What does 100 percent CRR mean for Nigerian Banks?

Nigeria's Central Bank Governor Sanusi Lamido Sanusi, hinted at a conference in Lagos today that the cash reserve requirements (CRR) on government deposits in banks may move to 100 percent from 75 percent.

Sanusi has been using the CRR tool as a means to tighten ample liquidity in the system which he blames for the increasing pressure on the Nigerian naira.

Earlier in the day the naira traded at its lowest levels in almost 3 years,at N164.7 per dollar.

Nigerian banking stocks which have had a terrible start to 2014 may correct further in tommorows trading session, which would be bad for the NSE as the banks make up close to 30 percent of the bourses capitalisation.

Banks may sell-off because they make most of their income by channeling excess funds into FGN bonds, at yields north of 13 percent. Some of that free money is being taken away by the CBN, which has started to affect profitability.

Most banks reported lower profits and revenues in the third quarter of 2013, compared to the earlier period in 2012.

Smaller banks (Skye, Diamond, Fidelity) may bear the brunt the most from a further increase in the CRR, however large banks (First Bank) with ample funds may also see a big reduction in profitability. This has already happened for First Bank and Skye Bank, in the 3Q results.

The outlook for Nigerian Banks in 2014, remain hazy. We would need to see full year results for some clarity and outlook for loan growth in 2014.

All the same UBA looks interesting at these levels for accumulation of shares. The bank (UBA) trades at a discount to its peer tier one names, but it has cleaned up its books, has ample room to increase lending with loan to deposit ratios in the mid 50 percent, and also is the most diversified Nigerian Bank, with almost 12 percent of its revenues coming from the rest of Africa.