When the Central Bank of Nigeria reduce its benchmark rate of interest by 350 foundation factors in September, one of many rapid issues for financial institution traders was that the lower-rate surroundings would finally cut back what banks earn from loans, authorities securities and surplus money positioned with the CBN.
The logic is simple.
Banks earn money by incomes curiosity on their property, and when market rates decline, newly issued securities and repriced loans would usually start to supply decrease returns.
However, developments because the September fee reduce recommend that the adjustment will not be as fast or as extreme because the headline discount within the Monetary Policy Rate initially implied.
The CBN decreased the MPR from 26.5% to 23% and recalibrated its standing services hall to +50/-300 foundation factors, successfully putting the Standing Deposit Facility at 20% and the Standing Lending Facility at 23.5%. The Cash Reserve Requirement for deposit cash banks remained at 45%.
Yet banks can still earn greater than 17% on some CBN and authorities securities, whereas surplus liquidity parked in a single day with the apex financial institution continues to earn 20%.
The query is due to this fact turning into extra nuanced: will decrease rates truly translate into a cloth decline in financial institution curiosity earnings, or will still-elevate market yields cushion the affect?
OMO rates are proving sticky
The newest Open Market Operations public sale gives an early indication that fixed-income yields might not fall in a straight line.
At the October 22 public sale, the CBN bought N2.628 trillion in OMO payments, exceeding its preliminary N2 trillion provide by about N629 billion. The 138-day invoice cleared at 17.63%, whereas the extra closely subscribed 180-day instrument cleared at 17.14%.
Both rates have been increased than on the October 6 public sale, when comparable 147-day and 182-day payments cleared at 17.22% and 16.92%, respectively. Earlier in September, OMO yields had fallen because the market repriced after the CBN’s coverage shift.
One public sale is not sufficient to ascertain one other upward fee cycle, however the October 22 end result reveals that the post-rate-cut decline has not less than paused.
This issues for banks as a result of OMO securities stay a comparatively high-yielding outlet for eligible establishments holding extra money. The CBN additionally allotted greater than it initially supplied, reinforcing the view that liquidity sterilisation stays vital even in an easing coverage surroundings.
Banks are still incomes 20% on extra money
The similar image could be seen on the CBN’s deposit window.
Banks reportedly positioned about N8.85 trillion on the Standing Deposit Facility, whereas banking-system liquidity stood at about N7.26 trillion. The Nigerian Overnight Financing Rate remained round 20%, whereas the Open Repo Rate was additionally 20%,
The SDF fee is decrease than the roughly 22% out there underneath the earlier coverage hall, which means banks now earn much less on surplus funds stored with the CBN.
However, a 20% in a single day return stays excessive in absolute phrases, significantly when put next with the expectation {that a} 350-basis-point MPR reduce would shortly drag market rates sharply decrease.
Government bonds are telling the same story.
Nigeria’s benchmark 10-year yield rose to 17.05% within the week ended October 16, whereas the September 2036 and June 2038 bonds cleared at 17.29% and 17.19%, respectively, on the October 19 public sale, whilst comparable benchmark yields in a number of different markets declined.
Together, the OMO, SDF and bond rates recommend that banks still have entry to comparatively high-yielding property even after the coverage reset.
Why the earnings strain might take time
Brokerage companies initially warned that the CBN fee reduce might cut back banks’ earnings from authorities securities and squeeze curiosity margins, though cheaper funding and stronger mortgage demand might present some reduction.
Chukwudi Nga, MD/CEO of MorganCapital Investment Limited, mentioned banks may gain advantage from cheaper short-term funding and stronger credit score demand, however warned that decrease rates might put strain on “interest margins and investment income,” as mentioned in Nairametrics’ post-MPR evaluation.
The newest forecasts, nonetheless, recommend that this strain might take time to materialise.
- MorganCapital expects yields to say no steadily, with the 364-day Treasury invoice round 14.5% to 16%, whereas OMO yields might stay comparatively enticing because the CBN continues managing liquidity.
- Blue Marina expects a good firmer fixed-income surroundings by December, forecasting the 364-day invoice at 16%, common OMO cease rates at 17% and FGN bond rates at 17% to 17.5%. It additionally expects inflation to fall to 13.80%, whereas the MPR stays at 23%.
Futureview additionally expects inflation to proceed easing, though vitality costs, exchange-rate actions and liquidity stay dangers.
- These forecasts recommend banks might proceed incomes comparatively excessive returns on securities whilst financial coverage eases.
- The impact may also be gradual as a result of current loans and securities don’t instantly reset when the MPR adjustments. They proceed incomes beforehand agreed rates till they mature or are repriced.
For banks, due to this fact, decrease rates still pose an earnings danger, however present fixed-income yields recommend the adjustment could also be slower than the 350-basis-point coverage reduce initially implied.
Lower rates might additionally assistance on the opposite facet
The affect of easing might also present up past curiosity earnings.
Isaac Valentine Osaro, Head of Research at First Securities Brokers Limited, argues that decrease borrowing prices can enhance debtors’ money flows and cut back the likelihood of default, which might finally gradual the formation of latest non-performing loans and cut back impairment prices, as mentioned in the identical post-MPR investor evaluation
Banks might due to this fact earn much less on some property however partly offset that strain by way of cheaper funding, stronger mortgage demand and decrease credit score losses.
That is why internet curiosity margin, relatively than gross curiosity earnings alone, will likely be one of many extra vital indicators for traders.
If mortgage and securities yields fall quicker than deposit and different funding prices, margins will come underneath strain. If funding prices decline extra shortly whereas OMO, bond and different asset yields stay elevated, financial institution earnings might show extra resilient.
What traders ought to watch
Because the CBN reduce rates only some days earlier than the top of September, banks’ 9M 2026 outcomes won’t yet present the complete impact. The clearer image ought to come from FY2026 and 2027.
There are already some helpful clues. In H1 2026, funding securities supplied a smaller share of curiosity earnings at Wema Bank, GTCO, Zenith Bank and FirstHoldCo, whereas FCMB recorded a slight improve. At Wema, for instance, the share fell from about 40.4% to 22.3%, as loans and different interest-earning property turned extra vital.
That suggests some banks might already be much less depending on earnings from authorities securities than earlier than.
For shareholders, this issues as a result of decrease curiosity rates don’t mechanically imply decrease earnings. Banks might earn much less from new loans and securities, however they might additionally profit from cheaper funding, stronger mortgage demand, and fewer dangerous loans.
- High OMO and bond rates additionally present some help for earnings whereas the transition to decrease rates continues.
- Investors ought to due to this fact concentrate on a easy query: can the financial institution proceed rising earnings and paying dividends as rates fall?
Banks that may develop good-quality loans, preserve funding prices low and management dangerous loans are prone to be higher positioned to guard shareholder returns.
