Agusto: CBN induced cash reserve requirement moderated banking industry 2020 performance

The banking industry in Nigeria faced a challenging year in 2020 as a result of various factors, including the increase in cash reserve requirement by the Central Bank of Nigeria (CBN) to 27.5 percent. According to a report by Agusto and Co, a research and rating institution in Nigeria, the CBN's actions, coupled with discretionary deductions, had a significant impact on the industry's performance and liquidity position. Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto and Co, shed light on the key findings from the report in a recent interview on CNBC Africa. Olubunmi highlighted the impact of the cash reserve ratio and discretionary deductions by the CBN on banks, stating that these measures had a negative effect on profitability and liquidity in the industry. The report revealed that the aggressive implementation of these requirements led to a loss of about 482 billion Naira in additional profits for the industry, representing approximately 11% of the industry's return on equity. Despite the challenges posed by the CBN's actions, Olubunmi expressed optimism about a potential bounce back in the industry in 2021. One of the key areas of assessment in the report was the reliability of business continuity, especially during the movement restrictions imposed in 2020 due to the COVID-19 pandemic. Olubunmi commended banks for their effectiveness in activating business continuity plans and investing in digital channels to ensure seamless operations and customer transactions. The shift to digital platforms saw a significant increase in electronic banking transactions, with a growth rate of over 50% in 2020. Electronic banking income emerged as a crucial source of non-interest income for the industry, contributing to approximately 10% of the industry's net interest and income accounts. Looking ahead, Olubunmi acknowledged the resilience of banks in navigating economic cycles and regulatory pressures. Despite macroeconomic and regulatory headwinds, banks have continued to lend to the real sector and manage their loan book growth. The report indicated a decline in non-performing loans in the industry, attributed to the CBN forbearance for borrowers during the pandemic. However, an expected increase in non-performing loans in 2021 could be influenced by the full impact of the pandemic on businesses and individuals. In terms of profitability, the industry experienced mixed results in 2020. While low-interest rates led to a decline in interest expenses, fair value gains on investment securities and FX transactions bolstered profitability for some banks. However, the industry's interest margin and return on assets saw a decline. Despite the challenges faced in 2020, the report anticipates a potential rebound in the industry's performance in 2021. Overall, the report by Agusto and Co paints a comprehensive picture of the Nigerian banking industry's performance in 2020 and offers insights into the key factors shaping its trajectory in the coming year.