WSTC Financial Services gives contrarian perspective to CBN’s new CRR

Contrary to widely belief that the Central Bank of Nigeria’s (CBN) decision to harmonise the CRR of both public and private sector deposits was tactical monetary easing, a further careful analysis of the impact of the policy will result in a net aggregate debit, or monetary tightening, which would weaken banks earnings, analysts at WSTC Financial Services Limited have said.

The CBN on Tuesday harmonised the CRR on public and private sector deposits at 31 percent, and also retained Monetary Policy Rate (MPR) and liquidity ratio at 13 percent and 30 percent, respectively.

The total deposits of deposit money banks for both public and private sectors stood at N18.5 trillion in April 2015, compared with N17.9 trillion in January 2015.

A breakdown of the deposits as compiled by WSTC Financial Services Limited revealed that private sector deposit of banks was N16.7 trillion in April as against N14.5 trillion in January, while that of public sector deposit dropped from N3.4 trillion in January 2015 to N1.8 trillion in April 2015.

At 20 percent CRR on private sector deposit, a total of N3.3 trillion was sterilised from banking system in April 2015, while N1.3 trillion was sterilised from banks at 75 percent CRR on public sector deposits in April 2015. This implies that in April 2015 N4.7 trillion was sterilised from banking system on both sector deposits.

Illustration of the net impact of the harmonised CRR on deposit money banks had the policy been implemented between January and April, shows that a total of N5.7 trillion would have been debited from the banking system for both sectors deposits in April 2015, and N5.5trillion in January 2015.

Further breakdown shows that at 31 percent CRR on public sector deposit banks would have paid N5.2 trillion in April 2015, as against N4.5 trillion in January 2015, while that at 31 percent CRR on public sector would have costs banks N5.6 trillion in April 2015 compared with N1.04 trillion in January same year.

According to Olutola Oni, analyst with WSTC Financial Services and his team, the harmonisation of CRR will have varying impacts on banks, depending on their relative exposure to public sector and private sector deposits. The larger the exposure of a bank to public sector funds, the lower the “net debit” impact of the new CRR structure on the bank’s total deposits. Suffice to say that implicit in this is the fact that the harmonisation of CRR may ultimately result in a “net credit,” in the interim, for banks holding considerable portion of public sector funds on their balance sheets.

A full analysis on players within the banking industry will be significantly limited by paucity of data resulting from insufficient disclosure on the part of the financial institutions.

“We believe that the net effect of the new CRR structure will further weaken earnings in the banking industry through higher cost of fund and reduced ability to earn interest income from liability generation. We also expect this scenario to further dampen market expectations about corporate earnings within the industry,” the analysts said.

The full implementation of the Treasury Single Account (TSA) will further worsen the implication of the new CRR structure on banks, according to analysts.

This is because the full impact of the treasury single account implies a 100 percent sterilisation of Federal Government deposits from the financial institutions. These deposits they said would have ordinarily had a dampening effect on the 11 percentage point increase in private sector CRR.


Source : BusinessDay

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