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The New CBN Interest Rates on Savings – The Potential Impact

The Central Bank of Nigeria CBN in a circular dated August 15, 2022, said it has revised interest rates from previously 10 percent to 30 percent of the Monetary Policy Rate (MPR).

Implications for Depositors

This means that savings depositors would receive a minimum return on their funds of 4.2% annually (as opposed to 1.4% earlier). This significant change can be attributed to the economy’s
satisfactory recovery from COVID-19-related issues. However, we believe that the
adjustment may be related to the Central bank’s earlier stated goal of halting demand-side
inflation triggers through a tighter monetary policy stance (this upward adjustment coming
after the rate hikes of 250bps in the last two MPC meetings). With headline inflation for Jul’22
printing at 19.64%, representing its highest level about 17 years ago, the CBN has adopted
an additional measure to dampen the money supply and incentivize savings.

By employing this ‘contractionary’ policy, the CBN can mop up excess liquidity, potentially
driving sector investment. In the short term, we expect banks to favour asset quality. Also,
the financial system, notably the commercial banks would be directly impacted by this
policy, given that the increased cost of funds will accompany the expectant increase in
deposit rates. Concerns about this policy’s effectiveness and its impact on demand, which
could further reduce circulation and worsen the unemployment level in an already fragile
economy, are two additional adverse risks.

Implication for Banks

The potential effects of the 2.8% increase in the minimum savings rate tend to differ on
commercial banks. FCMB is likely to be more vulnerable to a potential drag as it constitutes
about 26.6% of FY’21 earnings and 20.9% of our FY’22E earnings, STANBIC, on the other
hand, is likely to be least affected because the additional drag may only represent about 3.1%
of anticipated earnings for FY’22E. Notably, the two banks’ different levels of exposure
reflect their divergent business models, with STANBIC primarily driven by its non-core
banking business and FCMB by its core banking operation.

Additionally, our analysis showed that the most vulnerable banks are probably those whose
Nigerian operations account for a sizeable portion of their overall profitability and are
predominantly fueled by core banking activities including deposit mobilisation and lending.
FCMB, FBNH, and FIDELITYBK are likely to be more vulnerable. However, the relatively mild
impact for ACCESSCORP, UBA, ZENITHBANK, and GTCO is probably due to their substantial
Pan-African exposure and/or better non-interest income contributions.

Overall, in the long term, we believe there will be potential net gains. While there is a
possibility of an increased interest income for banks going forward on the increased cost of
funds, the listed banking companies may experience a decline in Net Interest Margin (NIM)
in Q3-2022 q/q vs Q2-2022 as a result of the rise in funding costs. Additionally, the CBN may
raise MPR rates further in response to the anticipated rise in inflation, which would put
additional pressure on banks’ funding costs