Fitch Ratings has declared that Nigerian banks foreign liquidity remains tight despite cutting reserve requirements to 25 per cent.
According to the rating agency, this will not add liquidity to the Nigerian banking system because the reduction will not lead to additional foreign currency (FC).
In a statement the rating agency said that substantial government-related foreign currency deposits are exempt from reserve requirements. They have already been withdrawn from the system after the government ordered all public-sector deposits to be moved from commercial banks into the centralised Treasury Single Account (TSA) earlier this month.
With the objective of easing the liquidity pressure and stimulate new lending to further economic growth, Nigeria's Monetary Committee reduced mandatory reserve requirements on all local-currency (LC) deposits to 25% from 31% last week.
This is meant to provide some additional LC liquidity into the banking system but around 1.2 trillion naira (6.5 billion US dollars) of deposits were sucked out of the banks in September, reflecting transfers to the TSA.
The report said, “Lower reserve requirements will not offset the tighter FC liquidity at Nigeria's banks. A currency split of public-sector deposits is not disclosed but in our opinion, FC deposits are substantial, held up by oil-related deposits. The centralising of public-sector and government-related FC deposits at the TSA has made it increasingly difficult for commercial banks to meet customer demand for FC. “
Warnings throughout the year that JP Morgan intended to remove Nigeria from its emerging markets bond index, which occurred in mid-September, also sparked heavy FC outflows as investors sold Nigerian securities, said the report.
According to a statement by Fitch, “viability ratings assigned to Nigeria's banks, all in the 'b' category, already reflect a wide range of weaknesses, including the increasingly strained FC liquidity position. Our sector outlook for Nigerian banks remains negative.”
Fitch said its expectations for loan growth have been muted- a nominal 5 per cent increase in 2015, which is low by Nigerian standards, because of the deteriorating operating environment.