Ratings agency, Moody’s, has warned that the recent 50 basis points interest rate cut by the Central Bank of Nigeria (CBN) would weigh on domestic banks’ profitability.
On September 22, the CBN at its 302nd Monetary Policy Committee (MPC) meeting lowered its monetary policy rate by 50 basis points to 27 per cent from 27.50 per cent, and reduced the cash reserve requirement (CRR) for commercial banks to 45 per cent, it was the first policy rate cut since 2020.
“The lower monetary policy rate and cash reserve requirement for commercial banks will support economic activity but modestly compress Nigerian banks’ net interest margins,” it said in a document seen by Business Post.
“Specifically, we expect the lower policy rate to weigh on banks’ profitability and be only partly offset by the lower CRR’s increased income-generating capability-notwithstanding the indirect benefit from policy loosening on growth, credit demand and borrowers quality,” it added.
Moody’s added that it also expect the lower policy rate to drive a decline in yields on loans and government securities that will outpace the related decease in the cost of deposits.
“Slower repricing in funding costs than in asset yields will reflect the limited pass-through of policy rate changes to deposit pricing,” it added.
Moody’s also noted other factors will also pressure Nigerian banks’ profitability this year, including the banking system’s exit from regulatory forbearance in relation to credit exposures and single obligor limits.