Fitch Ratings has said that cutting reserve requirements (CRR) will not add liquidity to the Nigerian banking system because it releases no additional foreign currency.
“Substantial government-related foreign currency deposits are exempt from reserve requirements and have already been withdrawn from the system after the government ordered all public-sector deposits to be moved from commercial banks into the centralised Treasury Single Account (TSA) earlier this month,.” Fitch said in its latest assessment of Nigerian banks.
Nigeria’s Monetary Policy Committee (MPC) last Tuesday reduced mandatory reserve requirements on all local-currency deposits to 25 percent from 31 percent in a bid to ease liquidity pressure, stimulate new lending and boost economic growth.
This should provide some additional liquidity into the banking system, while some analysts estimated that around N1.3 trillion of deposits were sucked out of the banks in September, reflecting transfers to the TSA.
Public-sector deposits traditionally account for around 10 percent of total banking sector deposits. However central bank governor, Godwin Emefiele said the amount sucked via TSA was less than being estimated by analysts. a banker put the figure at N250 billion.
“Lower reserve requirements will not offset the tighter foreign exchange liquidity at Nigeria’s banks. A currency split of public-sector deposits is not disclosed but in our opinion, forex deposits are substantial, held up by oil-related deposits,”. Fitch noted.
The centralising of public-sector and government-related forex deposits at the TSA has made it increasingly difficult for commercial banks to meet customer demand for forex.
Forex availability was already strained in 2015 due to falling oil revenues, central bank action to defend naira depreciation and heightened negative investor sentiment towards emerging markets.
Warnings throughout the year that JP Morgan intended to remove Nigeria from its Emerging Markets index, which occurred in mid-September, also triggered heavy forex outflows as investors sold Nigerian securities.
“Viability Ratings assigned to Nigeria’s banks, all in the ‘b’ category, already reflect a wide range of weaknesses, including the increasingly strained forex liquidity position. Our sector outlook for Nigerian banks remains negative,” Fitch said.
The agency said key financial metrics reported by Nigerian banks are likely to continue to weaken in the closing months of 2015. Impaired loans have been rising over the past 12 months.
“We expect them to rise above the central bank’s informal five percent of total loans cap but to remain below 10 percent at year-end. Pressure is mounting on regulatory capital ratios and we expect Tier 1 capital ratios at many banks to fall below 15 percent, which is low by recent Nigerian standards.
“Loan growth is slowing under the strain of lower oil prices. Our expectations for loan growth are muted – a nominal five percent increase in 2015, which is low by Nigerian standards – due to the much deteriorated operating environment.