Low returns on treasury bills could force Nigerian banks to look to private sector

A Nigeria central bank policy aimed at regulating the market for treasury bills that is making banks reconfigure their investment plans because of low interests on the bills could force them to look at doing business with the private sector by way of lending, analysts at FBNQuest Research have said.

The analysts believe that banks would be looking to replicate the high returns on treasury bills they enjoyed last year.

They envisage some pick-up in real economy bank lending, possibly low single-digit growth annualised, they said.

“Our chart today shows the trend in net domestic credit extension on a quarter on quarter basis over the past two years. These are the claims of the monetary system (the CBN and the banks combined) on both the FGN and the private sector, which includes the state governments.

“From the chart we can see the modest growth of lending to the private sector, together with the swings in claims on the FGN. The broader trend in money and credit aggregates has been a sharp increase in the net foreign assets of the system since Q2 2017, reflecting investor confidence in the economy,” they explained.

Contained in their ‘Good Morning Nigeria’ report, the analysts said the share of claims on the federal government and the private sector in total claims stands at about 20/80.

The growth in claims on the private sector has been modest because the banks have instead bought treasury bills on a large scale, they averred, adding that rates on the 364-day paper were over 22 percent as recently as late August, when prime and maximum lending rates to the real economy were 18 percent and 31 percent respectively, according to the CBN.

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FBNQuest said banks and PFAs may wish to change their investment thinking due to the rates on the 364-day paper which are more than 600bps lower at auction.

“For the banks, a core question is whether they can identify new lending targets where they are comfortable with the risk (and for which they have the necessary credit skills). They like to join club deals where the risk is shared with their competitors. These deals can also go wrong but in our view, their popularity with the banks reveals a “safety first” mindset,” they said.

Meanwhile, Nigeria’s trade account turned positive in 2017 as a rise in oil exports outweighed imports after dollar shortages frustrated transactions, the National Bureau of Statistics (NBS) said.

The balance of trade last year was N4.03 trillion. The net trade balance stood at minus N290 billion for 2016.

The NBS said oil and gas exports accounted for more than 93 percent of exports in the fourth quarter, with cocoa bean exports, largely to the Netherlands, Malaysia, and Indonesia, making up 0.37 percent.

Nigeria’s manufacturing capacity is limited, so it imports most of what it consumes. Fourth-quarter imports dipped 8.5 percent from the previous year to N2.11 trillion, the statistics bureau said.

But exports more than compensated, jumping 31.3 percent in the fourth quarter from a year earlier to N3.91 trillion, the NBS said.

The trade balance for fourth quarter more than doubled to N1.8 trillion from a year earlier.