Nigeria’s recent decision to lower the monetary policy rate is expected to put pressure on the profitability of domestic banks, according to a commentary note from Moody’s Ratings following last week’s Central Bank of Nigeria (CBN) Monetary Policy Committee decision.
The CBN reduced its policy rate by 50 basis points to 27 per cent and simultaneously lowered the cash reserve requirement (CRR) for commercial banks to 45 per cent.
It was the first policy rate reduction since 2020, reflecting improvements in macroeconomic indicators and a drive to stimulate economic activity.
Furthermore, the CBN adjusted the standing facilities corridor to plus or minus 250 basis points around the policy rate, maintained the liquidity ratio at 30 per cent, and kept the cash CRR for merchant banks at 16 per cent, while introducing a 75 per cent CRR on public sector deposits held outside the Treasury Single Account.
Moody’s stated that the lower policy rate and reduced CRR would support economic activity but would also “modestly compress Nigerian banks’ net interest margins.”
The ratings agency explained that lower interest rates on loans and government securities are likely to outpace the corresponding reduction in deposit costs, placing downward pressure on banks’ net interest income, which accounted for 62 per cent of operating income for Nigerian banks in 2024.
“We expect the lower policy rate to drive a decline in yields on loans and government securities that will outpace the related decrease in the cost of deposits,” Moody’s said.
The agency further noted that deposit costs tend to be less sensitive to policy rate cuts, as observed during the recent tightening cycle, when increases in deposit costs were muted compared with the rise in asset yields.
While the reduced CRR will release a portion of deposits previously held idle at the central bank, making them available for lending or investment in income-generating securities, Moody’s said that the net impact on profitability will vary among banks.
“We expect banks’ net interest margins to decrease to varying extents. For banks with the highest proportion of low-cost deposits, margins will weaken the most,” the commentary stated.
Other factors that could weigh on bank profitability include the banking system’s exit from regulatory forbearance, which has led to increased provisioning for portions of loan portfolios with credit performance challenges, and the absence of the sizeable foreign-exchange gains that boosted earnings during the 2023–2024 period amid currency devaluation.
Moody’s added that while the policy rate cut is intended to stimulate economic growth and credit demand, it is likely to reduce banks’ net interest income and, by extension, profitability, at least in the near term.
