Between NDIC and AMCON: Recalibrating Regulatory Roadmaps
Investors bother about earnings rather than asset size, which is the primary cause of the value variance observable amongst Nigerian banks. For Analysts, earnings forecasts take precedence over assets, making the banks’ earnings to Loan Asset ratio an essential pointer to the market value of banks. If the CBN tightens up liquidity so much through its discretionary cash reserve requirement (CRR) deposits available for lending reduces, the banks earn less from their primary business of creating credit; they would record a reduced bottom line and consequently a declining share price.
Another reason for the share price discrepancies that characterise Nigerian banks is the ambiguity around loan asset quality. Looking at the impairment provisions is the most straightforward strategy since the more requirements for credit loss, the lower the anticipated rate of loan assets. This would apply whether or not net assets increase, higher impairment charges would hurt net earnings and bring down share prices.
Analysts have also observed that many times, banks have relatively low loan assets (below the CBN’s statutory loan-to-deposit (LDR) ratio of 65%), which might also have an impact on their loan-to-total assets ratio, which would cause CMOs to discount their share prices likely. The third explanation for lags between share price fluctuations and net assets is the larger ratio of loans and advances to total assets.
The interest spread for many Nigerian banks is narrow. This is particularly the case with the Tier two banks whose business is mainly funded at an exorbitant cost at the inter-bank market. Given their vast net interest expense, such banks must catch up on operating costs to be profitable. It is related to the misalignment or disintermediation between the bank’s deposit and loans. For instance, where a bank has a relatively low number of Current Accounts Savings Accounts (CASAs), the profit margin is less because the interest paid on term deposits is higher, and the net interest Margin is closed out. Market intelligence suggests that for the average bank, the priorities should be to optimise earnings and increase deposits available for lending, at the heart of which lies the disruptive charges of NDIC, AMCON, and the CRR discretionary debit
