CASH SQUEEZE HITS BANKS AS NIBOR VOLATILITY SURGES

Nigeria’s inter-bank offer rate (NIBOR) volatility is surging as a combination of an all-time high cash reserve ratio (CRR) at 31 percent and multiple other Central Bank (CBN) regulations tighten money in circulation and place a strain on banking sector liquidity.

Interbank rates have averaged 19.2 percent in 2015 compared with their 12-13 percent average over the past two years.

They have also been quite volatile this year, sometimes exceeding
100 percent intra-day.

“Banks are feeling the pinch….through tight CRR, coupled with the implementation of the treasury single account (TSA), and the recent requirement for banks to provide the naira for CBN FX purchases 48 hours in advance,” Renaissance Capital Bank analysts, Adesoji Solanke and Olamipo Ogunsanya, said in a September 1 note.

NIBOR is an interest rate used among banks to lend each other money, ranging from spot to six months tenor, and it’s considered a useful proxy for liquidity in the Nigerian credit markets.

Renaissance Capital says based on the net interbank position of Nigerian lenders, the proportion of Treasury Bills (T-bills) in the securities portfolio and the weight of term deposits in the mix, higher interbank rates are net positive for GTBank, Zenith, UBA and Fidelity.

GTBank had on average 96 percent of securities in T-bills, Stanbic 91percent, Fidelity 78 percent and Zenith 71 percent of securities in T-bills.

On average, 91-day T-bill yields are up 180 basis points (bps) in 2015 to 13.6 percent, compared to 11.7 percent on average in 2014.

Nigeria’s interbank lending rates held steady at 8.25 percent on average, last week, on ample naira liquidity after the Central Bank declined to borrow funds at higher yields through its open market operations (OMO) bills from commercial lenders.

Banks balance with the Central Bank stood at N261 billion in credit on Friday, boosted by about N114 billion in matured treasury bills repaid on Thursday.

The secured Open Buy Back (OBB) remained unchanged at 8 percent, while overnight placement was also stable at the same level as last week, 8.5 percent.

“We see rates inching up gradually by next week, as the Central Bank moves to tighten liquidity,” one dealer said.

Dealers said the Central Bank may resort to debiting banks for cash reserve requirements (CRR) to cover for the last four week of arrears in its bid to reduce liquidity.

The CBN has increased the cut-off rate during its periodic open market operations (OMO) to 14 percent, from 13.7 percent, signalling higher rates. It has also been more aggressive in mopping up liquidity using OMOs.

Furthermore, the CBN is withdrawing $5.5bn of deposits linked to Nigeria Liquefied Natural Gas Company (NLNG) and the Nigerian National Petroleum Corporation (NNPC) from the banks; 50 percent of this amount is scheduled to have been withdrawn by end-August, with the balance potentially withdrawn by year-end.

Some banks may be negatively affected by the tight money supply expressed by higher NIBOR.

“Nigerian banks have had to contend in recent months with the slower economy and tightening bank liquidity. These are all credit negative for the sector. Since the beginning of August, public sector deposits, which represent around 8% of total system deposits, have exited the commercial banks and must be held at a single treasury account at the Central Bank. This adds pressure to liquidity,” Rating agency Fitch, said in an August 27 note.