In its latest communique, the Central Bank of Nigeria (CBN) announced an increase in the minimum interest rate on savings deposits to 30% of the monetary policy rate (MPR), currently pegged at 14.0%. Thus, savings depositors would effectively get a minimum of 4.2% per annum on their investments (vs 1.4% previously). This material revision was linked to the satisfactory recovery of the economy from COVID-19-related concerns. We, however, believe that the adjustment may be linked to the apex bank’s prior stated objective to arrest demand side triggers of inflation via a tighter monetary policy stance.
In our view, the decision of the apex bank (taken in isolation, i.e. assuming other variables remain unchanged) slightly weakens the outlook for net-interest margins for our coverage banks and, by extension, earnings. This report, therefore, sensitizes the potential impact of the 2.8ppts increase in the minimum savings rate on the said banks. As shown in figure 1 below, FCMB is likely to be more exposed to a potential drag from the policy change, given that its likely additional interest cost burden represents 20.9% of our FY’22E earnings and 26.6% of FY’21 earnings. The least impacted is likely to be STANBIC because the additional drag may amount to only 3.1% of projected FY’22E earnings. Interestingly, the differing level of exposure for both banks reflects their contrasting strategies, with FCMB primarily driven by its core banking business and STANBIC by its non-core banking business.
Our analysis also revealed that the most susceptible banks are likely to be those whose Nigerian operations constitute a major chunk of their group performance and are primarily driven by core banking activities such as deposit mobilization and lending. Consequently, we see scope for a potentially higher burden on FCMB, FBNH and FIDELITYBK. In contrast, the relatively benign outcomes for ACCESSCORP, UBA, ZENITHBANK and GTCO likely reflect their robust Pan-African exposure and/or better non-interest income contributions.