They are going for low-cost funds, especially savings and demand deposits, to enable them lend at lower interest rate and make higher margins.
The pension funds, under the Contributory Pension Scheme (CPS), grew to about N6.5 trillion at the end of July 2017, with contributors hitting 7. 6 million. The fund rose to about N6.5 trillion from the N6.4 trillion it was in April.
Under a new regulation on investment of pension fund assets Pension Fund Administrators (PFAs) were asked to invest pension funds to ensure safety and maintenance of fair returns.
The National Pension Commission attaches importance to corporate governance practices in entities or specialist investment funds seeking pension fund investments.
But not all the pension assets are kept with banks. Large part of the family is invested in bonds, sukuk, treasury bills, global depository notes and other securities issued by the federal government and the Central Bank of Nigeria (CBN) or their agencies.
Confirming the banks’ focus a low cost funds, Wema Bank’s Executive Director, Mrs. Folake Sanu said the decline in their deposit portfolio was a deliberate effort to change the structure of deposit. It is also to give priority to low cost deposits as against term deposits including pension funds.
She said Wema was targeting low cost funds from the retail-end of the market, insisting that retail is the future of banking.
“We are trying to manage the high cost of funds that are prevalent in the industry, focusing basically on retail market through savings and current accounts, instead of bloating the deposit base with huge term and time deposits”Mrs. Sanu said.
She noted that the loan book remained diversified as there were no significant exposures to the upstream oil sub-sector, power sector and foreign currency loans, the areas, which according to his, some banks had issues during the year.
An industry source explained that the funds with the banks are those under the old pension scheme – mainly parastatals and will remain with interested banks until the last pensioner in that category dies. “Pension for pensioners under the old scheme still goes to the banks as cash receipt through the Pension Transitional Directorate (PTAD), which credits retirees’ bank accounts. Over N300 billion was remitted to the banks in the last few months and the inflow into interested lenders will continue,” the source said.
The source explained that high net-worth customers can bring say N300 million and be asking for between 10 and 20 per cent interest, but the retail customer walks in with N100,000 and does not mind getting four per cent.
“Therefore, if a bank has more of the retail accounts, and is not incurring more cost, it can lend cheaper and make higher profit. Also, high net-worth customers are more demanding, they want one-on-one service which is more costly. You have to deploy manpower to service them. Many of them do not want to read emails, and do not want to complete account opening forms online”.
Findings showed that six smaller banks recorded N233 billion decline in deposit in the first half of this year as they avoided costly assets due to customers’ demand for higher interest rate on deposits.
The customers want higher rates, arguing that the benchmark interest rate – Monetary Policy Rate (MPR) has been at 14 per cent for more than two years; banks sometimes pay less than four per cent interest on deposits.
The federal government is also into the deal. Its Savings Bond, spearheaded by the Debt Management Office (DMO) offering less than 14 per cent to investors as against treasury bills rate of around 18.5 per cent. But by the time treasury bills rate is marked up with risk premium, the cost of the fund will probably be at 20 to 22 per cent.
“Again, one has to look at the operating environment. If a bank for instance is borrowing at 20 to 22 per cent, how much is it going to lend to customers? So, that’s the challenge many of the banks are facing. Retail is the future. I think about 47 per cent of Nigerians is unbanked. A lot of cash is in the informal sector and banks are going for such funds,” an asset manager who does not want to be quoted said.
The source added: “Again, there is what we call investors’ apathy. If a bank continues to go to same group of the high net-worth customers for deposits, including those handling the pension funds, it will get tired overtime. The lender is put under pressure based on the level of attention such customers always need. But when it comes to the retail segment of the market, even if two banks are selling the same product, both of them can market the customers comfortably without getting to the same client because the market is so huge.
“Again, with retail, the sustainability of the funds is more guaranteed. If you have a balance sheet built by fewer number of people, if any of them moves his funds, then the impact will be heavy on the bank. But if you have like 100,000 customers each depositing N10, 000, that will be N1 billion. If 10 of them decide to move their funds, that will be N100, 000 and the bank will not feel the impact. But if you have 100 customers with N50 million each, if one of them pulls out, the impact will be significant,” the source explained.
Besides, banks are now using Financial Technology (FinTech) to drive savings at the retail end of the market because it saves time and cost given that a customer can open an account with his mobile phone without visiting the bank.