Nigerian banks have placed about N4.4 trillion of surplus funds with the Central Bank of Nigeria (CBN) through its Standing Deposit Facility (SDF), as lenders seek safe returns on excess cash amid high money-market rates and the apex bank’s continued efforts to manage liquidity.
The large placement at the SDF came as total liquidity in the banking system remained firmly positive during the week, rising to N4.66 trillion from N3.61 trillion in the previous week.
The SDF is a facility through which banks can deposit excess cash with the CBN and earn interest. It provides lenders with a low-risk alternative to leaving funds idle or placing them in other short-term markets.
Market analysts said the N4.4 trillion placement shows that banks still have substantial cash available, despite the CBN’s efforts to withdraw excess liquidity through Open Market Operations (OMO).
The development also reflects the cautious approach of banks to lending, particularly as demand for loans remains relatively subdued compared with the amount of liquidity available in the system.
Apart from the SDF placement, about N2.3 trillion in repayments from the primary market also provided additional support to system liquidity during the week.
However, the liquidity position is expected to come under pressure following the CBN’s OMO settlement of about N2.9 trillion. OMO refers to the CBN’s sale of government securities to financial institutions to absorb excess money from the banking system.
The combination of strong liquidity inflows and aggressive sterilisation by the CBN has created a market in which banks are able to move between depositing funds with the apex bank and investing in short-term government securities, depending on the returns available.
Despite the large liquidity surplus, money-market rates remained relatively high during the week.
Dealers from Cowry Assets Management Limited said the overnight rate, which reflects the cost of borrowing funds between banks for one day, fell marginally by 13 basis points to 22.13 percent, while the funding rate remained unchanged at 22 percent.
The relatively high rates indicate that the cost of short-term funds remains elevated, even though the banking system is carrying substantial liquidity.
NIBOR rates, which indicate the rates at which banks lend to one another in the Nigerian interbank market, increased across most maturities.
The one-month, three-month and six-month NIBOR rates rose by 26 basis points, 56 basis points and 76 basis points, respectively.
The overnight NIBOR rate increased by only two basis points.
The rise in longer-tenor NIBOR rates suggests that market participants are preparing for tighter liquidity conditions in the weeks ahead, particularly as the CBN continues to withdraw funds through its monetary-policy operations.
Treasury bills attract strong demand.
Activity in the secondary Treasury bills market remained relatively subdued during the week, with yields broadly stable across maturities.
The average Nigerian Treasury Bills (NTB) yield declined slightly to 18.86 percent from 18.95 percent in the previous week, reflecting buying interest across the curve.
At its NTB auction during the week, the CBN offered N750 billion across the 91-day, 182-day and 364-day maturities.
Investors submitted bids totalling N3.4 trillion, more than four times the amount offered, indicating strong appetite for short-term government securities.
The CBN eventually allotted N865.7 billion, exceeding the initial offer by N115.7 billion.
The 91-day and 182-day stop rates were unchanged at 16.30 percent and 16.50 percent, respectively.
However, the stop rate for the 364-day bill declined by 31 basis points to 16.84 percent.
The lower rate on the longest-dated bill suggests that investors were still willing to commit funds for longer periods, but at a slightly lower yield than in the previous auction.
Demand was even stronger at the CBN’s OMO auction, highlighting the amount of liquidity available in the financial system and investors’ appetite for relatively attractive short-term instruments.
The apex bank offered N1 trillion in OMO bills with maturities of 91 days, 147 days and 154 days.
Investors submitted bids totalling N5.5 trillion, representing a bid-to-offer ratio of 5.5 times.
The CBN allotted N2.9 trillion, almost three times the amount initially offered.
The large allotment indicates that the apex bank was willing to absorb a substantial amount of surplus cash from the financial system as part of its liquidity-management strategy.
The stop rate for the 91-day OMO bill settled at 19.59 percent, while the 147-day and 154-day instruments cleared at 18.99 percent.
The relatively high yields helped attract investors looking for secure short-term investments.
CBN balances liquidity management with rate stability
The latest money-market developments highlight the delicate balance facing the CBN.
On one hand, the apex bank needs to prevent excessive liquidity from building up in the banking system because too much money chasing limited financial assets can put pressure on interest rates, the foreign exchange market and inflation.
On the other hand, removing too much liquidity too quickly could raise the cost of funds for banks and businesses and potentially weaken credit growth.
The N4.4 trillion placed in the SDF therefore provides an important indication of how banks are managing their cash positions.
Rather than deploying all their excess funds into loans or the interbank market, banks are choosing to keep a significant portion with the CBN, where the funds are considered highly secure and earn a return.
This does not necessarily mean banks are unwilling to lend. Rather, it suggests that lenders are weighing the risk and return on loans against the relatively attractive and more predictable returns available from central-bank and government securities.
For borrowers, however, persistently high money-market rates can translate into higher borrowing costs, especially for businesses that depend heavily on bank credit.
N3.14trn liquidity injection expected
Looking ahead, about N3.07 trillion in OMO maturities is scheduled to be released into the financial system next week.
An additional N71 billion in NTB maturities is also expected, bringing the projected liquidity injection to about N3.14 trillion.
When government securities mature, the CBN effectively returns funds to investors. Unless the funds are immediately reinvested in new securities, they become available to banks and other financial institutions, increasing liquidity in the system.
However, the expected liquidity injection could be partly offset by new government securities sales.
The CBN is expected to conduct an NTB auction of about N700 billion, which would withdraw part of the liquidity returning to the market.
More than N700 billion in expected OMO maturities could, however, provide some additional support to liquidity.
The conflicting flows mean that the banking system could continue to experience substantial liquidity movements from one week to another.
The current situation also highlights the importance of banks’ liquidity-management decisions.
With about N4.4 trillion parked at the SDF, banks are clearly making use of the CBN facility as a temporary home for excess funds.
For banks, the attraction is straightforward: the SDF offers security and a predictable return without the credit risk associated with lending to customers.
The decision also allows banks to remain liquid and ready to respond when attractive lending or investment opportunities emerge.
For the CBN, however, the heavy use of the SDF does not mean its liquidity-management task is over.
The apex bank must continue to monitor how much money is circulating in the financial system and how quickly liquidity moves between the banking sector, government securities market, foreign exchange market and other asset classes.
Analysts expect money-market conditions to remain relatively stable in the near term, although liquidity could tighten modestly as the CBN continues its sterilisation programme.
Sterilisation, in this context, simply means the CBN withdrawing excess cash from the financial system, mainly through instruments such as OMO securities.
Strong demand at both the OMO and NTB auctions suggests that investors remain comfortable putting money into short-term securities at prevailing yields.
Unless there is a major liquidity shock, money-market rates are expected to remain broadly within their current range.
This week will provide a clearer picture of whether the CBN’s continued OMO operations will succeed in reducing excess liquidity or whether strong maturities and other inflows will continue to replenish the banking system.
For now, the N4.4 trillion sitting at the SDF represents a significant pool of bank funds that could otherwise have been deployed into lending, investments or other financial-market activities.
Its movement will therefore remain an important indicator of liquidity conditions, banks’ risk appetite and the direction of short-term interest rates in the Nigerian financial system.
SOURCE: tribuneonlineng.com