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HomeEconomyBank stocks sell-off on CBN’s lending order may be overdone

Bank stocks sell-off on CBN’s lending order may be overdone

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Bank stocks have been selling off since the Central Bank of Nigeria (CBN) announced plans to force commercial banks to maintain a loan to deposit ratio (LDR) of 60 percent, or effectively lend at least 60 percent of their deposits to customers.

Investors, spooked by the potential downside of the July 3 order by the CBN, have largely sold some of the country’s largest banks.

The big lenders are down by an average of 2.19 percent since July 3.

Guaranty Trust Bank has been the biggest loser, after sliding by as much as 6.7 percent since July 3. First Bank follows with a 2.4 percent decline. United Bank for Africa (UBA) and Zenith bank are down 1.64 percent and 0.26 percent respectively.

Access Bank however has been unfazed by the new regulation.

Investors are interpreting the regulation by the CBN as negative for the banks and that has fuelled the sell-off.

Investors are well aware that there is a risk that the new regulation could lead to banks underwriting high-risk loans which could lead to further asset quality deterioration and destabilisation of the industry, at a time when the regulator has limited scope for further bail-outs.

However, Ronak Ghadia, Director of Sub-Saharan African Banks, at EFG Hermes research points out that based on conversation with the management team of some the banks, the LDR will be calculated using gross loans and not net loans as indicated earlier.

On this basis, the impact of the regulation will be even less than earlier estimates.

Access, FBNH and Zenith’s LDR ratios were already above 60 percent as at the First Quarter (Q1) of 2019, while GTB and Stanbic’s (Q1) 2019 LDRs were moderately below the threshold.

“UBA is the only bank with an LDR significantly below the regulatory threshold. Likewise, GTB and Stanbic would have to grow their loan book by a modest 1.5 percent and 0.5 percent respectively to meet the 60 percent LDR threshold while UBA would have to increase its credit portfolio by 8.8 percent, hefty but manageable,” Ghadia said in a July 9 note to clients.

On the upside, the sell-off could also serve as opportunities for bargain hunters to take advantage of the low price of bank stocks and take positions.

By LOLADE AKINMURELE

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