Nigerian bank stocks gained by the most in three months Tuesday after the Central Bank of Nigeria (CBN) reduced the interest rate on savings deposits to a minimum of 1.25 percent per annum from 3.75 percent.
The rate reduction which became effective today (Sept.1) is expected to translate to increased profitability for banks as it reduces their cost of funds.
It means they can save money that would have gone into paying higher interest on savings deposits. Banks with already low cost of funds like Guaranty Trust Bank and Zenith Bank are however expected to benefit the least from the new directive.
The banking index, which tracks the share price movement of publicly listed banks in Nigeria, was up 1.25 percent, with the big banks gaining the most in three months, according to data from the Nigerian Stock Exchange (NSE).
Ecobank gained the most with a 6.4 percent gain Tuesday, the biggest jump in three months.
United Bank for Africa (UBA) was also up 4.8 percent Tuesday while Access Bank climbed 3.23 percent.
First Bank was up 3.06 percent while Stanbic IBTC gained 1.25 percent.
Zenith Bank and Guaranty Trust Bank rose 0.6 percent and 0.39 percent respectively on the day.
“Given that savings deposits account for around 20 percent 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,” analysts at Lagos-based investment bank, FBN Quest said in a Sept.1 note reacting to the new directive.
“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 c.50bps in Q4,” the FBN Quest analysts said.
“In terms of earnings impact, we estimate an average increase of around 8 percent in the 2020 Profit Before Tax (PBT) for our banks’ universe.”
They, however, add a caveat that the stringent rules around interest on savings make it doubtful that the impact will be that material.