Balance liquidity, deposit / loan ratio, nonperforming loans, banks default to CBN 65% LDR requirement in first half

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Darasimi Adebisi

As a result of concerns over the need to balance liquidity, deposit-to-loan ratios, and verify non-performing loans, the country’s Tier 1 banks failed to meet the central bank’s loan-to-deposit ratio of 65%. Nigeria (CBN) (LDR) for the semester ended June 30, 202.

This despite the CBN’s warning that failure to meet the target would continue to attract additional cash reserve drawdowns of 50 percent of the target LDR’s loan deficit.
Tier 1 banks are Ecobank Transnational Incorporated (ETI) with a Nigerian subsidiary, Ecobank Nigeria, FBN Holdings Plc, Access Bank Plc, Guaranty Trust Holdings Company Plc (GTCO), United Bank for Africa Plc (UBA) and Zenith Bank Plc.

Analysis of the banks’ performance revealed that over the past two years, they continued to challenge the apex bank’s LDR policy which required lending to the real sector.

Apex bank announced in July 2019 an increase in the minimum required LDR to 60% from the end of September 2019.

After reviewing the results of the policy, the CBN decided to raise the ratio to 65%, which the banks had to meet by the end of December 2019.

The CBN by proposing the policy sought to trigger growth in a weak economy.

With the exception of Ecobank Nigeria which recorded 67.50% of LDR in the first half of 2021, against 70.10% in the first half of 2020, all the other level 1 banks declared an LDR lower than the 65% required by the CBN.

Specifically, Access Bank (Group) declared 51.70% of LDR in H1 2021, up from 50.70% in H1 2020, while Zenith Bank Plc (Bank) LDR fell to 61.60% in H1 2021, compared to 64.50% in the first half of 2020.

FBN Holdings’ (group) LDR rose to 51.70% in the first half of 2021, from 47.40% in the first half of 2020, while UBA’s LDR fell to 41.90% in the first half of 2021, from 43.20% in the first half of 2020.

In addition, GTCO (Group) declared 46.28% in the first half of 2021 against 49.42% in the first half of 2020.
Data obtained from CBN’s website by THISDAY showed that the Nigerian banking sector’s LDR stood at 61.97% in June 2021.

The last time the LDR exceeded the regulatory threshold was in December 2019, when it stood at 68.46%.
Lenders have been reluctant to extend credit to the private sector due to the country’s economic slowdown caused by the impact of COVID-19, which crippled the global economy between March and November last year and the price of oil which dropped to $ 29 in May 2020.

As a result, Nigeria entered a recession in the second quarter of last year, the second time in four years, before recovering in the fourth quarter.

Despite an aggressively growing customer base and a sustained increase in customer loans and advances, Teir-1 banks between 2019 and 2020 did not adhere to the CBN’s LDR policy.

Banks lost 8.3 trillion naira to the CBN as the umbrella bank continued to be tough on Nigerian creditors in 2020 as banks face penalties for the LDR ratio.

Further analysis of bank figures revealed that UBA among Tier 1 banks surveyed had the lowest LDR in the two years under review.

The Pan-African bank’s gross LDR fell to 43.20% in 2020 from 52.9% in 2019.

A reliable source at UBA said: “The LDR requirement relates to the Group’s operations in Nigeria and not the entire Group. Therefore, the estimate of LDR is for the purposes of CBN regulation intended for Nigerian businesses. UBA has increased its loans and deposits compared to the industry average in Nigeria over the past two years. “

The same LDR applies to other banks, as this report covers the data published by these banks during the period under review.

Access bank with 62.1% LDR in 2019 reported 50.7% in 2020, a decrease of 11.4% while GTCO’s LDR closed 2020 at 43.2% compared to 60.62 % reported in 2019.

For its part, FBN Holdings Plc declared an LDR of 46.8% in 2020 compared to 48% in 2019.

Commenting, Highcap Securities Limited Vice Chairman David Adnori said CBN’s application for 65% of LDR is a difficult task, stating that “loans are made to borrowers in accordance with the loan canon”.

He added: “Each bank has the particularity of lending to the real sector in terms of existing exposure to the client; how do these funds behave? In addition, the type of deposit they have available to extend loans to the real sector. Lending to the real sector is not something that can be regulated.

An analyst at PAC Holdings, Mr. Wole Adeyeye denounced the cautious level 1 banks regarding lending to the real sector in the context of the reduction in non-performing loans (NPL).

According to him, “most of these level 1 banks are cautious with the level of their non-performing loans and this is the reason why they have NPLs below 5%, which corresponds to the regulatory requirements of the CBN”.

The CBN had recently stressed that failure to meet the target would continue to attract additional reserve requirement drawdowns equal to 50 percent of the target LDR’s loan deficit.

“The CBN has noticed a remarkable increase in the size of gross credit deposit banks (DMBs) to customers. As a result, the CBN decided to maintain the minimum LDR of 65 percent in the interim. All DMBs are required to maintain this level and are further advised that average daily figures should be applied to assess compliance in the future.

“The incentive that assigns a weight of 150% with respect to loans to SMEs, personal loans, mortgages and consumer loans will continue to apply, while failure to meet the target will continue to result in a drawdown of additional liquidity reserves of 50%. of the target LDR credit deficit by March 31, 2020.

“DMBs (Deposit Money Banks) are further encouraged to maintain sound risk management practices in their lending operations. The CBN will continue to monitor compliance, review market developments and make other changes to the LDR as it deems appropriate, ”he said.

Also commenting, Enterprise Stockbrokers CEO Mr. Rotimi Fakeyejo explained that because the economy is in crisis, there are no good loans looking for funding.

According to him: “So if the banks are to lend, they have to lend to certain blue chip consumers. Banks need to determine if they have enough demand to meet this threshold. “

He also noted that banks have a large portion of their funds stored at the central bank as a cash reserve ratio (CRR), which puts a lot of pressure on them in terms of lending.

“Banks need to strike a balance between liquidity and deposit-to-loan ratios. These factors must be taken into account before meeting this requirement, ”he added.

CBN Governor Godwin Emefiele at the last Monetary Policy Committee (MPC) in September said the MPC noted an improvement in lending to the real sector following the introduction of the LDR in 2019. According to him: “Gross credit to industry increased from N6 0.63 trillion from N15.57 trillion at the end of May 2019 to N22.20 trillion at the end of July 2021. Credit growth has been largely recorded in the manufacturing, petroleum and oil sectors. gas and agricultural.

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