Nigeria’s banking sector might be a big beneficiary as inflation decelerates, and markets anticipate a cut in the Monetary Policy Rate (MPR).
So far in 2025, the NGX Banking Index has rallied from 7% in Q1 to 18% by June, and surged to 48% as of August 15, adding about N6 trillion ($3.9 billion) in market value.
Yet, much of this rally has been driven by strong earnings expectations in H1 2025 and investor inflows, suggesting that a rate cut, if delivered, could provide additional upside that is not fully priced in.
In July 2025, Nigeria’s annual inflation rate eased to 21.88%, the lowest since January 2023, down from 22.22% in June, marking the fourth consecutive deceleration in 2025.
Prior to the official release, analysts had projected this easing trend. Bismarck Rewane, Managing Director of Financial Derivatives Company (FDC), had forecast July inflation at 21.79%, citing the naira’s stability at N1,500–N1,600 per dollar, lower energy costs, and the ongoing harvest season.
- Rewane explained: “The disinflationary backdrop could set the stage for the Central Bank of Nigeria (CBN) to deliver a modest 25-basis-point cut in the Monetary Policy Rate (MPR) to 27.25% at its September MPC meeting.”
Likely impact on the banking sector
A cut in the MPR would typically reduce borrowing costs, stimulate credit appetite, and potentially increase loan growth.
At the same time, lower rates would drive down yields on fixed-income assets, encouraging greater investment allocation to equities.
However, analysts are divided on the potential impact for banks’ earnings.
Arnold A. Dublin-Green, Chief Investment Officer at Cordros Asset Management Ltd, argued that the backdrop is broadly supportive:
“In my opinion, disinflation and the expectation of lower MPR are broadly supportive for banking stocks. Generally, as inflation eases, the discount rate applied to future earnings falls, allowing valuations to re-rate higher.
While lower rates may compress net interest margins (NIMs) slightly, they can also support stronger loan growth and a healthier earnings mix.
Investor sentiment should improve as the market looks to a more stable macro environment, with banks seen as early beneficiaries of credit expansion and possibly reduced systemic risk.”
By contrast, Egie Akpata, Chairman of Skymark Partners Ltd, warned of downside risks:
“Lower interest rates are a negative for the topline earnings of banks as interest income from loans and securities will decline.
It might lead to a short-term reduction in the net interest margins of banks, as their funding costs could take a while to come down in line with a drop in topline interest income
The impact on bank earnings might not be immediate. I would not expect much change to the risk assets of banks as loan growth is constrained by a lot more than the MPR.”
Investors may shift from bonds to stocks
A cut in MPR may drive yields on fixed-income assets lower, prompting investors to rotate into equities.
Buttressing this point, Egie Akpata, Chairman of Skymark Partners Ltd, noted:
“Any further fall in bond and bills yields could lead to a rotation out of fixed income securities to stocks in general.”
The CRR constraint
Overall, the impact of a rate cut on banks’ earnings may remain muted unless accompanied by a reduction in the Cash Reserve Ratio (CRR).
- Nairametrics data indicate that the cumulative CRR debits rose to N25 trillion in 2024 from N18 trillion in 2023, representing a significant sterilization of liquidity relative to customer deposits of N144 trillion in 2024.
- According to Renaissance Capital Africa’s June 2025 report, Cash is King, the FUGAZ banks (FirstBank, UBA, GTCO, Access Holdings, and Zenith Bank) lost about N840.2 billion in potential income due to additional CRR debits.
- However, the Central Bank of Nigeria (CBN) may not be too keen to reduce the CRR immediately.
Liquidity management remains a major concern for the regulator, as easing CRR could inject excess liquidity into the system, potentially stoking renewed inflationary pressures and undermining the naira’s recent stability.
Backstory
The Central Bank of Nigeria (CBN) had announced a retention of the Monetary Policy Rate (MPR) at 27.5%, following the conclusion of its 301st Monetary Policy Committee (MPC) meeting held on Tuesday, July 22, 2025.
- Cardoso said the committee’s decision to hold the rate steady was based on the need to sustain the disinflationary trend in the economy.
- The CBN Governor stated that maintaining the current policy stance will continue to address existing and emerging inflationary pressures.
He said, ‘’Maintaining the current policy stance will continue to address existing and emerging inflationary pressure. The MPC will continue to undertake rigorous assessment of economic conditions, price developments and outlook to inform future policy decisions.’’
What you should know
If disinflation persists and the CBN eases policy, banks could enjoy stronger credit growth, improved profitability, and re-rated valuations.
- Coupled with rotation from declining bond yields, the sector may see renewed investor interest.
- Still, elevated CRR requirements and lingering inflation risks could temper the upside.
- Investors should balance optimism with caution, keeping an eye on policy signals and upcoming corporate releases.
As Akpata noted, “Any rally in banking stocks will likely be results-driven, with interim dividend announcements and earnings reports serving as key catalysts. Conversely, if profits and payouts remain flat relative to 2024 levels, short-term gains could be limited.”
