CBN’s loan on deposit ratio may spell doom bank warned

Financial analysts have warned that commercial banks haste to meet up with new Loan-Deposit-Ratio policy action of 65 per cent may portend danger for banking sector Non-Performing loans in the coming years.

Already, the Nigerian equities market suffered its worst week since April, as the impact of the CBN’s punitive measures on 12 banks for failing to meet the new LDR floor (previously 60.0 per cent, recently revised to 65.0 per cent), weighed down on Banking stocks.

Consequently, the All-Share Index declined by 2.5 per cent to 26,987.45 points, and settled the YTD return at -14.1 per cent.

Analysing by sectors, Banking (-3.9 per cent) index recorded its largest decline since the week ended August 9, with the Consumer Goods (-4.9 per cent), and Oil & Gas (-2.3 per cent) indices following suit. Conversely, the Insurance (+5.7 per cent) and Industrial Goods (+0.1 per cent) were the only indices to post positive performances.

According to the analysts, with the rush to meet the new benchmark, banks may be dragged into giving some unprotected loans which may serve as basis for re-buildup of NPLs in the Nigerian banking sector in the long run.

Recall that the non-performing loans (NPL) dipped by 14.1 per cent q/q, thereby setting the stage for a 148 bps decline in the sector’s NPL ratio to 9.3 per cent (Q1-19: 10.8 per cent), this is the first time sector NPLs have settled in the single-digit territory since Q4-2015.

Analysts at Codros Capital argued that given the weak macroeconomic environment and the risk of economic pressure over the short-term, there might be an uptick in NPLs in 2020.

Already, data from the National Bureau of Statistics’ (NBS) Selected Banking Sector Data report for Q2-19, gross loans reported in the Nigerian banking sector declined by 0.4 per cent q/q to NGN15.48 trillion.

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