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Is the CBN really forcing Nigerian banks to lend?

In another desperate attempt to increase lending to the real sector, the Central Bank of Nigeria (CBN) came out with guidelines to mandate commercial banks to direct credit to real sectors of the economy particularly small and medium scale enterprises (SMEs).

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In another desperate attempt to increase lending to the real sector, the Central Bank of Nigeria (CBN) came out with guidelines to mandate commercial banks to direct credit to real sectors of the economy particularly small and medium scale enterprises (SMEs).

The apex bank yesterday issued a letter to all banks on regulatory measures to improve lending to the real sectors of the economy. The guidelines specify that;

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1. All Deposit Money Banks (DMBs) are required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 2019 and will be reviewed quarterly.

2. To encourage SMEs, Retail, Mortgage, and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose. The CBN will provide a framework for classification of enterprises that fall under these categories.

3. The punitive measure to be employed to ensure that DMBs comply is a levy of additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target LDR.

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While we are not completely sure of what the second point implies pending the release of the guidelines by CBN, latest Q1 numbers from the banks within our coverage show that affected banks will be Zenith Bank, Guaranty Trust Bank, FBNH, UBA and Stanbic IBTC.

However, this is assuming that loans and deposits figures have remained stagnant since Q1, which is highly unlikely.  Guaranty Trust Bank, for instance, launched its retail loans attracting an interest rate of 1.75% monthly as against c.4% charged by consumer finance companies. This has gained widespread acceptance and we believe it would have helped increase loan growth for Guaranty by H1 2019.

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This will result in an additional N1.4 trillion in loans to the N24.16 trillion within the private sector as at February 2019. Since many of the affected banks are the big banks, we believe the implication may not be as disastrous as would have been if smaller banks were the most affected considering many of the big banks have adequate capital and would typically have access to better quality loans.

Nevertheless, requesting banks to increase loans by 20% in a short period, will ultimately result in a buildup of NPLs. Also, a bank like FBNH with Capital Adequacy Ratio (CAR) of 16.5% as at Q1 2019 may fall below regulatory requirements if it must grow loans by 26% within 6 months.

That said, in our view, this move does not address the fundamental question of why commercial banks have abandoned their traditional role of financial intermediation- mobilizing deposits and granting loans to individuals and corporates and have rather concentrated on investing in government instruments.

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The low-risk appetite among banks for lending to the real sector can be attributed to attractive yields on government instruments on the back of aggressive government borrowings to bridge fiscal deficits, high risk in the operating environment which has hindered the survival of SMEs, tepid demand from SMEs owing to the high cost of securing loans- brought about by the high-interest rate environment.

Consequently, DMBs have preferred investing a huge chunk of their liquid assets in government instruments given that they do not have Capital Adequacy Ratio (CAR) implications, are tax-free and do not result in Non-Performing Loans (NPLs).

[READ ALSO: FG assures no infrastructure was mortgaged in the China loan agreement]

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We believe DMBs concentration in high-yield government instruments is a fallout of the structural imbalances in the broad economy and the attractive yields on money market instruments which is aimed at ensuring Nigeria’s risk-free assets remain attractive to foreign investors to attract dollar inflows, hence ensuring stability in the exchange rate.

If government continues to rely heavily on borrowings to bridge its fiscal deficits and the need to keep yields on government instruments attractive to FPIs remain a priority for the CBN, yields on government instruments will remain elevated, which would mean that DMBs investments will remain skewed towards those government instruments.

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The Central Bank’s stringent Cash Reserve Requirements (CRR) also tightens banks’ liquidity, limiting their ability to lend.

Banks aversion to giving loans to the real sector has also intensified in the period of the recession and post the recession given the heightened risks involved.

Implications for the banks: Forcing banks to lend under the current macro-economic situation will only result in;

  • A build up in NPLs given the sluggish growth in the economy and the high risk in the operating environment- this could pose a risk to financial stability.
  • Apart from the fact that margins of banks may be squeezed if lending is redirected to the real sector, high NPLs will also directly affect the profitability of banks.
  • Capital Adequacy Ratio implication: For banks that are already close to their regulatory minimum (10% for National banks, 15% for banks with International subsidiaries and 16% for SIBs- Not being enforced currently), aggressive loan growth will impact capital.

However, with a more favourable economic climate, better infrastructure that can aid the survival of SMEs, and less stringent CRR rules by the Central Bank, the new guidelines may well be a trigger to boost growth in the real economy.      

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

Patricia
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Coronavirus

Former Liberian President to sit on WHO review panel of COVID-19 response effort

Ellen Sirleaf has been picked alongside Helen Clark, to serve as co-chairs of the independent panel.

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Former Liberian President to sit on WHO review panel of Covid-19 response effort

Following stern criticism by US President, Donald Trump, over their handling of the COVID-19 response efforts, the World Health Organization (WHO) has announced it will implement an independent panel to review said response efforts to the pandemic.

To this end, Liberia’s former President and West Africa’s first female President, Ellen Johnson Sirleaf, has been picked alongside former Prime Minister of New Zealand, Helen Clark, to serve as co-chairs of the independent panel. They will be responsible for selecting the other members of the panel, according to the WHO.

