The lower consumer price index (CPI) print for March is putting a renewed focus on the outlook for the Central Bank of Nigeria’s Monetary Policy Rate (MPR) and its impact on bank profits going forward.
Inflation in Nigeria eased to 8.6 percent year-on-year (y/y) in March, from 9.5 percent y/y in February and 9 percent y/y in January, which represents a low since May 2008, the National Bureau of Statistics (NBS), said last week.
“While the drop in the March CPI figure was anticipated given the high base effects in the time series, it however exceeded our expectations (9.1% y/y) and market consensus (9% y/y),” Samir Gadio, an emerging markets strategist at Standard Bank, London, wrote in a note.
Nigerian banks who have sustained juicy net interest margins (NIMs) due to high interest rates and cheap funding may have seen reduced profitability due to the likely decline in net interest margins in 2013, as fixed income yields compress further on the back of declining inflation.
The CBN may also be compelled to cut the MPR – which it has held at a record high of 12 percent for more than a year – in 2013, which would be a negative for bank interest income.
As bank executives have benefited from higher net interest rates (NIM), they’ve also spent the past three years cutting costs to keep earnings expanding.
Many Nigerian banks have announced job cuts as they target staff compensation, usually their largest non-interest expense.
Analysts say there will also be increased competition to lend to high-quality corporate customers and financing of large infrastructure and government backed projects as banks change their earnings model, as yields fall from last years highs.
“It’s hard to imagine the NIM environment getting much more favourable than this in the medium term,” said an industry source.
Zenith Bank expects loan growth of 15 percent to 20 percent this year, with opportunities to lend to the manufacturing, power, agriculture, telecoms and oil industries as competition heats up in the sector and treasury bill yields compress, according to Godwin Emefiele, its CEO.