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CBN Reviews LDR Target Upwards To 65%


…Banks required to attain LDR of 65% in 3 Months

In furtherance for deposit Money Banks (DMBs) to support the real sector, the Central Bank of Nigeria (CBN) has reviewed its Loan-to-Deposit (LDR) policy target of 60 per cent to 65 per cent by December 31, 2019.

In a bid to drive lending to the real sectors, the CBN in July directed all DMBs to maintain a minimum of 60 per cent LDR by the end of September 2019.

The circular signed by Director of Banking Supervision, CBN, Mr. Ahmad Abdullahi had noted banks “failure to meet the minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target LDR.”

However, the CBN in its latest circular obtained by our correspondent on Tuesday noted appreciable growth in industry gross credit to real sector by 5.33 per cent, maintaining that DMBs must continue to strengthen their risk management practices particularly with regards to their lending operations.

According to the circular, “CBN has noted the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33 per cent from N15.56 trillion at end-May 2019 to N16.39 trillion as at September 26 2019 following its pronouncements on the above initiative.

“In order to sustain the momentum and in line with the provisions of our earlier letter the minimum Loan to LDR target for all DMBs is hereby reviewed upwards from 60per cent to 65per cent.

“Consequently, all DMBs are required to attain a minimum LDR of 65per cent by December 31, 2019 and this ratio shall be subject to quarterly review.

“To encourage SMEs, Retail Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150 per cent computing the LDR for this purpose.”

The circular noted that “DMBs failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50per cent of the lending shortfall implied by the target LDR.

“The CBN shall continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe. sound and resilient financial system.

“This letter is with immediate effect.”

Exceptional of Access Bank Plc with 65.6 per cent LDR as at half year ended June 30, 2019, other Tier-1 banks have the required ratio below the apex bank requirement.

Findings revealed that Guaranty Trust Bank (GTBank) with 49.94 per cent for parent company as at H1 2019 is considering credit growth to surpass the regulatory target of 60 per cent.

According to the bank, “As at H1 2019, the Bank closed with an LDR of 57.9 per cent which represents the ratio of the Bank’s Gross Loans of N1.149trillion to Customers’ deposits of N1.983trillion.

 “The ratio of 57.9per cent has not taken into consideration the 1.5 multiple for SME, Retail, Mortgage and Consumer Lending.

“We wish to state that the Bank has already commenced credit growth and will ensure that our LDR is close to or surpass the regulatory target of 60per cent through continued loan growth to identified quality names,” the company explained in a statement.

However, United Bank for Africa Plc (UBA) reported 48.05 per cent LDR in H1 2019 while Zenith Bank plc reported 51.2 per cent.

In addition, FBN Holdings Plc reported 52.6 per cent LDR as at H1 2019, our correspondent can report.

Fitch Rating explained that exception of Access Bank, other Tier-1 banks operating the country have LDR below or close to 60per cent and will be among the most affected by the new requirement.

The report by Fitch Rating said, the CBN move would bring a credit-negative for the banking sector, stressing that, “We believe it will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or underpricing of risk.”

Fitch rating noted that, “Due to the new LDR requirement, we have raised our 2019 loan growth forecast to an average of 10per cent for Fitch-rated banks, compared with one per cent growth in 2018.

“Achieving the new LDR requirement in such a short timescale will be very difficult for some banks given their lending levels, particularly if customer deposits continue to grow at present rates. The sector’s overall LDR was 57per cent at end-May, according to CBN data.

“This is low relative to many markets, and reflects banks’ concern about the risk to asset quality from Nigeria’s often volatile operating environment. Nigeria’s largest banks, with the exception of Access Bank, have LDRs below or close to 60per cent and will be among the most affected by the new requirement.

“It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards. Banks continue to struggle with high impaired and other problem loans, which is partly the cause for muted lending since 2016.

“The present operating conditions are not conducive to loan growth, and rapid lending during the fragile economic recovery could increase asset-quality problems in the future. Chasing loan growth could also weaken banks’ profitability if they cut margins to attract customers, and because of the need to set aside expected credit loss provisions under IFRS 9 when loans are originated.

“Despite the difficulty of sourcing rapid loan growth and the risks it entails, we expect banks to make a big effort to achieve the 60per cent target given the severity of the penalty for missing it. Depositing cash at the central bank is highly unattractive for banks as they receive no interest on it, in stark contrast to the high yields they can earn by holding Nigerian T-bills and government bonds,” the report by Fitch Rating explained.


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