FG’s Sukuk Bond issuances to take away deposits from bank, non-bank, say analysts

A group of analysts at Guaranty Trust Holding Company Plc (GTCO) said 2022 may witness an intensified competition for deposits not only between banks and non-bank competitors but also with the federal government as a result of FGN Sukuk Bond issuances and possible pick up of the e-naira, effectively taking away deposits from banks.

They expressed that the discretionary Cash Reserve Requirement (CRR) of the Central Bank of Nigeria (CBN) debits will continue in 2022 and would weigh negatively on asset yield for the sector.

The analysts in a report titled: “Nigeria’s macro-economic and Banking Sector Themes For 2022” noted that the relatively low yield on fixed income securities (FIS) would mount pressure on banks to intensify credit creations to the private sector which is expected to increase competition for quality loans amongst banks and cause funding cost to inch up slightly.

“The pressure on funding could also trigger a complimentary repricing on deposits in line with current market realities.

“Following the success recorded in the digital banking space post-pandemic and the massive investments made by banks to contain the pressure from fintechs, Banks will continue to look for innovative ways to grow non-interest revenue as well as consumer and retail loans. In view of an expected increase in government borrowing on the back of a higher budget deficit and dwindling revenue, a low-interest rate regime might not hold for much longer.

“We expect the CBN to continue to defend the naira with more frequent interventions in the I&E window. Overall, the regulatory authorities will maintain its hold on the market as it continues to monitor activities in the market and will be quick to implement policies to mitigate the developments that might negatively affect its plan for a stable naira.

“In view of the forbearances granted by the CBN to banks on certain exposures, the apex bank has continued to assist banks in dealing with the issues of bad loans. In 2021, the CBN introduced a sinking fund for loans enjoying forbearance. The sinking fund will require banks to set aside 15% of Retained Earnings every half year for 3-5 years. In effect, the regulators have given the banks the option of taking provisions for delinquent loans through Retained Earnings instead of hitting the P&L. We note that this is a positive for the industry as sterilised funds will help to douse the impact of delinquent loans on capital in the event they crystalize.

“The relatively lower yield on fixed-income securities prompted most banks to aggressively grow their loan book. Recent money and credit statistics by the CBN revealed that loans by banks to the private sector increased by 13.8per cent from N29.7 trillion in Sept. 2020 to N33.8 trillion as of Sept. 2021. The report also revealed that loans to the government grew by 35per cent to N13 trillion as of Sept. 2021 from N9.7 trillion in Sept. 2020.

“Although there are concerns that the CBN’s interventions as a percentage of total system liquidity is quite sizeable, and competes with and in some other cases, crowds out loans from banks, most of the intervention funds are for new businesses and to select sectors with a longer tenure.

“Going into 2022, we expect the CBN to maintain its accommodative stance, further strengthened by strong oil prices, positive GDP numbers and tapering inflation. Thus, provisioning would return to somewhere around pre-pandemic levels in view of Basel III impact while NPL and Cost of Risk (COR) are also expected to remain depressed as the uptick in economic activity and strong oil prices could translate into improved performance of certain struggling or restructured exposures. An upside to low NPLs and COR could arise if the apex bank decides to further extend its forbearance on certain exposures,” the report said.