Exception of Access Bank, largest banks have LDRs below 60% – Fitch Rating

Motolani Oseni

Fitch Rating has disclosed that, exception of Access Bank Plc, other large banks in Nigeria have Loan-to-Deposit Ratio (LDR) below or close to 60per cent and will be among the most affected by the new requirement.

This is coming on the heels of Central Bank of Nigeria (CBN) directive that required banks to have a LDR of at least 60per cent at end-September 2019.

The report by Fitch Rating disclosed that the CBN move will bring a credit-negative for the banking sector, stressing, “We believe it will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or underpricing of risk.”

The apex bank announced that the measure will stimulate lending and boost economic growth.

Banks failing to meet the requirement will be penalised by having to deposit extra unremunerated cash reserves, equal to 50per cent of their lending shortfall, at the central bank.

Fitch rating said, “Due to the new LDR requirement, we have raised our 2019 loan growth forecast to an average of 10per cent for Fitch-rated banks, compared with one per cent growth in 2018.

“Achieving the new LDR requirement in such a short timescale will be very difficult for some banks have given their lending levels, particularly if customer deposits continue to grow at present rates. The sector’s overall LDR was 57per cent at end-May, according to CBN data.

“This is low relative to many markets, and reflects banks’ concern about the risk to asset quality from Nigeria’s often volatile operating environment.

Nigeria’s largest banks, with the exception of Access Bank, have LDRs below or close to 60per cent and will be among the most affected by the new requirement.

“It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards.

Banks continue to struggle with high impaired and other problem loans, which is partly the cause for muted lending since 2016.

“The present operating conditions are not conducive to loan growth, and rapid lending during the fragile economic recovery could increase asset-quality problems in the future.

Chasing loan growth could also weaken banks’ profitability if they cut margins to attract customers, and because of the need to set aside expected credit loss provisions under IFRS 9 when loans are originated.

“The CBN is incentivising banks to focus on SME, retail, mortgage and consumer lending in particular, by assigning a weight of 150per cent to these segments when computing banks’ LDRs for the 60per cent target.

The SME and retail segments tend to be riskier for banks, and Nigeria’s mortgage market is in its infancy”, the report stated.