The requirement for Nigerian banks to have a loan-to-deposit ratio (LDR) of at least 60 per cent at end-September is credit-negative for the sector, Fitch Ratings says.
We believe it will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or underpricing of risk.
The Central Bank of Nigeria (CBN) announced the measure on 3 July to stimulate lending and boost economic growth. Banks failing to meet the requirement will be penalised by having to deposit extra unremunerated cash reserves, equal to 50 per cent of their lending shortfall, at the central bank.
“Due to the new LDR requirement, we have raised our 2019 loan growth forecast to an average of 10 per cent for Fitch-rated banks, compared with one per cent growth in 2018.
Achieving the new LDR requirement in such a short timescale will be very difficult for some banks given their lending levels, particularly if customer deposits continue to grow at present rates. The sector’s overall LDR was 57 per cent at end-May, according to CBN data. This is low relative to many markets, and reflects banks’ concern about the risk to asset quality from Nigeria’s often volatile operating environment. Nigeria’s largest banks, with the exception of Access Bank, have LDRs below or close to 60 per cent and will be among the most affected by the new requirement.
It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards. Banks continue to struggle with high impaired and other problem loans, which is partly the cause for muted lending since 2016.
The present operating conditions are not conducive to loan growth, and rapid lending during the fragile economic recovery could increase asset-quality problems in the future.
