CBN’s 15.5% Interest Rate Hike Will Hurt Nigerian Banks, S&P Warns

A global rating agency, Standard and Poor’s (S&P) has warned that banks in Nigeria will witness a dip in their earnings and many Nigerians will default in loan repayment due to the new monetary policy rate hike to 15.5 per cent.

Advertisement

The New York based rating firm also said banks assets will drop.

S&P disclosed this in recently published report.

The warning by S&P is a reaction to the 150 basis points increase in MPR to 15.5 per cent from 14 per cent.

The Cash Reserves Requirement (CRR) of banks was moved up to 32.5 per cent from 27.5 per cent in September 2022.

The report noted that banks have used the CBN’s intervention facilities to extend credit to the private sector at a preferential rate, mainly to support small and midsize enterprises amidst prolonged economic setbacks.

In 2020 during the Covid-19 era, the CBN spent billions of naira on intervention on a reduced rate of five per cent, but the rates have been reverted to the original rate of 9 per cent due to inflationary pressure.

In November, it also reduced rates from 12.5 to 11.5 per cent to encouraging borrowing and improve output growth.

But inflation has risen to 20.52 per cent in August prompting another review of the MPR which is a review of 400 basis points in the first nine months of 2022 alone.

It said, “The Central Bank has raised its MPR by a cumulative 400 bps so far this year in efforts to tame inflation, which stood at 20.5 percent in August. At the same time, it revised the rate on its intervention facilities (special funds offered at a discount rate to priority sectors) to nine percent in August 2022.

Advertisement

“However, an additional increase of their mandatory reserves, beyond the current discretionary debits, will likely lead to a freeze in lending in the short term and squeeze net interest margins.

“On a positive note, non-interest-bearing deposits account for a large share of banks’ funding sources, which should mitigate the increase in the cost of funds.

“In their attempt to adapt to the CBN’s sharp liquidity tightening, banks have been purchasing government securities, but yields are low. In our view, the increase in the MPR and intervention funds rate suggests that the CBN has not closed the taps entirely. Since banks should still be able to extend credit to priority sectors such as agriculture.”

The S&P also believes that hiking the rate would lead to a rise in non-performing loans to 5.5 per cent which is above the CBN’s prudential level.

The current maximum lending rate rose to 28.30 per cent in August and it is expected to rise. Banks have already begun to restructure their loans along the new benchmark rate.

The Non-Performing Loans (NPLs) ratio was 4.8 per cent in August 2022, compared with 5.0 per cent in June 2022, as the CBH hopes to “sustain its tight prudential regime, to ensure that the NPL ratio is kept below its 5 0 per cent prudential benchmark.”

It said, “In our view, limited financial intermediation somewhat constrains the central bank’s ability to curb inflation using the MPR. Further rate hikes are possible, given the gap between inflation and the MPR, and will put pressure on banks’ loan portfolios as they pass the full rate increase to retail customers.

“Although the cash reserve ratio CRR is now 32.5 percent, we understand that the effective CRR has been greater than the previous statutory minimum of 27.5 percent introduced in 2019.

“We expect banks’ earnings will fall as non-performing loans increase and net interest margins decline. We expect the banking sector’s NPL ratio will deteriorate to 5.5 per cent on average in 2022 after improving to 5 per cent at year-end 2021, while the return on equity moderates to 13 percent from 14 percent.

“This is because of a weakening environment. Dollar-denominated oil revenue from the large oil-producing companies has been under pressure amid lower oil production, due to oil thefts, pipeline leaks, and terminal shutdowns in 2022.”

Advertisement

Leave a comment