Cut in savings interest: Bank customers to consider alternative investments


By Joshua Elekwachi, Abuja

Following the Central Bank of Nigeria (CBN) reduction on local currency savings interest, analysts have expressed that banks customers might consider investing in other alternative asset classes such as equities market, among others.

A top bank director in the country explained to Nigerian NewsDirect that the implication of the CBN policy is going to lead to lower interest rates and lower cost of funds, which eventually might translate to better profit in the short term for banks.

He was quick to add that, “But then, bank customers will move from savings and probably buy foreign exchange or go to smaller microfinance banks to deposit their funds.”

The CBN on Monday directed banks not to pay less than 1.25per cent in interest on savings deposit accounts.

According to a circular signed by Director of Banking Supervision, CBN, Bello Hassan, on Monday, the implementation will take effect on September 1, 2020.

The circular stated that the bank is satisfied with the recent declining trend in market rates in the banking sector following the implementation of policies aimed at stimulating credit flow to the real sector.

It added that the interest rate will be negotiable, subject to a minimum of 10 per cent per annum of Monetary Policy Rate., which serves as the apex bank’s benchmark rate for lending in the financial services sector which is at 12.5 per cent.

“In line with recent market developments, the ‘Bank has reviewed the minimum interest payable on savings deposits as provided in its Guide to Charges by Banks’ consequently reviewing rates to 10% of Monetary Policy Rates.

“Consequently, all deposit money banks are hereby informed that effective September 1, 2020 interest on local currency savings deposits shall be negotiable subject to a minimum of 10% per annum of Monetary Policy Rate,” the circular read in part.

Responding, analysts at FBNQuest Research in a report on Tuesday said, part of the implication is slight reduction in banks’ funding cost, adding that the negative real interest rate on customer deposits widens.

They expressed that, “We note that two of such policies rolled out by\ the CBN – the exclusion of non-bank corporates from participating in OMO auctions and the increase in banks’ minimum loan-to-deposit (LDR) ratio to 65per cent – have been particularly effective in exerting downward pressure on interest rates.

“Broadly speaking, given that savings deposits account for around 20 per cent of the deposit liabilities of commercial banks, the new directive should be positive for banks in terms of a slight reduction in their overall cost of funds.

“All else being equal, our back of the envelope calculations indicate that on average, the cost of funds for our universe of banks could potentially decline by around 50basis points in Q4.

“In terms of earnings impact, we estimate an average increase of around eight per cent in the 2020 PBT for our banks universe. Banks with already low cost of funds such as GTBank and Zenith will benefit the least from the interest rate reduction.

“However, given the stringent rules around interest on savings, we doubt that the impact will be that material. Our reason is simple.

“Statutory provisions indicate that customer savings accounts will be ineligible for (monthly) interest rate payments in any month where a customer makes more than 4 withdrawals. Typically, most savings account holders fall within the retail segment of customers with a high frequency of withdrawals from their accounts on a monthly basis.

“Consequently, for most banks, the average funding cost for savings deposits is much lower than the 3.75 per cent implied by the MPR.

“For banks’ customers, given an inflation rate trending above 12 per cent (12.8 per cent July 2020), the negative interest earned on savings deposit accounts will widen to -11.5 per cent from the -8.7per cent rate implied by the former interest rate regime.

“Despite limited investment outlets due to the subdued interest rate environment, we believe that some bank customers might be encouraged to take a second look at alternative asset classes such as equities.

“In our view, with most banks trading below book value, we believe that a significant portion of banks’ credit risks is already reflected in their share prices.

“Despite the deterioration in the macro environment, GTBank and Zenith, our preferred names within the sector, have adequate capital and liquidity buffers to withstand potential shocks.”

They added that “Finally, although their dividend outlook is unclear at this time, we believe that both banks will still pay a dividend on their 2020 results.

“We believe that their dividend yields will still be better than the 1.25 per cent implied interest on savings deposits and the c.2 per cent yield on T-Bill instruments.”

A renowned professor of capital market, Prof. Uche Uwaleke in text message to Nigerian NewsDirect said, “ I think this is designed to facilitate the transmission of monetary policy by anchoring interest rate on savings deposits on the MPR.

“For me, the important thing to note is that a higher interest rate can be negotiated with the bank. What the CBN has done is just to set the floor below which it becomes unacceptable.”

The President, Bank Customers of Nigeria (BCAN), Dr. Uju Ogbuika, said, “The minimum of ‘10 per cent p.a of MPR’ is confusing to me.  If it means 10per cent of MPR, then minimum interest on savings will be as low as below two per cent p.a. but there is no upper limit. Certainly, it will not be as high as might have been obtainable before now.

“For all I care, banks will negotiate to the barest minimum which may serve as a disincentive to save and consequently, a dwindling in loanable funds to galvanise the real sector.”

Speaking from a different perspective, a financial expert Mr. Eze gweobi in a telephone chat with Nigerian NewsDirect said, “The implication is that the high rates the Government was paying on Treasury Bills and Bonds have crowded out the real sector from borrowing from the deposit banks”

“With the drop in those rates, the CBN is mandating banks to pay increased interest on savings accounts to encourage people to save more thereby building the liquidity of banks to be able to meet loan demands.

“Lending rates are high and banks need to pay fund owners part of the income they earn from these loans,” he said.