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New CBN’s LDR policy may push up recovering NPLs in 2020—Codros Capital

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

However, according to a report released weekend by Codros Capital, “While the recent positive trend for the sector may be maintained through the rest of 2019, we are cautious about our outlook for NPLs given the expectation of increased risk asset creation in the face of the Loan-Deposit-Ratio policy action which will induce continuous credit extension.”

“In our view, 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% q/q to NGN15.48 trillion.

Analysts say with the rush to meet CBN’s new benchmark, banks may be dragged into giving some unprotected loans which may serve as basis for re-build up of NPLs in the Nigerian banking sector in the long run.

Besides, 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%, recently revised to 65.0%), weighed down on Banking stocks.

Consequently, the All-Share Index declined by 2.5% to 26,987.45 points, and settled the YTD return at -14.1%. Analysing by sectors, Banking (-3.9%) index recorded its largest decline since the week ended August 9, with the Consumer Goods (-4.9%), and Oil & Gas (-2.3%) indices following suit. Conversely, the Insurance (+5.7%) and Industrial Goods (+0.1%) were the only indices to post positive performances.

Experts at Codros Capital are of the view that “The trend witnessed through the year is likely to persist through the final quarter of the year, although we expect pockets of gains over the final months of the year as fund and portfolio managers realign portfolios prior to the start of 2020. “Nonetheless, we note that valuations remain attractive driven by price deterioration throughout the year. Hence, we advise that long-term investors consider appropriately timed investments.

On Money market, the capital market guidance group said “In line with our expectations, the overnight (OVN) rate moderated during the week, settling 5.86ppts lower week-on-week at 3.4% as the liquidity in the system improved. On the first trading day, the rate settled 0.50ppts lower at 8.8% given the open position of the market as liquidity from the prior week was sufficient for market players.

“However, by the second trading day after the public holiday, the rate increased by 4.36ppts at 13.1%. On the penultimate trading day, the rate pared by 3.50% as PMA and OMO maturities worth NGN596.34 billion hit the system.

“This week beginning Monday, October 7, 2019, OMO maturities worth NGN443.54 billion are expected to hit the system on the 10th of October. Given that we do not expect the CBN to intervene in the market with the same frequency over the coming week, we expect the OVN rate to settle lower week on week,” Codros Capital projected.