Investors Selling Bank Stocks Ahead of LDR Implementation

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  • Investors Selling Bank Stocks Ahead of LDR Implementation

Investors at the Nigerian Stock Exchange have started selling their holdings of bank stocks following the announcement of the new LDR policy that mandates banks to loan at least 60 percent of their deposits to customers.

In a bid to stimulate the economy and broaden growth, the Central Bank of Nigeria had directed Nigerian banks to maintain 60 percent Loan-to-Deposit Ratio (LDR) by September 2019.

While some stakeholders seem to be in support of the new policy, there are clear signs that it could increase the size of non-performing loan and limit banks’ ability to earn at a minimal risk level.

Investors are aware that the new policy may force banks to start issuing high-risk loans at a period when the regulator, CBN led AMCON, has limited tools to bail-out financial institution.

Therefore, investors are selling bank stocks to reduce risk exposure ahead of the new LDR policy as they are projecting drop in earnings amid high-risk exposure.

Since the new directive was announced on July 3, the big banks are down by 2.19 percent. Guaranty Trust Bank led the chart with a decline of 6.7 percent, followed by First Bank’s 2.4 percent.

Zenith Bank and United Bank for Africa (UBA) are down 0.26 percent and 1.64 percent, respectively.

The Director of Sub-Saharan African Banks at EFG Hermes research, Ronak Ghadia, however, highlighted a likely misconception concerning the new policy, he said the 60 percent LDR will be computed based on gross loans and not net loans as indicated earlier. Therefore, the impact of the new policy may not be as severe as previously estimated.

He later said: “UBA is the only bank with an LDR significantly below the regulatory threshold. Likewise, GTB and Stanbic would have to grow their loan book by a modest 1.5 percent and 0.5 percent respectively to meet the 60 percent LDR threshold while UBA would have to increase its credit portfolio by 8.8 percent, hefty but manageable.”

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: samed@investorsking.com.

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