Stocks Rebound, Bond Yields Fall as Positive Sentiment Trails CBN Rate Cut

The markets reacted positively to the decision by the Central Bank of Nigeria (CBN) to slash the benchmark monetary policy rate (MPR) TO 11 per cent for the first time in six years, with the stock market halting its seven-day losing streak.

The Nigerian bourse appreciated by 0.53 per cent after declining to the lowest level since February 2015 on Tuesday. Just the same, the Nigerian Stock Exchange (NSE) All-Share Index closed higher at 27,743.92 yesterday while market capitalisation added N50.1 billion to close at N9.53 trillion.

Four of the five sectoral indicators appreciated – the NSE Banking Index gained 1.05 per cent while the NSE Industrial and Consumer Goods Indices rose by 0.63 per cent and 0.06 per cent respectively.

Similarly, yields on the most liquid five-year bond fell 264 basis points to a five-year low of 7 per cent while the benchmark 20-year bond closed 150 basis points lower at 10.8 per cent yesterday.

Bond yields had traded above 11 per cent across maturities prior to Tuesday’s rate decision, with the 2034 bond trading at 12.30 per cent.

The CBN on Tuesday also reduced the cash reserve requirement (CRR) from 25 per cent to 20 per cent and changed

the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points.

The CBN Governor, Mr. Godwin Ifeanyi Emefiele, at the end of the meeting of the Monitory Policy Committee (MPC) explained that the committee evaluated various options for ensuring increased credit delivery to the key growth sectors of the economy, capable of generating employment opportunities and improving productivity and growth.

But he pointed out that the liquidity to arise from the reduction in the CRR to 20 per cent would only be released to the banks that were willing to channel it to employment-generating activities in the economy such as agriculture, infrastructure and solid minerals.

He said the committee also underscored the need for banks to ensure that measures taken by the central bank to inject liquidity and stimulate the economy adequately translates into increased lending to sectors with sufficient employment capabilities and the potential to generate growth.

To an analyst at Ecobank Nigeria, Mr. Olakunle Ezun, the MPC’s decision to cut the MPR by 200 basis point was significant, saying that it will have a far-reaching impact on assets pricing, which would likely set a new direction that aligns with the CBN’s monetary easing outlook.

“We expect an initial downward movement of approximately 200bp on asset pricing, which implies that the current bond yields of 9-10 per cent on short to medium term tenured bonds might trend downwards between 6-8 per cent, while the long end of the curve might stabilise around 8-10 per cent.

“While we do not expect significant changes in treasury bills yields (currently it trades between 4 to 6 per cent), the asymmetric interest rate corridor around the MPR might reduce and re-align the 364-day treasury bills yields around the standing deposit rate of 4 per cent,” he added.

Ezun was of the view that by cutting the MPR, “it weakens the holding status on naira-denominated bonds: domestic investors would likely reconsider their portfolio holdings structure of naira denominated bonds in the light of current inflation rate (with inflation at 9.3 per cent year-on-year in October 2015, current nominal yields of 10-12 per cent on short to medium term government securities provide real returns of between 2-3 per cent)”.

“They might need to reassess portfolio composition in order to minimise any potential losses arising from the rise in bond prices.

“By reducing the CRR to 20 per cent, it helps to inject at least five per cent liquidity into the system, which will possibly increase market liquidity to about N950 billion. In the immediate-term, we expect interbank rates to remain low, and possibly trend towards negative in the short-term.

“This is expected to boost lending to the selected sectors of the economy with the potential for employment creation,” he said.

A note from CSL Stockbrokers Limited also said that in the short term, it anticipate little impact on the currency, as the administrative measures put in place by the CBN would likely limit the extent to which additional liquidity finds its way to the forex market.

“However, over the longer term, easier policy will likely lead to greater demand for imports and place depreciatory pressure on the naira. If the CBN does not relax the restrictions on the forex market, we are likely to see foreign exchange reserves start to decline again (having been relatively stable at around a headline level of US$30bn for several months), which will likely pose a threat to macro stability and Nigeria’s sovereign profile.

“In other words, whereas we had previously believed that the CBN would be able to hold the interbank rate at N200.00/US$ without using the reserves to defend the currency, we now believe that some currency depreciation will be necessary on a six to nine months time horizon to keep the economy stable and the external accounts on a sustainable footing,” CSL said.

On the impact on banks’ balance sheets, the sub-Saharan Africa banking analyst at Renaissance Capital, Adesoji Solanke, said that in the light of the MPC decisions, interest rates would clearly remain low for longer, which according to him implied that the fourth quarter 2015 margin pressure would continue into 2016.

“For the banks, we need to be asking questions around capital levels, forex mix, treasury book duration and structure, margin dynamics around funding costs and asset yields, etc, to try to paint a realistic picture of what 2016 could look like.

“Some banks would have significantly more funding cost benefits than others, while some are better shielded from asset yield pressure given their loan/asset penetration levels.

“Further, the classic Tier 1 banks (FBNH, Zenith, GTBank and UBA) that typically operate with significant excess liquidity on their balance sheets could face considerable margin pressure given the low yield environment, while some banks such as Access Bank and Stanbic could benefit more from lower funding costs vs. peers while dealing with systemic asset yield pressures,” he added.