Banks agonize over high cost of funds

Nigerian football fans15 October 2013, Lagos – Faced with unpleasant tight monetary policy conditions, Deposit Money Banks (DMBs) in the country anticipate that their 2013 full year weighted funding cost will trend upward, a report has shown.

According to the report, the tighter liquidity condition in the market would be felt more by the smaller banks that rely heavily on this form of funding to meet most of their obligations. It also noted that although treasury bills rates looked attractive, the cost of purchased (term) deposits had also risen.

The Renaissance Capital Limited (RenCap), stated this in a report titled: ‘Nigeria Banks- Feedback from Management Meetings,’ obtained yesterday.

The Central Bank of Nigeria (CBN) had in July, imposed a 50 per cent Cash Reserve Requirement (CRR) on public sector funds, which saw the sterilisation of N1.2 trillion from the system. In addition the increased contributions to the Asset Management Corporation of Nigeria’s (AMCON’s) sinking fund, the reduction in the Commission on Turnover (COT) for banks and other regulatory amendments had been putting pressure on the banks’ earnings.

In fact, the Nigerian Interbank Offered Rates (NIBOR) had on September 18, spiked to an average of 56 per cent, before the situation was brought under control.

Continuing, the RenCap report noted: “For some of the banks, the benefits of playing the treasury bills market (tax-free, risk free rate of 12 to 13 per cent) still outweigh aggressive loan growth as their best corporates are still borrowing at 14 to 15 per cent.”

It added: “On the asset side of the balance sheet, banks have lost interest income on all cash set aside for the CRR. To mitigate these pressures, banks appear to have: cut the deposit rates on public sectors funds; attempted to re-price their loan books by 100 to 300 basis points.

“Not all of the proposed increases have stuck, we estimate about 40 to 60 per cent of the increase has gone through. On balance, we would expect to see Net Interest Margins (NIMs) decline by 25 to 100 basis points for most of the banks as we head to the end of the year.”

Commenting on the full year loan projection of banks, the report anticipated that most of the bigger banks will record around 15 per cent loan growth, with the exception of Access Bank. It forecast over 20 per cent loan growth for Access Bank.
*Chima Obinna, ThisDay

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