Analysts fear negative real interest rate of -11.5% as CBN reviews savings rate downward  

Charles Abuede

• Customers may consider equities for investment

Analysts at FBNQuest Capital Research have reacted to the recent move by the Central Bank of Nigeria to stimulate credit flow into the real sector of the nation’s economy, saying that the implication will be a reduction in bank’s funding costs as well as a negative real interest rate of -11.5 per cent widening on customers’ deposits.

The CBN in a circular to all banks on Monday directed that the minimum interest rate on savings deposit be reduced to a minimum of 10 per cent of the policy rate, or 1.25 per cent, from the previous minimum of 30 per cent of the MPR, or 3.75 per cent. The new interest rate regime took effect from Tuesday, September 1, 2020.

According to the circular, the CBN “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”.

The new directive should be positive for banks in their overall cost of funds

Although FBNQuest analysts noted that two of such policies rolled out by the CBN: (a) the exclusion of non-bank corporates from participating in OMO auctions and, (b) the increase in banks’ minimum loan-to-deposit (LDR) ratio to 65 per cent; have been particularly effective in exerting downward pressure on interest rates.     

In their note on the review of the rates by the CBN, the FBNQuest Research analysts said: “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.

“All else being equal, our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around 50 basis points in Q4. In terms of earnings impact, we estimate an average increase of around +8 per cent in the 2020 PBT earnings for our banks’ universe. Banks with already low cost of funds such as GT Bank and Zenith will benefit the least from the interest rate reduction.”

Bank customers may consider alternative asset classes such as equities for investment

For bank customers, given an inflation rate trending above 12 per cent (12.8% 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, the analysts said, adding that despite limited investment outlets due to the subdued interest rate environment, “we believe that some bank customers might be encouraged to take a second look at alternative asset classes such as equities”.

The FBNQuest analysts asserted that “Given the stringent rules around interest on savings, we doubt that the impact will be that material. Our reason is simple. 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. Typically, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts monthly.

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

How will banks react to potential shocks in the liquidity buffers?

On how banks will react to potential shocks in the liquidity buffers, the analysts noted that fundamentally, with most banks trading below book value, a significant portion of banks’ credit risks is already reflected in their share prices, and they add that despite the deterioration in the macro environment, banks such as GT Bank and Zenith, have adequate capital and liquidity buffers to withstand potential shocks. “Their valuations are also supportive with GT trading on a P/B (Price to Book Ratio) multiple of 1.0x for 24.2 per cent ROAE (Return on Average Equity) in 2021E, and Zenith on a 0.5x multiple for 21.8 per cent ROAE in 2021E,” the analysts explained.

While they hold that banks’ dividend outlook is unclear at this time, they are of the view that both GT Bank and Zenith will still pay a dividend on their 2020 results, adding that perhaps, 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.