The Central Bank of Nigeria (CBN) increased its main monetary policy rate by 150 basis points (bps) on September 27. 5%, but also banks’ cash reserve requirement to a minimum of 32. 5%, amid ongoing foreign exchange shortages in the nation.
S&P Global Ratings believes banks in Nigeria could experience lower earnings, with weaker lending growth and asset quality. So far this year, the central bank has increased its MPR by a total of 400 bps in an effort to reduce inflation; which was at 20. The CBN’s intervention facilities have been used by banks to provide loans to the private sector at a preferential rate; primarily to aid small and midsize businesses during protracted economic downturns.
Despite loan growth having averaged close to 20% over the previous two years, the economy still has low credit leverage; with total private sector loans only accounting for roughly 13% of GDP. However, if their mandatory reserves are increased more than their present discretionary debits, it will probably cause a short-term lending freeze and reduce net interest margins.
Positively, S&P noted that a sizable portion of bank funding comes from non-interest-bearing deposits; which may lessen the impact of rising funding costs. Nigerian government bond yields over the past 10 years have averaged around 13%; which is significantly less than inflation.
Additionally, S&P anticipates a drop in net interest margins and a rise in nonperforming loans (NPLs); to result in a decline in bank profitability.