Banks Shift Focus From Time Deposit To Attract Low Cost Deposits
Commercial banks are increasingly shifting their focus away from time deposits, to attracting low cost deposits from customers since the reduction in treasury bills yields, a report has stated.
This, according to the report is to enable them manage margin declines from the fall in treasury bill yields.
London-based Exotix Capital stated this in a report on Nigerian banks, after its analysts visited Lagos, where they met with six banks. The report was titled: “Notes from the field: Reasons to Be Positive.”
It explained that treasury yields have generally been declining in response to the Central Bank of Nigeria’s (CBN) less aggressive stance on liquidity tightening.
“For some banks, mix shifts (e.g. moving from large loans to smaller balances) could be a positive support for asset yields.
“The cost of funds is likely to fall in the second quarter (Q2) of 2018 as some of the expensive wholesale funding that the banks took on in October/ November 2017 matures.
“In addition, the cost of customer deposits has declined as current/savings account deposit collection has improved. Improving cost of funds is a key management objective for several of the banks.
Retail savers are being aggressively targeted to help achieve this goal.”
It revealed that one of the commercial banks that had been an active participant in the central bank’s swap scheme had indicated its willingness to roll-over its exposures.
“However, another indicated that its swap volumes were considerably lower than before.
“In any case, spreads on this business have declined, which will result in negative revenue momentum.
“However, the banks indicated that this can be offset by more customer-driven derivatives income.
“Corporate transactional activity has increased, and appetite for hedging has increased given the historical experience.
“Outsourcing is being adopted as a cost control tool, for example in relation to back-office processing/data centres, or to back-up generator capacity.
“We are also seeing banks taking a more focused approach; they are looking to be more active in the sectors where they have strengths and to de-emphasise other segments where they feel the competition/ growth/ risk profile is unfavourable.
“In general, the view on asset quality is that it should be stable to improving during the year. Accelerating loan growth and lower interest rates, allied to higher oil prices, are key positive drivers.
“In addition, loan books have now become seasoned – most exposures are around 3-4 years old. The biggest stresses in the loan book took place in 2016, but now borrowers are doing better.”
The report also pointed out that the application of technology had helped banks to lower theircustomer acquisition and transaction processing costs, potentially opening up a much larger retail customer base for the financial institutions.
It also predicted that banks were likely to move to an exchange rate of N360/$1 in their financial statement this year, which according to the report could lift their non-performing loans (NPLs) or provisioning needs.
The report noted the growth recorded by the economy as well as higher oil prices, even as it anticipated that there could be rate cut by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) prior to the election.
The main focus of the CBN’s liquidity management drive via its open market operations (OMO) last year was to control foreign currency demand.
“One of the key initiatives is utilising technology to get more people into the banking system, and to help generate cheaper and more stable current accounts.
“Banks are also embracing the use of agent networks to reach lower income customers more economically
“More recently, the CBN has been cutting naira liquidity as a means of protecting the currency in light of stronger foreign currency demand in recent weeks,” it stated.
The report acknowledged that foreign currency supply in the economy has improved significantly, compared with the first half of 2017, just as it noted the country’s improved tax receipts.
Presently, there are over 15 million individual taxpayers in the country.
It, however, attributed the key improvement in tax receipts in the country to revenue from the informal sector, adding that the Voluntary Assets and Income Declaration Scheme (VAIDS) had also created more avenues for tax compliance.
“One interesting topic of discussion was that once ownership of 9mobile is transferred, these NPLs could theoretically be pushed into the performing loan category.
“Effectively the old, non-performing loan would be de-recognised, and a new loan (to the new owner) would be put on the books.
“This would bypass the usual delay in moving NPLs to the performing category (which requires a sustained period of satisfactory performance),” it added.