‘Banks’ earnings to drop over CRR increase for private sector deposit’

By NKIRUKA NNOROM

Commercial banks operating in  the country will likely report weak earnings at the end of 2014 financial year following continuous tightening of banking system liquidity by the Monetary Policy Committee.

Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management Limited, expressed the position at the Capital Market Correspondents Association of Nigeria, CAMCAN, forum in Lagos.

He said that cost of fund will also skyrocket in the nearest future as a result of the decision.

At the end of its meeting last week, the MPC retained the Cash Reserve Ratio, CRR, on public sector deposit at 75 percent, while that of the private sector was increased by 300 basis points from 12 percent to 15 percent.

He explained that the MPC decision has continued to constitute challenge to the capital market, saying that  is why  the equities market has gone down nine percent year-to-date.

Delivering a paper themed, “Investment Instruments in Nigerian Capital Market: risks and Benefits”, Chukwu added that the development has made the Nigerian capital market less attractive than what it used to be some years back. “With the consistent tightening of banking system liquidity through increases in deposit money banks’ cash reserve requirement on public funds to 75 percent and private sector funds to 15 percent, the available liquidity for lending and investment have been greatly reduced.

“Apart from the liquidity impact, this policy has also dampened banks’ income prospects, hence the cautious outlook on banks’ equities. With leaner cash for lending, banks’ lending rates have remained high at about 26 percent, which is a disincentive to real sector borrowing. Equities of non-bank companies are therefore faced with bearish outlook as business activities are challenged by non-availability of funds.”

He noted that the United States of America recently started tapering of its quantitative easing strategy, thereby signaling a likely yield in its longer tenured bonds, adding that this has kept foreign portfolio mangers on a watch out for eventual crystallization of the opportunity, hence increasing the volatility of foreign portfolio investments.

He further stated that the Nigerian capital market is still lacking in depth as ‘we don’t have instruments they have in other markets.’ He explained that complex securities like derivatives, Futures and options would require a lot of market operators’ education and investor enlightenment before they could be embraced.