Credit Growth Likely to Weaken on Naira Depreciation


Obinna Chima

Given the depreciation of the naira exchange rate and the liberalisation of the forex market, credit growth is likely to remain subdued this year, a report has stated.
Given the relatively weaker macro environment, the report, “Nigerian banks -Life after ’40,” by Renaissance Capital Limited, stated that many of the banks had guided for muted loan growth in 2016.

Some banks had factored in the impact of naira depreciation in their forecasts.
“We expect core credit growth to remain subdued in 2016, and think the impact of depreciation will be the main driver of nominal credit growth. Based on our estimates, forex loans accounted for about 46 per cent of sector loans in full year 2015.

“Using this as the basis of our analysis, we estimate that naira depreciation to N300/$ could result in average nominal loan growth of 23 per cent in 2016. We expect this to be highest at FBN Holding, GTBank, Diamond and the United Bank for Africa Plc (UBA), given that they had the highest proportion of group loans in forex as at full year 2015, at 59 per cent, 50 per cent, 50 per cent and 49 per cent, respectively,” it added.

In the light of this, analysts at RenCap stated that they anticipated nominal loan growth of about 29 per cent at FBN Holdings and about 25 per cent at the other three banks mentioned above.

“That said, GTBank mentioned that the loan book dipped in second quarter 2016 owing to some significant pay-downs, so nominal growth could come in lower than we estimate; UBA is expecting loan growth (including depreciation effects) in the mid-to-high teens. In our models, we assume an exchange rate of N285/$ by year-end.

“We also expect a weaker currency to inflate deposit growth, although the impact would be lower than on the credit side, given that most banks have a relatively lower proportion of their deposits in FX versus loans. Based on our estimates, FX deposits represent about 29 per cent of total deposits, translating to an average nominal growth rate of 15 per cent using an exchange rate of N300/$.
“UBA, Access and Diamond should see their deposits grow the most, considering they had 46 per cent, 36 per cent and 32 per cent, respectively, of their total deposits in FX as at full year 2015,” it added.

Commenting on the Central Bank of Nigeria’s (CBN’s) decision to clear the N4.6 billion backlog of FX demand ($0.532 billion settled at spot, with $4.02 billion settled using one- to three-month forward rates), at a rate of N280/$, it stated that central bank’s decision to sterilise the naira equivalent of the forward transactions was unexpected and as such liquidity strain pushed the NIBOR overnight rate to as high as 120 per cent last week.

“From our discussions with the banks, we understand that system liquidity is tight, with only a few net placers in the market. Given the nature of the Nigerian money markets, this could be short-lived, as monthly inflows from the Federal Accounts Allocation Committee (FAAC) should help. That said, liquidity ratios have come under some pressure and we broadly expect that interest rates should directionally trend higher in second half of 2016.

“We believe the argument for tighter monetary policy is stronger in the current environment – greater upside risks to inflation following naira depreciation, coupled with the fact that the Monetary Policy Committee (MPC) has a greater incentive to increase yields to attract foreign portfolio inflows (FPI).

“Consequently, we expect to see some level of tightening at next month’s MPC meeting. Should we see a movement in the monetary policy rate (MPR), we think the banks could struggle to pass this on fully to customers, given the weak macro environment, and any re-pricing of loans would likely be on a selective basis.

“On the back of this, we expect asset yield improvements to be driven more by rising yields on liquid assets. Funding costs will also creep higher, as rates on term deposits track yields on government securities, offsetting some of the asset yield improvements,” it added.