CBN’s 60% LDR: We have commenced commercial credit growth – GTBank

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As the deadline for Central Bank of Nigeria (CBN) 60 percent Loans-to-Deposits (LDR) beckons, the management of Guaranty Trust Bank plc (GTBank) has said   it planned to commence commercial credit growth to meet the regulatory body requirement.

Our correspondent gathered that GTBank as at half year ended June 30, 2019 audited result and accounts reported 49.9 per cent LDR at the Group lelvel from 53.55 per cent, while the Bank, closed the period with 57.9 per cent.

The CBN in a circular in June was incentivising Commercial banks to focus on Small and Medium Enterprises (SME), retail banking, mortgage and consumer lending in particular, by assigning a weight of 150per cent to these segments when computing banks’ LDRs for the 60per cent target.

The CBN had directed that banks must to have a LDR of at least 60per cent at end-September 2019 and announced that the measure will stimulate lending and boost economic growth.

Finance experts noted that the SME and retail banking segments tend to be riskier for banks, and Nigeria’s mortgage market is in its infancy.

Responding to Nigerian NewsDirect enqurie on the group LDR’s decline from 53.55per cent in 2018 full year ended to 49.9 per cent, the lender in an email response, said, “We wish to state that the Bank has already commenced credit growth and will ensure that our LDR is close to or surpass the regulatory target of 60per cent through continued loan growth to identified quality names.”

The lender explained further that, “the LDR of 49.94per cent  cited in your email relates to net Loans to total deposits (Deposits from banks and deposits from customers) at the Group Level.

“The LDRs target of 60per cent as stipulated by the CBN is applicable to the Parent (Nigeria) alone and the ratio is computed as the ratio of Gross loans to Deposits from customers.

“As at June 2019, the Bank closed with an LDR of 57.9per cent which represents the ratio of the Bank’s Gross Loans of N1.149trillion to Customers’ deposits of N1.983trillion.

“The ratio of 57.9 per cent has not taken into consideration the 1.5 multiple for SME, retail, mortgage and consumer lending.”

Fitch rating had explained that exception of Access Bank Plc, other Tier-1 banks operating the country  have LDR below or close to 60 per cent and will be among the most affected by the new requirement.

The report by Fitch rating said, the CBN move would bring a credit-negative for the banking sector, stressing that, “We believe it will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or underpricing of risk.”

Fitch rating said, “Due to the new LDR requirement, we have raised our 2019 loan growth forecast to an average of 10per cent for Fitch-rated banks, compared with one per cent growth in 2018.

“Achieving the new LDR requirement in such a short timescale will be very difficult for some banks given their lending levels, particularly if customer deposits continue to grow at present rates. The sector’s overall LDR was 57per cent at end-May, according to CBN data.

This is low relative to many markets, and reflects banks’ concern about the risk to asset quality from Nigeria’s often volatile operating environment. Nigeria’s largest banks, with the exception of Access Bank, have LDRs below or close to 60per cent and will be among the most affected by the new requirement.

“It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards. Banks continue to struggle with high impaired and other problem loans, which is partly the cause for muted lending since 2016.

“The present operating conditions are not conducive to loan growth, and rapid lending during the fragile economic recovery could increase asset-quality problems in the future. Chasing loan growth could also weaken banks’ profitability if they cut margins to attract customers, and because of the need to set aside expected credit loss provisions under IFRS 9 when loans are originated.

“Despite the difficulty of sourcing rapid loan growth and the risks it entails, we expect banks to make a big effort to achieve the 60 per cent target given the severity of the penalty for missing it. Depositing cash at the central bank is highly unattractive for banks as they receive no interest on it, in stark contrast to the high yields they can earn by holding Nigerian T-bills and government bonds.”

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