Culled—Proshare
October 30, 2020
by CSL Research
The Nigerian Treasury Bills (T-Bills) auction conducted by the Central Bank of Nigeria (CBN) on Wednesday recorded significant oversubscription with unsuccessful bids reported at N667.1bn due to robust financial system liquidity amidst limited investment options. Stop rates at the auction settled at 0.34%, 0.5% for the 91-day, & 182-day maturities, and 0.98% for the 364 day instrument. CBN’s policy which has prevented non-banking corporates from accessing the OMO window has limited Fixed income options for them to Nigerian Treasury Bills (NTbills), Fixed deposits, Eurobonds and FGN bonds. This has led to a surge in demand for NTbills which has exerted downward pressure on rates (in primary & secondary markets). For example, stop rate for the 364-day bill at the bi-weekly PMAs has slumped to less than 1% from c.11.5% less than a year ago when the policy was announced .
We realise that interest rates on NTbills at these low levels though not favourable for the investor may be of benefit to the economy. High double digit returns on risk-free NTbills provided banks, PFAs and other asset managers a riskless outlet to make money which generally discouraged lending and other risky investments which would be expected to support economic growth. From the government standpoint, interest rate at double digit meant raising both short term and long term finance was too expensive and unfavourable for already precarious debt service cost level. Thus, the lower interest rates gives the Federal government opportunity to refinance existing NTBills obligations at cheap cost.
That said, we think the prevalent low yield environment is artificial considering it is not representative of current macroeconomic fragilities. In addition, there exists an unusually huge spread between the low rates on government issues and borrowing costs from banks in Nigeria reflective of the macroenomic concerns and huge business environment risk. However, blue-chip corporates have taken advantage of the record low rates to raise cheap short term financing through commercial paper issuances. Thus, we think the CBN may not necessarily achieve its ambition of forcing banks’ borrowing rates in the wider economy lower which disadvantages less fashionable SMEs and small corporates. Nevertheless, we think the CBN will maintain its dovish stance on interest rates in the short to medium term which we expect will remain positive for the equities market.
The NSE has gained 9.7% YTD, largely supported by local investors participation. Following two consecutive years of negative close, we believe the market will close positive in 2020, albeit market gains and bullish sentiments continue to be capped by current macroeconomic fragilities. We expect the current robust liquidity in the financial system to remain supportive of the bullish trend in Nigerian equities. However, we note that as this huge liquidity thins out, bullish sentiments will largely be supported by decent financial performance by listed corporates. Lastly, we also expect the high dividend yield bias to remain favourable for stocks with high dividend yield.
