates in the banking sector, following the implementation of policies aimed among others at stimulating credit flow to the real sector.

Reacting to this development,  FBNQuest analysts have acknowledged that two of such policies rolled out by the CBN  earlier have been particularly effective in exerting downward pressure on interest rates.

Specifically, those policies are the exclusion of non-bank corporates from participating in Open Market Operation (OMO) auctions and the increase in banks’ minimum loan-to-deposit (LDR) ratio to 65 per cent.

“Broadly speaking, given that savings deposits account for around 20 per cent of the deposit liabilities of commercial banks, the new directive should be positive for banks in terms of a slight reduction in their overall cost of funds,” the analysts explained in a report.

“All else being equal,” they continued, “our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around 50bps in Q4.

“In terms of earnings impact, we estimate an average increase of around +8 per cent in the 2020 PBT for our banks universe.”

They noted that banks with already low cost of funds such as GT Bank and Zenith will benefit the least from the interest rate reduction.

They however, observed that given the stringent rules around interest on savings, “we doubt that the impact will be that material.”

Explaining the reason for this, they said “Statutory provisions indicate that customer savings accounts will be ineligible for (monthly) interest rate payments in any month where a customer makes more than 4 withdrawals.”

Whereas, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts on a monthly basis, they said.

“Consequently, for most banks, the average funding cost for savings deposits is much lower than the 3.75 per cent implied by the MPR.”

For banks’ customers, given an inflation rate trending above 12 per cent (12.8 per cent July 2020), the negative interest earned on savings deposit accounts will widen to -11.5 per cent from the -8.7 per cent rate implied by the former interest rate regime, they said.

Despite limited investment outlets due to the subdued interest rate environment, FBNQuest analysts believed some bank customers might be encouraged to take a second look at alternative asset classes such as equities.

“In our view, with most banks trading below book value, we believe that a significant portion of banks’ credit risks is already reflected in their share prices.

“Despite the deterioration in the macro environment, GT Bank and Zenith, our preferred names within the sector, have adequate capital and liquidity buffers to withstand potential shocks.

“Their valuations are also supportive with GT trading on a P/B multiple of 1.0x for 24.2 per cent ROAE in 2021E, and Zenith on a 0.5x multiple for 21.8 per cent ROAE in 2021E.

“Finally, although their dividend outlook is unclear at this time, we believe that both banks will still pay a dividend on their 2020 results.

“We believe that their dividend yields will still be better than the 1.25 per cent implied interest on savings deposits and the 2  per cent yield on T-Bill instruments,” they explained.

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