Lenders find solace in bonds

SLOWDOWN: BANKS PUT FUNDS IN SECURITIES

Moody’s sees subdued growth in loans as virus elevates risks.

Measures by some African countries to get money flowing into the real economy aren’t working yet, with banks parking cash in government bonds as the economic slowdown cuts demand for credit.

Lenders have little choice but to invest in government securities as opportunities to deploy unprecedented amounts of liquidity provided by their central banks dry up. Lockdowns aimed at containing the spread of the coronavirus have brought trade to a halt, leaving lenders to focus on helping existing customers with payment holidays or loan restructurings.

“In this kind of environment, where you have weak economic activity and high-risk profile, it is very difficult to grow your loan book,” said Omotola Abimbola, an analyst at Chapel Hill Denham in Lagos.

Central banks in South Africa, Kenya, and Ghana have released billions of dollars from lenders’ balance sheets by easing measures on how much capital lenders need to set aside.

Deep interest-rate cuts means banks make less money on loans, while rising impairments and a reduction in fee and transaction income will also weigh on lenders’ earnings, said Moody’s Investors Service.

“At best, profitability will stay flat yearon-year,” said George Bodo, the chief executive officer of Callstreet Research and Analytics. “Credit risks were already elevated across the region. Covid-19 just exacerbated everything.”

While banks are required to hold a certain amount of high-quality liquid assets such as government securities, regulators in Nigeria, Kenya and Ghana have berated lenders for not doing enough to support their economies in the past.

Regulatory backlash

Profiting from the investments could result in a regulatory backlash, said Courage Martey, an Africa economist at Databank Group in Accra.

Nigeria’s central bank, which expects lenders to extend 65% of their deposits as credit, last month penalised those that failed to meet the target. Earlier this year, it limited transaction fees. And, in 2019, the regulator barred individuals and non-banking firms from buying short-term high-yielding bonds to stimulate lending for purposes other than market speculation.

Kenya in November scrapped a threeyear rule that limited interest rates banks can charge. In 2014, Ghana boosted the rates it charges banks to discourage them from borrowing to buy local Treasury bills and profiting from the difference in the rates.

In South Africa, where banks have a loan-to-deposit ratio of more than 90%, the Treasury, regulators and banks are working on a R200 billion loans guarantee programme backed by the government to further stimulate lending.

Nedbank Group chief executive Mike Brown said last week that liquidity in South Africa is stable as lenders buy government securities to meet regulatory requirements.

There has been a shortening in the duration of bonds being bought as banks position themselves for retail customers seeking to withdraw fixed deposits to cover their expenses, and businesses wanting to keep more cash on hand, he said.

The eight banks that buy bonds directly from the South African government bid for a record R30.8 billion at an auction on Tuesday.