Fitch: Nigerian T-Bill Boost to Bank Margins May Be Temporary

Fitch, a rating agency, has said that very high Nigerian Treasury Bill yields are helping banks to maintain their margins, but noted that the boost to net interest income may be temporary, Reuters reports.

It added that banks have been investing heavily in T-Bills since 2H16, boosting interest income and maintaining margins.

Margins reported by Fitch-rated Nigerian banks averaged 7.5% in 1H17, in line with 1H16. But the boost to net interest income may be temporary, as T-Bill yields have reduced in recent weeks, falling to about 15.5% from their mid-year levels of just over 18.5%, and they may decline further.

High yields on T-Bills are part of the Nigerian authorities' attempts to control inflation and manage demand for foreign currency. By providing a remunerative, relatively low-risk, naira-denominated investment (interest payments are tax-free), they hope to encourage naira retention and dampen demand for US dollars.

Central Bank of Nigeria (CBN) data show that volumes of naira time and savings deposits held by the banking sector fell 8.7% to NGN11.7 trillion (USD38 billion at the official exchange rate) during the 12 months to end-July 2017, as depositors switched to T-Bill investments. T-Bill yields are still considerably higher than savings deposit rates, which are capped at 30% of the monetary policy rate, currently 14%.

Large, systemically important banks are holding on to their deposits, but many second-tier and smaller banks are seeing deposit outflows and almost all banks are reporting an increase in deposit funding costs.

The CBN recently raised the minimum T-Bill purchase amount to NGN50 million (USD164,000) from NGN5,000. This should stem the outflow of small retail depositors, but is unlikely to have a significant impact on overall deposit flows because most Nigerian banks are majority-funded by corporate deposits.

For now, high yields on banks' investments in T-Bills are offsetting the rise in their funding costs and compensating for the scarcity of opportunities for profitable new lending to the private sector.

Lending opportunities have been constrained by weak economic growth, continued soft oil prices and sluggish consumer demand. High cash reserve requirements (CRRs) on naira deposits, currently set at 22.5%, are also a constraint on lending.