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WHO’s Director-General, Tedros Adhanom, announced the panel will produce an interim report in a November meeting of global health ministers. Meanwhile, the substantive report would be produced by May 2021.

Tedros also said that the size of the pandemic calls for the need for a “commensurate evaluation, an honest evaluation”, adding that the WHO would be very serious with the preparation of the report.

READ MORE:COVID-19: WHO warns worst is yet to come as firm charges $2,340 for virus treatment

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The WHO members in May agreed to an independent review of the organization’s response to the pandemic. Ellen Johnson Sirleaf said the review of the body’s response would be challenging but looks forward to her role in doing what she can contribute to the response of the pandemic’s challenges.

The panel will also report monthly updates on the body’s response and will not only review the WHO’s response but also the International community’s response. Tedros added that it’s time for an honest reflection on the global response, saying a response will help with lessons on the pandemic.

 

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Economy & Politics

Presidency dismisses allegation of Osinbajo receiving N4 billion from recovered loots

The accusation was described to be an obvious campaign of lies and calumny.

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Twitter deactivate Yemi Osinbajo's Twitter account, How Nigeria's LPG sector can create 2 million jobs -Osinbajo, budget support, NEC okays $250 million investment in NSIA , MSMEClinic gets 200,000 capacity yam storage facility in Benue, Accusations of Yemi Osinbajo receiving N4 Billion from recovered loots are baseless- Presidency

The office of the Vice President has reacted to a series of tweets accusing Professor Yemi Osinbajo of instructing the embattled acting Chairman of the EFCC, Ibrahim Magu, to release the sum of N4 billion out of N39 billion that was recovered from alleged looters. 

These allegations have been described as “false and baseless”. 

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READ ALSO: UPDATE: President Buhari appoints Prof. Gambari as new Chief of Staff

A statement that was signed by the Senior Special Assistant to the Vice President on Media and Publicity, Laolu Akande, said, with all emphasis at our disposal, let it be firmly stated that these are totally false and baseless fabrications purposing to reflect goings-on at the probe panel investigating Mr Ibrahim Magu”. 

Ibrahim Magu was relieved of his duties this week, after a probe was conducted on his activities as Acting Chairman of the nation’s anti-graft agency. He has since been replaced with Mohammed Umar. 

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READ MORE: Just In: DSS invites EFCC’s Acting Chairman, Ibrahim Magu for questioning)

Meanwhile, the statement by the Presidency also complained about the recent rise in people being paid to “peddle blatant falsehoods” against the Vice President and says Mr Osinbajo “will not be distracted by these obvious campaigns of lies and calumny”. 

The statement added that the online publications “being criminally defamatory in nature”  have been referred to law enforcement agencies for investigation. 

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Financial Services

Stanbic IBTC observes closed period, as directors set to consider H1 results

The directors will also consider a proposal to pay an interim dividend to shareholders.

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Stanbic IBTC

Stanbic IBTC Holdings Plc announced earlier today that its board of directors will meet on Wednesday, July 29, as part of preparations towards the release of the company’s consolidated and separate audited financial statements for half-year 2020. The directors will also consider a proposal to pay the company’s shareholders an interim dividend.

A statement issued by the Stanbic IBTC to the Nigerian Stock Exchange (NSE) noted that the scheduled board meeting is in tandem with guidelines contained in section 1.2 of the NSE’s rules book.

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In the meantime, the bank Hold-Co has already commenced observing its closed period ahead of the release of the half-year financial statements. Specifically, Stanbic IBTC began observing its closed period on June 1st, 2020, the implication being that all insiders and their relatives have been prohibited from trading the company’s shares for more than one month now.

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Note that the Stanbic IBTC’s closed period will continue until the half-year financial statements are released. Part of the statement which was signed by Chidi Okezie (Company Secretary), said:

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“In accordance with the provisions of Section 1.2 of the Rules of The Nigerian Stock Exchange (The NSE) relating to Board Meetings and General Meetings of Issuers, we would like to notify The NSE and our Shareholders, that a meeting of the Board of Directors of Stanbic IBTC Holdings PLC (the Company) is scheduled to hold on Wednesday 29 July 2020 at 1:00 pm. The meeting will discuss amongst other items, the Company’s Consolidated and Separate Audited Financial Statements for the Half-year ended 30 June 2020 as well as a proposed interim dividend.

READ ALSO: COVID-19: NSE extends time for submission of audited financial statements

“In view of the above, the closed period for the release of half-year results, which commenced on Monday, 01 June 2020 will continue to be in effect until the release of the Company’s Half-year audited financial statements.”

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Recall that the last earnings report that was released by Stanbic IBTC Holdings Plc was for Q1 2020. The unaudited report showed that gross earnings stood at N61.4 billion as against N58.7 billion in Q1 2019, even though interest income for the period declined by 12% year on year to N27.5 billion. Meanwhile, profit for the period stood at N20.6 billion, an increase when compared to N19.2 billion in Q1 2019.

Stanbic IBTC Holdings’ share price closed at N30.25 at the end of today’s trading session on the Nigerian Stock Exchange. Year to date, the stock has declined by nearly -20%.

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