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Breakfast Report - 07 October 2019

In a circular issued last week Monday by the Central Bank of Nigeria (CBN), the regulator raised the Loan-to-Deposit Ratio (LDR) requirement previously set at 60% to 65% for all Deposit Money Banks (DMBs). The reason for this, according to the apex bank, was the marginal growth in loans observed following the announcement of the new LDR regulation in July. In nominal terms, loans to the real sector were reported to have increased by c.₦800 billion. However, the passthrough to the real economy has yet to be realized, as the time since the implementation of the regulation is too small to measure the true economic impact. The apex bank had required all DMBs meet the LDR by the end of Q3’19. However, 12 banks failed to meet this requirement, incurring fines of ₦499.2 billion. The CBN also directed banks to apply a weighting of 150% for the key sectors (SME’s, retail, mortgage and consumer lending) intended to boost real sector borrowing. However, these sectors carry heightened risk for banks, which could have a negative impact on banks’ NPLs - which currently hover just below 10%. Thus, while the increase in LDR will increase real sector lending, it could potentially deteriorate asset quality in the banking sector.

Equity: In the Equity market last week, we saw prices moderate due to profit taking by investors in the space. With most bellwether stocks dipping last week and subsequently trading at their multi-week lows, we expect modest interest in fundamentally sound stocks this week.

Stock Watch: Position taking in UNILEVER (+832bps w/w) helped the stock close higher at ₦26.70 last week. The stock had dipped in recent sessions and opened Friday's session at its 52 weeks low of ₦24.65. Year-to-date, the stock has lost 27.84%.

Fixed Income: In the T-bills market, we expect investors in the space to continue to favor notes at the long-end. However, the yields at the short-end indicate that some investors could seek notes that are attractive. Meanwhile, we foresee the bond market opening this week on a quiet note.