Excess cash in banks is set to rise as a result of the N1 trillion inflow

Excess cash in banks is set to rise as a result of the N1 trillion inflow

This month, liquidity inflows of N1.02 trillion will flood the interbank money market, adding to the amount of excess cash in banks.

N335.13 billion in coupon (interest) payments on FGN Bonds, N390 billion in matured secondary market treasury bills (Open Market Operations, OMO), and N295.33 billion in matured primary market treasury bills are among the inflows (Nigeria Treasury Bills).

Money market dealers who spoke to Financial Vanguard about the impending inflows said that in the absence of aggressive liquidity mopping up by the Central Bank of Nigeria, CBN, the development is likely to exacerbate the downward trend in treasury bill yields that had characterized yields in the first two months of the year.

According to research, the average interest rate on Nigeria Treasury Bills (NTBs) fell 51 basis points (bpt) to 3.29 percent in February from 3.81 percent in December.

Similarly, during January and February 2022, average benchmark yields on FGN Bonds declined by around 120 basis points month over month.

The reduced returns were caused by excess liquidity (idle funds) in the interbank money market, which resulted in a dramatic drop in banks' borrowing from the CBN as well as an increase in demand for government securities.

The excess liquidity was created, among other things, by a net influx of N542.15 billion from matured OMO bills into the interbank money market between January and February 2022. The CBN refunded N972.15 billion in matured OMO bills and sold N430 billion in the same bills during the two months, leaving a net balance of N542.15 billion.

The average opening position of the market in terms of liquidity increased by 125 percent to N306.55 billion in February 2022 from N135.98 billion in December 2021, reflecting the current excess cash scenario.

The significance of the liquidity rise is also evident in the dramatic drop in banks' borrowings from the CBN, which decreased by 71% to N666.8 billion in February 2022 from N2.34 trillion in December 2021, through the apex bank's Standing Lending Facility, SLF, and Repurchase agreement, Repo.

Bank deposits of excess liquidity in the apex bank's Standing Deposit Facility, SDF, however, increased by 132 percent in February to N489.05 billion from N210.05 billion in December.

Excess liquidity drove a surge in demand for government assets, culminating in a 424 percent oversubscription in the CBN's February 2022 auction, up from 355 percent in December 2021.

According to Financial Vanguard's data, the oversubscription resulted from a 35% increase in overall subscription (investor demand) to N602.62 billion in February, up from N446.3 billion in December.

Even though the CBN offered N115.28 billion in bills, up 17% from N98.01 billion in December, it took advantage of the large subscription to sell N258.01 billion, a 20% rise from the N214.96 billion sold at the December auction.

Furthermore, the CBN decreased bill stop rates, with the 91-Days bill stop rate falling 26 basis points to 2.24 percent in February from 2.5 percent in December. Similarly, the stop rates on the 184-Days Bills and 364-Days Bills decreased to 3.3 percent and 4.35 percent in February, respectively, down 14 basis points and 115 basis points from the previous auction in December.

Analyst’s Perspective:

The N1.02 trillion flood into the money market, according to experts at FBNQuest, the First Bank Group's investment arm, may exacerbate the decreasing trend in treasury bills rates this month.

"System liquidity is projected to be elevated in March as OMO maturities worth N390 billion will hit the market," they said in their outlook for the fixed income market in March. This is in addition to NTB maturities of N295.33 billion and N335.13 billion in coupons.

"As a result, we expect money market rates to fall to single digits." We expect demand for bonds to remain strong as investors try to reinvest their coupons and cash.

Nnamdi Nwizu, Co-Managing Partner/Founder, Comercio Partners Limited, an investment banking firm, stated that the interest rate reduction will continue until the CBN switches from its current Pro-Growth monetary strategy to one of defending the naira.

"A pro-growth strategy implies that the government will continue to favor liquidity injection and low-interest rates over a hawkish stance of raising rates to attract foreign portfolio investors to the fixed-income market," Nwizu, who heads the Trading division of Comercio Partners and is responsible for overseeing fixed-income investments for individual and institutional investment management accounts, explained. High-interest rates encourage people to save, but they also make it more difficult for corporations and retail investors to obtain cash for expansion.

"The CBN's decision to pursue a Pro-Growth strategy means that interest rates will remain low, and the CBN will inject liquidity, which should lead to greater demand for government assets from investors looking for outlets for their excess cash."