Our chart today shows the trend in net domestic credit extension on a q/q basis over the past two years. These are the claims of the monetary system (the CBN and the banks combined) on both the FGN and the private sector, which includes the state governments.
From the chart we can see the modest growth of lending to the private sector, together with the swings in claims on the FGN. The broader trend in money and credit aggregates has been a sharp increase in the net foreign assets of the system since Q2 2017, reflecting investor confidence in the economy.
The share of claims on the FGN and the private sector in total claims stands at about 20/80.
The growth in claims on the private sector has been modest because the banks have instead bought NTBs on a large scale. Rates on the 364-day paper were over 22% as recently as late August, when prime and maximum lending rates to the real economy were 18% and 31% respectively according to the CBN. The choice of FGN paper has been a “no brainer”.
Now that the rates on the 364-day paper are more than 600bps lower at auction, banks (and PFAs too) may wish to change their investment thinking.
For the banks, a core question is whether they can identify new lending targets where they are comfortable with the risk (and for which they have the necessary credit skills).
They like to join club deals where the risk is shared with their competitors. These deals can also go wrong but in our view their popularity with the banks reveals a “safety first” mindset.
We do, however, see some pick-up in real economy bank lending, perhaps low single-digit growth annualised, because the banks will be looking to replicate the high returns on NTBs they enjoyed most of last year.