Nairametrics| Data from the Central Bank of Nigeria reveals, loan to deposit ratios of deposit money banks in Nigeria has been on the rise since mid 2015. Bank credit to the private sector rose by an astonishing 22% in 2016 alone.
Loan to deposit ratios, which is the ratio of loans issued by banks to their customers to the deposit received from their customers stands at a multi-year average of about 78%. The last time we saw this sort of numbers was at the height of the banking crisis of 2009, which forced the CBN to sack boards of about 9 commercial banks and nationalize three others.
Loan to deposit ratio of 78% implies that banks are lending N78 of every N100 of deposit they receive. Critics of high loan to deposit ratios point to the danger it posses to bank’s risk profile as further impairments to loans could erode the ability of banks to meet their depositors demand on time.
However, unlike in 2009 -2011 when banks had weaker shareholder funds, commercial banks in Nigeria have stronger net assets and could withstand significant rise in non performing loans. Also, banks have stronger liquidity ratios and have mostly passed stress test conducted by the CBN in recent months. The CBN requires commercial banks to have a minimum liquidity ratio of 30% and CRR of 22.5%. Currently, banks have on average liquidity ratios of 44%. This suggest 44% of their assets can easily be converted to cash.
It is however important to note that in March 2009, deposit money banks had a total claims to the private and public sector of about N9.2 trillion (private sector alone was N7.7 trillion) out of a total asset of N15.5 trillion. This represents about 59% loan to total assets ratio of banks. In March, 2017 it was N21.5 trillion (private sector claims was N15.7 trillion) compared to a total asset of N32.4 trillion. Thus bank loans to its total assets stood at 66.3%.
Despite these flashes of comfort, the concentration of bank loans in risky sectors of the economy, such as oil and gas is reminiscent of 2008- 2009 when banks similarly concentrated on margin lending. The dangers of high loan to deposit ratios are glaring, particularly in the midst of a recession that have seen most sectors of the economy reel from weakening demand, inventory pile up and cash constraint.
Analysts believe the quest for higher returns have driven banks into riskier segments of the market but cut backs are now being undertaking as impairments takes it toll on bank balance sheets. Some commercial banks have pivoted towards risk free government securities considering that they yield returns that are comparable to their return on equity. The banking sector in 2016, reported a combined return on average equity of 12% according to research from Nairametrics, making government securities a more lucrative proposition.
There is still room for banks to reduce their loan to deposit ratios considering the quantum of unbanked population in Nigeria. Bank deposits currently stand at over N22 trillion and is expected to grow as banks move aggressively towards mobile powered retail banking. This could help allay frayed nerves.