Nigeria: Elevated CRR Level Moderated Banking Industry’s Performance, Liquidity Position In FY 2020

The Nigerian banking industry would have recorded a return on average equity (ROE) of 31.6 per cent if not for the aggressive implementation of the cash reserve requirement (CRR) policy in 2020, Agusto & Co. Limited has said.

In its flagship 2021 Banking Industry Report, the rating agency said the elevated CRR level moderated the banking industry’s performance and liquidity position during the year under review.

The report reviewed the banking industry structure, financial condition, the regulatory environment in addition to the macroeconomic environment and its impact on the Nigerian banking industry.

Specifically, Agusto & Co in the report stated that assuming the sterile CRR were invested in treasury securities at 5 per cent, N482 billion would have been added to the Industry’s profit before taxation.

This, they argued, would have increased the Industry’s return on average equity by 11 per cent to 31.6 per cent in the financial year ended 31 December 2020.

According to Agusto & Co, “The CBN’s policies targeted at lowering interest rates have persisted especially given the dire need to stimulate the economy following adversities created by the pandemic. However, given the need to moderate inflation amidst efforts to maintain a stable exchange rate, the cash reserve requirement was increased and standardised to 27.5 per cent for both merchant and commercial banks. The standardised CRR was implemented alongside discretionary deductions. As at FYE 2020, the Industry’s restricted cash reserves exceeded N9.5 trillion and translated to an effective CRR of 37 per cent.

It is noteworthy that Nigeria has the highest reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 per cent. We believe the elevated CRR level moderated the Industry’s performance and liquidity position during the year under review. Assuming the sterile CRR were invested in treasury securities at 5%, N482 billion would have been added to the Industry’s profit before taxation. This would have increased the Industry’s return on average equity (ROE) by 1110 per cent to 31.610 per cent in the financial year ended 31 December 2020.”

Agusto & Co. added that the reliability of business continuity measures was tested in 2020, considering the movement restrictions that lasted for months.

Most banks, Agusto & Co. stated, showed resilience through innovative measures including remote work arrangements and upgrade of network infrastructure to accommodate higher traffic on digital channels.

“These arrangements also provided support during the mandatory curfew elicited by the civic unrest that followed the #EndSARS protests in October 2020. Indeed, the pandemic brought to the fore, technology’s crucial role in deepening financial services as some banks recorded as much as a 50 per cent increase in digital banking transaction volumes. However, these gains were limited by the CBN-induced reduction in bank charges, which took effect in January 2020. As a result, electronic banking income declined by 27.3 per cent, accounting for a lower 13.2 per cent (FY 2019: 21.1%) of non-interest income, “the report stated.

According to the report, the COVID-19 pandemic brought about an extraordinary test for the global community.

It added, “Although the global COVID mortality rate stands low at about 2.2 per cent, casualties increased from less than 3,000 in December 2019 to about 3.9 million as at 30 June 2021. Nigeria’s mortality rate stood comparably lower at about 1 per cent as at the same date. However, the local economy had its fair share of pandemic-related adversities. However, leveraging lessons from the 2016/2017 economic recessions, the Nigerian banking industry was better prepared in 2020.

“Proactive measures in the form of forbearance granted by the Central Bank of Nigeria CBN, enabled banks to provide temporary and time-limited restructuring of facilities granted to households and businesses severely affected by COVID-19. There was generally a cautious approach to lending in the Industry, given difficulties in the operating environment. Although gross loans and advances grew by 12 per cent, loan growth was negative when the 19.3% naira devaluation is considered. Underpinned by the forbearance and proactive measures adopted by banks, the NPL ratio improved to 6.6 per cent (FYE 2019: 7.6%).”

– Thisday