The Central Bank of Nigeria (CBN) issued a total of N2 trillion open market operation (OMO) bills, mostly in long-tenured bills of 180 to 361 days maturity in 2021, a report by Guaranty Trust Holding Company Plc (GTCO) has revealed.
The value of the OMO bills issued in 2021 was significantly lower than the N7.1 trillion the banking sector regulator issued in 2020.
GTCO, in the report titled, “Nigeria’s Macro-economic Outlook for 2022,” predicted that the CBN would continue with its discretionary cash reserve requirement (CRR) debits in 2022. It stated that this could weigh negatively on asset yield for the sector. Furthermore, it stated that the CBN’s discretionary CRR debits posed a huge challenge to banks’ ability to create credit as 50 per cent of total naira deposits were sterilised with the CBN as CRR and special bills.
The report 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 would in turn increase competition for quality loans amongst banks and cause funding costs to inch up slightly.
The report added, “The year could 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.”
The report stated that banks would 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,” it said.
The report also projected that the CBN would implement a tight monetary policy in the second half of 2022 to deal with excess liquidity that would flow into the economy as a result of electioneering campaigns.
GTCO added, “Although it is unlikely that the CBN will slow down on its discretional CRR debits, we expect more banks to approach the apex bank for the release of a portion of their ‘excess’ CRR to assist them in funding their transactions, payment of regulatory levies and fees, etc.”
The report stated that the competitive environment would primarily be driven by regulation, non-bank competitors, law enactment, and responses to macro-economic developments.
It further estimated that non-bank competitors would eat into banks’ earnings of banks in 2021, as more fintech secure requisite approvals and enter the space, offering a range of financial services and products to banked customers using asset-light technology, especially with the expected licensing of the MTN and the Airtel to commence Payment Service Bank (PSB) operations in 2022.
GTCO urged the CBN to create a level playing field by subjecting the telcos that desired to play in the PSB space, “to the same rigorous KYC procedures in place for banks and the payment of similar regulatory charges/levies (AMCON, NDIC, etc.).
It, nevertheless, noted that the commercial banks pre-empted the possibility of having telcos become licensed financial services providers and consequently, “established the Shared Agency Network Expansion Facilities (SANEF) in a bid to minimise its impact on industry earnings and their market share.
According to the GTCO, “bank’s ability to run a wallet account system in addition to the traditional accounts, the need for PSBs to be subjected to the same rigorous KYC procedures in place for banks and the payment of similar regulatory charges/levies (AMCON, NDIC, etc.) will go a long way to level the playing field.”
The report also commented on the impact of the e-Naira on traditional banking institutions, noting that its success would largely be dependent on the number of active users, rate of merchant adoption, and the value-added services available on the app.
GTCO also stated that macro-economic challenges and regulatory headwinds that had gradually wiped out and/or constrained a significant portion of the revenue of banks would more banks to initiate restructuring and transition that would see them diversify their earnings base into other non-banking operations while consolidating market share and operations in the banking industry.
The GTCO also stated that the introduction of Basel III, which provided for a more stringent capital regime where the strength and sufficiency of a bank’s tier-one capital would determine how much risk it can take, would motivate most banks to shore up their Tier 1 capital position.
The GTCO, however, “expect the apex bank to encourage banks with capital shortfalls to retain a sizeable position of their earnings. The apex bank could work out transitional arrangements that will assist banks whose capital position is below the regulatory minimum to gradually build capital over a three- five-year period.”