Bank profitability faces pressure from higher CRR, say analysts

By Moses Obajemu & Adesola Afolabi

• Fear possible spike in interest rates

Financial experts and economic analysts have said the upward review of the cash reserve ratio (CRR) from 22.5 percent to 27.5 percent by the Central Bank of Nigeria (CBN) Monetary Policy Committee will pressure system liquidity, moderate inflation levels and further pressure bank profitability.

The MPC on Friday raised the CRR in response to the creeping inflationary trend in the last four months. Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) who disclosed the CRR increase after a meeting of the MPC in Abuja, said “increasing the CRR at this time is fortuitous as it will help address monetary induced inflation whilst retaining the benefit from the bank’s loan to deposit ratio policy which has been successful in significantly increasing credit to private sector as well as pursuing market interest rates downwards.”

The MPC members noted during their meeting that the decision by the apex bank to increase LDR to 65 percent last year had pumped in N2 trillion between May and December 2019, into strategic sectors of the economy, specifically the manufacturing and agricultural sectors, which they termed employment stimulating sectors.

However, the experts said the decision will impact the banking sector as it is a form of liquidity tightening measure that will make less money available to the banks for business activities.

Analysts at United Capital hinted of a spike in interbank rates, meaning that the cost of borrowing or cost of doing business by banks will rise soonest.

“The Monetary Policy Committee voted to retain monetary policy rates and liquidity ratio at 13.5% and 30.0% respectively. However, Cash Reserves Ratio (CRR) was increased by 5% to 27.5%.We expect the new decision to pressure system liquidity, moderate inflation levels, and further pressure bank profitability

“Also, following the surprise decision by the Monetary Policy Committee to increase Cash Reserve Ratio (CRR) by 500bps to 27.5%, we could see short term spikes in interbank funding rates, in reaction to the policy decision,” they said.

According to Tajudeen Ibrahim, head of research at Chapel Hill Denham, the decision means that a re-pricing in yields will happen at some point, later this year.

He agrees that the decision to increase CRR is another way of reducing the level of money in the economy, but he noted that it will cause rates for assets to be priced higher, adding that the height in which pricing will go cannot be ascertained now.

But from Monday higher re-pricing of interest rates in the financial market is imminent.

Funke Oladoke, Deloitte’s mergers and acquisition partner, said she understands the reasons given by the committee members for the decision to increase CRR. According to her, looking at the parameters will mean that caution is exercised so as not to distort the economy so much. “This is good, but down the line there will be an evaluation on what must change; the decision is, however, not surprising,” she said.

Gbolahan Aina, investment management head at Cordros Capital, expressed similar optimism, adding that to keep inflation rate from spiralling a form of tightening without necessarily increasing MPR was required.

Having noted some constraints limiting further monetary policy measures to curtail inflation, Emefiele expressed committee members’ advice on upgrade of fiscal policies.

They advised the fiscal authorities that legacy structural impediments such as infrastructural deficit and long standing clashes between herdsmen and farmers be speedily addressed. These impediments, he said, are currently constraining domestic production and contributing to upward trending price development.