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When the Central Bank of Nigeria cut its benchmark interest rate by 350 basis points in September, one of the immediate concerns for bank investors was that the lower-rate environment would eventually reduce what banks earn from loans, government securities and surplus cash placed with the CBN.
The logic is straightforward.
Banks make money by earning interest on their assets, and when market rates decline, newly issued securities and repriced loans would normally begin to offer lower returns.
However, developments since the September rate cut suggest that the adjustment may not be as quick or as severe as the headline reduction in the Monetary Policy Rate initially implied.
The CBN reduced the MPR from 26.5% to 23% and recalibrated its standing facilities corridor to +50/-300 basis points, effectively placing the Standing Deposit Facility at 20% and the Standing Lending Facility at 23.5%. The Cash Reserve Requirement for deposit money banks remained at 45%.
Yet banks can still earn more than 17% on some CBN and government securities, while surplus liquidity parked overnight with the apex bank continues to earn 20%.
The question is therefore becoming more nuanced: will lower rates actually translate into a material decline in bank interest income, or will still-elevate market yields cushion the impact?
OMO rates are proving sticky
The latest Open Market Operations auction offers an early indication that fixed-income yields may not fall in a straight line.
At the October 22 auction, the CBN sold N2.628 trillion in OMO bills, exceeding its initial N2 trillion offer by about N629 billion. The 138-day bill cleared at 17.63%, while the more heavily subscribed 180-day instrument cleared at 17.14%.
Both rates were higher than at the October 6 auction, when comparable 147-day and 182-day bills cleared at 17.22% and 16.92%, respectively. Earlier in September, OMO yields had fallen as the market repriced after the CBN’s policy shift.
One auction is not enough to establish another upward rate cycle, but the October 22 result shows that the post-rate-cut decline has at least paused.
This matters for banks because OMO securities remain a relatively high-yielding outlet for eligible institutions holding excess cash. The CBN also allotted more than it initially offered, reinforcing the view that liquidity sterilisation remains important even in an easing policy environment.
Banks are still earning 20% on excess cash
The same picture can be seen at the CBN’s deposit window.
Banks reportedly placed about N8.85 trillion at the Standing Deposit Facility, while banking-system liquidity stood at about N7.26 trillion. The Nigerian Overnight Financing Rate remained around 20%, while the Open Repo Rate was also 20%,
The SDF rate is lower than the roughly 22% available under the previous policy corridor, meaning banks now earn less on surplus funds kept with the CBN.
However, a 20% overnight return remains high in absolute terms, particularly when compared with the expectation that a 350-basis-point MPR cut would quickly drag market rates sharply lower.
Government bonds are telling a similar story.
Nigeria’s benchmark 10-year yield rose to 17.05% in the week ended October 16, while the September 2036 and June 2038 bonds cleared at 17.29% and 17.19%, respectively, at the October 19 auction, even as comparable benchmark yields in several other markets declined.
Together, the OMO, SDF and bond rates suggest that banks still have access to relatively high-yielding assets even after the policy reset.
Why the earnings pressure may take time
Brokerage firms initially warned that the CBN rate cut could reduce banks’ earnings from government securities and squeeze interest margins, although cheaper funding and stronger loan demand could provide some relief.
Chukwudi Nga, MD/CEO of MorganCapital Investment Limited, said banks could benefit from cheaper short-term funding and stronger credit demand, but warned that lower rates could put pressure on “interest margins and investment income,” as discussed in Nairametrics’ post-MPR analysis.
The latest forecasts, however, suggest that this pressure may take time to materialise.
- MorganCapital expects yields to decline gradually, with the 364-day Treasury bill around 14.5% to 16%, while OMO yields could remain relatively attractive as the CBN continues managing liquidity.
- Blue Marina expects an even firmer fixed-income environment by December, forecasting the 364-day bill at 16%, average OMO stop rates at 17% and FGN bond rates at 17% to 17.5%. It also expects inflation to fall to 13.80%, while the MPR remains at 23%.
Futureview also expects inflation to continue easing, although energy prices, exchange-rate movements and liquidity remain risks.
- These forecasts suggest banks could continue earning relatively high returns on securities even as monetary policy eases.
- The effect will also be gradual because existing loans and securities do not immediately reset when the MPR changes. They continue earning previously agreed rates until they mature or are repriced.
For banks, therefore, lower rates still pose an earnings risk, but current fixed-income yields suggest the adjustment may be slower than the 350-basis-point policy cut initially implied.
Lower rates could also help on the other side
The impact of easing may also show up beyond interest income.
Isaac Valentine Osaro, Head of Research at First Securities Brokers Limited, argues that lower borrowing costs can improve borrowers’ cash flows and reduce the probability of default, which could eventually slow the formation of new non-performing loans and reduce impairment charges, as discussed in the same post-MPR investor analysis
Banks could therefore earn less on some assets but partly offset that pressure through cheaper funding, stronger loan demand and lower credit losses.
That is why net interest margin, rather than gross interest income alone, will be one of the more important indicators for investors.
If loan and securities yields fall faster than deposit and other funding costs, margins will come under pressure. If funding costs decline more quickly while OMO, bond and other asset yields remain elevated, bank earnings could prove more resilient.
What investors should watch
Because the CBN cut rates only a few days before the end of September, banks’ 9M 2026 results will not yet show the full effect. The clearer picture should come from FY2026 and 2027.
There are already some useful clues. In H1 2026, investment securities provided a smaller share of interest income at Wema Bank, GTCO, Zenith Bank and FirstHoldCo, while FCMB recorded a slight increase. At Wema, for example, the share fell from about 40.4% to 22.3%, as loans and other interest-earning assets became more important.
That suggests some banks may already be less dependent on income from government securities than before.
For shareholders, this matters because lower interest rates do not automatically mean lower profits. Banks could earn less from new loans and securities, but they may also benefit from cheaper funding, stronger loan demand, and fewer bad loans.
- High OMO and bond rates also provide some support for earnings while the transition to lower rates continues.
- Investors should therefore focus on a simple question: can the bank continue growing profits and paying dividends as rates fall?
Banks that can grow good-quality loans, keep funding costs low and control bad loans are likely to be better placed to protect shareholder returns.
