Implications of CBN’s Five-Year Policy Thrust

June 25, 2019/FBNQuest Research

Event: CBN unveils five-year policy thrust aimed at supporting Nigeria’s macro-economic growth and development.

Implications: Banks’ capital buffers to be strengthened by proposed recapitalisation, but risk ROAE dilution

Yesterday, the CBN governor unveiled his policy thrust for the next five years. Although the policy document outlines a number of objectives, the most important ones include

  1. a) the aim to achieve double-digit GDP growth in the next five years,
  2. b) bringing down inflation to single-digits
  3. c) improving the payment systems infrastructure and driving financial inclusion to 95% by 2024,
  4. d) maintaining the existing exchange-rate policy regime of a managed float and
  5. e) recapitalisation of the banking industry. 

We believe that the proposed recapitalisation of Nigerian banks could have far reaching implications for the banks and the entire financial sector. No specific numeric target was disclosed by the governor. However, broadly speaking, it is a double-edged sword. While on the one hand, enhanced capital buffers will translate to improved stability of the financial sector, adding capital by extension will likely result in a reduction in banks’ ROAEs post-recapitalisation. It is impossible to provide extensive commentary on the ROAE reduction risk given the absence of a numeric recapitalisation target.

However, assuming the banks are required to increase their capital base by c.N50bn i.e. an absolute increase, and credit extension remains within our forecast trajectory, we expect to see an average ROAE reduction of c.100bps. A relative increase is more likely, keeping with the Basel Accord trends. All things being equal, Nigerian banks should be able to take on transactions of larger sizes. We also expect the drive for financial inclusion by the CBN and the imminent kick-off of payment service banks (PSB) to result in pressure for the banks on the e-payment front due to increased competition from Telco-backed PSBs. We should add that the financial inclusion target appears aggressive.

While the CBN’s objective of achieving double-digit growth is laudable, a potential downside risk to this is a slump in oil prices, particularly against the backdrop of limited diversification of government revenues. We also see the nation’s weak infrastructure base as a possible limitation. In addition, we believe that greater discipline is needed on the fiscal side to achieve this objective.

Given the success recorded by the CBN on exchange rate stability since the introduction of NAFEX in April 2017, it is no surprise that the Bank has chosen to maintain its current “managed float” regime. We do not expect unification of rates or a move to a free float any time soon.


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