- Bids now open only to banks, foreign investors
- PFAs’ appetite for equity investments drops on weak stock market performance
The Central Bank of Nigeria (CBN) Thursday completely prohibited individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions.
The central bank’s directive was contained in a circular titled: “Re: Open Market Operations Auctions,” dated October 24, 2019, and signed by its Director, Financial Markets Department, Dr. Angela Sere-Ejembi.
This is coming as a report by Stanbic IBTC Stockbrokers Limited, Thursday showed that
Pension Fund Administrators (PFAs)’s exposure to equity investment has dropped significantly from a high of 9.25 percent in April 2018, to as low as 4.93 percent in August 2019.
With this new CBN’s directive, investing in OMO bills would now be for banks and foreign investors alone.
However, some financial market analysts have expressed concern about the fate of non-bank financial institutions, such as PFAs that hold a significant amount of treasury bills and OMO instruments in their portfolio and are by law requested to invest in such instruments.
The latest directive followed an earlier circular that was also signed by Sere-Ejembi, dated October 23, 2019, which had directed that individuals and local corporates “be specifically excluded from investing in OMO auctions,” and stated that the participation at the auctions, “should be on proprietary and non-proprietary basis, without these classes of investors.”
A central bank source, who pleaded to remain anonymous, however, explained that the new directive was part of efforts to ensure that financial institutions, which in desperate bid to meet the 65 per cent minimum loan to deposit ratio (LDR), don’t disburse loans to customers and local firms, who subsequently invest same in treasury bills and other money market and capital market securities.
But reacting to the latest decision to restrict individuals and local firms’ participation in OMO auction, Arise Television analyst, Mr. Chika Mbonu, described the development as the battle of the banks trying to optimise their assets.
He said: “You do recall that the CBN’s objective in recent past has been to push banks to lend to the real sector and the banks are also trying to balance it because of the risk in the system.
“The banks know that if they lend to the real sector, they earn about 21 per cent, with risk, but if they buy treasury bills from the Nigerian Treasury Bills (NTBs) window or through OMO, they earn about 13 per cent, without any risk. So, why go and take risk?
“So, you find that the banks have always tried to gravitate towards treasury bills and the central bank is working assiduously towards blocking all the loopholes that enable the banks to put their monies in treasury bills.
“For example, you do recall that the CBN recently forced banks to achieve 65 percent LDR. But what the central bank found out was that some banks actually took the loan and gave some capital market companies as loans and those companies used the funds to buy treasury bills, defeating the central bank. So, this initiative once more is just one of those things.
“It says the banks can buy OMO bills on a proprietary basis, which means for their own books, that is the banks buying with their own liquidity; and non-proprietary means buying for others; however, now limited to foreign investors and no more Nigerian corporates or organizations can buy OMO bills. Again, this is to force banks to push the money to the real sector.”
Also responding to a question on how successful the banking sector regulator has been in achieving its objective, Mbonu, a former bank CEO, said: “It has been a mixed success in the sense that the CBN found that some banks tried to round-trip, thereby defeating the idea of the policy, which is to grow the economy. But, be that as it may, some banks have actually started pushing retail lending.”
Mbonu, however, said the new lending clause introduced by the central bank and Bankers’ Committee would help to address habitual loan defaulters in the banking system.
The Director, Corporate Communications, CBN, Mr. Isaac Okoroafor, had also warned that any bank found to be disbursing loans to customers, who subsequently invest such funds in treasury bills and other money market and capital market securities, would be sanctioned and the customer blacklisted.
According to him, there were indications that some commercial banks, in a bid to meet the earlier September 30 deadline, had disbursed loans to some customers to buy treasury bills.
Meanwhile, a report by Stanbic IBTC Stockbrokers Limited, yesterday showed that PFAs’ exposure to equity investment has dropped significantly from a high of 9.25 percent in April 2018, to as low as 4.93 percent in August 2019.
The equity market declined by 20 percent in 2018, and it is currently in the red as it has plunged by 15.8 year-to-date (YtD) at the close of business Thursday.
However, the report showed that over the same period, investments in FGN securities was up by a whopping 22 percent to N6.819 trillion, from N5.589 trillion in March 2018.
Government total public debt stock is now sitting at N25 trillion ($70 billion) – about 20 percent of Nigeria’s GDP today. But this does not include CBN OMO Bills.
“If we strip out the performance as a result of the MTN listing, the market loss YtD would be north of 20 percent. In absolute terms, the equity exposure of PFA has declined by N275 billion ($765 million) in the last 18 months. This would be driven by a combination of losses accrued from the share price depression and also absolute sale of shares.
“If we assume that equity market losses wiped out 35% of the NGN275bn which would amount to NGN100bn of losses as a result of price decline. The PFA industry has actively sold down NGN175bn in Equity sales over the same period,” it stated.
Continuing, the report added: “Given the young population in Nigeria, it is expected that portfolio managers would have 40 – 60 percent of its assets in equities versus fixed income investment as it applies in other climes. In Nigeria, equity as a percentage of total pension assets has hardly ever been above the 10 percent mark.
“Unfortunately, portfolio managers (PMs) are measured by their performance on the league table. Whilst there is nothing wrong with league table in itself to know the best performing money manager, such league tables should be bi-annually to reduce the pressure which portfolio managers come under.
“This would allow the portfolio manager to take a longer-term view of the market. Understanding the pain-point of the average Nigerian portfolio manager is very important – Due to strict regulatory supervision, they are unable to take a long term view of the market because PMs are measured by their fund price on a daily, monthly which is really not the right way to measure performance. As a result, local portfolio managers are not long term investors, they are hedge funds with long money.”
Source: THISDAY
