LDR credit rush: Analysts warn of mid-long term economic downturn

FINAN CIAL ANA LYSTS HAVE EXPRESSED concern that the odds of a mid-long term economic downturn are higher as banks increase lending to riskier sectors in a bid to meet the 60 percent loanto-deposit deadline set by the Central Bank of Nigeria.

In a bid to boost economic growth, and curb banks’ interest in fixed-income investments, the Central Bank of Nigeria (CBN), mandated Deposit Money Banks (DMBs), to give out a minimum of 60 percent of their deposits as loans with effect from the 30th September 2019 or face sanctions.

Despite acknowledging the initiative as thoughtful and one to foster economic growth, analysts and operators told Business AM that banks, which have been risk averse all years are now being forced to become increasingly creative in handing out loans even to less creditworthy firms in a bid to meet the new LDR ratio, therefore increasing the possibility of an economic downturn or banking sector crisis.

“With this in mind, we have seen banks become increasingly open to giving out loans at little or no collateral requirements, at the same time, they have increased their advertisement in informing the public of their consumer lending products”, the analysts said.

According to data compiled by Bloomberg, riskaverse Nigerian banks have resisted lending to businesses and consumers and instead piled their cash into Naira bonds, which yield 14.3 percent on average, one of the highest rates globally.

An analysis of the audited financial statements of the top-tier lenders in the country, showed that Access Bank was the only one above the LDR margin, having an LDR of 66 percent

Guaranty Trust Bank Plc increased its credit to customers by N13.85 billion to N1.27 trillion as of June. With customer deposits of N2.42 billion, its LDR stood at 52.5 percent.

FBN Holdings Plc expanded its loan book by N59.42 billion in the first half of the year as loans and advances to customers rose to N1.74 trillion as of June 2019. With customer deposits of N3.58 trillion, the bank’s loan-to-deposit ratio stood at 48.6 percent.

United Bank for Africa Plc also cut its lending to customers by N27.78 billion to N1.69 trillion as of June. With customer deposits of N3.51 trillion, its LDR stood at 48.15 percent.

Zenith Bank Plc reduced its loan book by N21.28 billion to N1.80 trillion, while deposits from customers grew to N3.81 trillion in June from N3.69 trillion in December 2018. Its LDR stood at 47.24 percent.

Solomon Adewole, a stockbroker at Cashcraft Securities is concerned forcing banks to lend under the current macro-economic conditions and poor conditions of doing business in the country could backfire and lead to an increase NPLs, or could see banks reject customer deposits and cripple the banks and in turn the economy.

Adewole said, “I believe that under the current economic circumstances, this could lead to a build up in NPLs given the sluggish growth in the economy and the high risk in the operating environment and pose a risk to financial stability. Apart from the fact that margins of banks may suffer a squeeze if lending redirects to the real sector, high NPLs will also directly affect the profitability of banks, which could affect the economy at large, because, banks will continue giving out loans or reject deposits just to be on the safe side of the LDR.

“In terms of capital adequacy ratio (CAR), banks that are already close to their regulatory minimum of 10 percent for National banks, 15 percent for banks with International subsidiaries and 16 percent for SIBs, which are not even being enforced currently, aggressive loan growth will impact capital. However, with a more favourable economic climate and improved infrastructure, the SME sector should see growth, and with less stringent CRR rules, the new guidelines may trigger a boost in the real economy,” he said

According to Tinuade Akinyemi, a fixed income and currency specialist, stated that while the policy is set to increase loan to the real sector, the banks are left to pay the consequences of a bad debt and the increasing scramble to loan out funds could lead to banks’ debt increase, could see the banking system fail.

“The economic implication of the new regulatory requirement is that DMBs will have to reduce their investment in debt securities while diverting funds to higher risk loan assets. However, this is perceived to mixed consequences as it would increase risk assets and potential income, but at higher levels of potential impairments, which would reduce bottom-line profit. The risk in this is that banks might have to abandon the directive to save their business or we might be looking at a potential banking system failure,” she said.