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Monday, February 27

Which Bank will gain the most from CBN FX moves?

Lenders finally get a break and a chance to boost earnings with CBN move

Measures announced on 20 February by the Central Bank of Nigeria (CBN) will ease some of the severe foreign currency liquidity pressure faced by the country’s banks, Fitch Ratings said in a note last week.
The most important aspect of the CBN’s announcement is a plan to normalise the FX interbank market, in Fitch’s view.
The CBN’s intention is to clear the backlog of overdue foreign currency obligations owed by banks to international creditors which are primarily trade finance obligations owed to correspondent banks.
In addition, the CBN will no longer have a say in how banks on-lend the foreign currency they access from it.
Banks previously had to demonstrate that funds were being directed to priority sectors of the economy.
The CBN says that providing foreign currency to the manufacturing sector is still a priority, but with restrictions eased, larger banks with greater access to foreign currency will be free to lend to the smaller banks whose access to international funding is restricted.
The CBN has also reduced the maximum waiting times for banks to take delivery of foreign currency through its forward sales contracts to 60 days from 180.
Fitch said this should help banks make more timely payments to creditors, speeding up the flow of currency to importers and helping the economy, according to Fitch.
According to Fitch the CBN’s initiatives are an important boost for banks as access to foreign currency liquidity is tight and banks have struggled to meet their foreign currency obligations. Nigeria is highly dependent on imports and Nigerian banks have long provided trade finance facilities to importers.
Currency scarcity and exchange rate weakness have made it harder for importers reliant on naira-denominated cash flows to service US dollar-denominated trade finance lines, forcing some banks to restructure their obligations with international correspondent banks last year.
Correspondent creditor banks also agreed to maturity extensions and were duly compensated for this.
So which banks are most likely to benefit from relaxed FX trading rules and more availability of FX?
The first clue for us would be banks that are fairly liquid and net placers of naira on the interbank market.
Last Friday the Nigerian Interbank offer rate (NIBOR), spiked to 117 percent as banks were debited for dollar purchases made during the CBN special FX intervention.
Overnight placement traded at around 200 percent during early trade but dropped at market close, said the traders.
This is an indication of the tight Naira liquidity in the system and bigger banks would have the advantage here.
The CBN said banks could resell dollars supplied them at a margin of not more than 20 percent above the interbank rate of 305 naira per dollar.
This again is a chance for banks to book solid FX gains.
Looking at banks 3rd quarter 2016 results, FBN Holdings, Guaranty Trust Bank (GTB), FCMB, Diamond Bank and Zenith Bank all had significant jumps in Foreign Exchange gains as at the third quarter of 2016, compared to a year earlier.
We believe this trend is set to continue!

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