Analysts have expressed concerns about the impact of the high interest rate environment on the asset quality of banks in the country.

This concern comes in the wake of the fresh hike in the Monetary Policy Rate by the Monetary Policy Committee of the Central Bank of Nigeria. At the close of its last meeting for the year, the MPC announced a 25 basic points hike in the benchmark rate, moving it to 27.50 per cent from 27.25 per cent in September.

Cumulatively, the MPC had raised the MPR by 875bps in 2024 from 18.75 per cent as of the end of 2023. This high interest rate environment had benefitted banks through upward loan repricing and improved yields on investment securities.

The PUNCH reported that no fewer than 10 Deposit Money Banks raked in about N4.20tn in the first nine months of this year. The banks listed on the Nigerian Exchange Limited saw their profit for the period climb by 102.81 per cent to N4.20tn from N2.07tn recorded at the end of the third quarter in 2023.

Speaking on the trend, analysts at Meristem Securities in their Post MPC Report said that the recent hike is expected to maintain the momentum, with average lending rates, treasury bills rates, and bond yields increasing by 1709bps, 1726bps, and 528bps to 32.36 per cent, 23.55 per cent, and 19.41 per cent, respectively, compared to 15.27 per cent, 6.29 per cent, and 14.13 per cent at the close of December 2023.

“Banks are anticipated to continue leveraging these higher yields on fixed-income instruments, further boosting earnings. This trend is expected to translate into higher YoY interest income for our coverage banks in the upcoming 2024FY results, offsetting the rise in MPR-driven interest expenses. For context, industry-wide interest income rose by 147.58 per cent YoY as of 9M:2024.

“However, the industry’s current account & savings account mix declined to 74.31 per cent in 9M:2024 from 88.11 per cent in H1:2024, indicating a reduction in cheaper deposit sources. Improving the CASA mix will remain critical for banks to bolster net interest margins and overall profitability.

“It is noteworthy that the MPC’s tone at the most recent meeting hinted at the possibility of a more accommodative stance in the near term. Banks are likely to intensify efforts to grow income from non-interest sources as part of their strategic focus. Overall, while the MPC’s tight policy stance continues to support high yields, boosting banks’ earnings through loan repricing and fixed-income investments, it also poses challenges to asset quality. As a result, banks must prioritise regulatory compliance and optimise funding structures to sustain profitability and resilience in the face of tighter monetary conditions,” the report said.

According to the Federal Deposit Insurance Corporation, asset quality is one of the most critical areas in determining the overall condition of a bank. The primary factor affecting overall asset quality is the quality of the loan portfolio and the credit administration programme.

Meanwhile, the Chief Economist for Africa and the Middle East at Standard Chartered Bank, Razia Khan, in their investor update said, the “token move” by MPC was anticipated following the continued rise in inflation in October.

“Going forward, FX stability will be key to the fading of inflationary momentum,” she said. “In that event, we see little need for the CBN to tighten further.”

The Managing Director of Financial Derivatives Company, Bismark Rewane, in his keynote address at the Parthian Economic Discourse 2024 also noted that the foreign exchange rate was a more important driver of inflation than interest rate.

Speaking on the outlook for the naira in the coming year, Rewane worried about the depreciation of the naira saying, “Central Bank of Nigeria will continue its tightening, and it will become clear that the exchange rate is a more potent driver of inflation than the interest rate.”