By John Omachonu
This may not be the best of times for deposit money banks in Nigeria as they face difficult operating environment characterised by pressure on the naira, limited access to foreign currency and policy uncertainty.
Despite these challenges, they have one more thing to worry about, the FGN savings bond, through the Debt Management Office (DMO).
Federal Government of Nigeria, through DMO, had on March 13, 2017, issued the first series of the monthly 2 year and 3 year tenured savings bond.
They are debt instruments offered by the government with the aim of mobilizing resources from the general public.
Since the debut of the instruments about five years ago, banks have been experiencing stiff competition.
Since the debut of the instruments about five years ago, banks have been experiencing stiff competition.
But recent developments ocassioned by hostile environment may have changed the narrative as investors are looking for higher interest to cushion the effect of rising inflation.
Major advantages that are luring customers to the savings bond include the fact that the income from investments are exempted from tax, as well as the fact that investment can be used as collateral for loan.
This attractive coupon, which is above average bank savings rate, is serving as steady means of income as coupon is paid quarterly.
Besides the Nigerian debt management office (DMO), the bonds are marketed by stockbroking firms for easy accessibility and reach by retail investors.
The 2-3-year savings bond targeted at the retail investor with yields on offer as high as 10 percent and minimum subscription levels of N5,000 is considered more lucrative by investors than the peanuts offered by the banks.
The bond pays interest quarterly, with a bullet repayment for principal at maturity.
MBN investigations show that, the bond is posing a problem for deposit money banks (DMB), which currently pay little to nothing on savings deposits, by raising their cost of funds.
This is because at 10 percent, the yield is very attractive for the average retail investor who is earning about 3 percent per annum on savings accounts or under 5 percent on term deposits.
The aggressive nature of the stockbroking community in pushing the product at every auction is causing a major risk to deposit money banks as cost of fund is rising.
For instance, one of the stockbroking firms, Investment One, sent a message to its customers on Monday, in a renewed efforts at marketing the product
“Dear Esteemed Client, We are delighted to inform you that the offer for the Sixty-second (62nd) series of the FGN savings bond will be coming up between the 1st of August 2022 and 5th of August 2022 and Investment One Stockbrokers Int’l Ltd as a Distribution Agent (DA) for the bond, will be receiving applications from the investing public starting from the 1st of August 2022
. 2-Year FGN Savings Bond due August 10,2024: 9.413% per annum
. 3-Yesr FGN Savings Bond due August 10,2025: 10.413% per annum
The implication is that even though some DMBs have eventually raised deposit rates slightly, they are still finding it difficult to match the rate offered by the savings bond.
This is aside from the minimim deposit of N5000, compared to millions requested under the normal bond as well as fixed deposits by banks.
Consequently, the net interest margins (NIMs) of most of the deposit money banks have started shrinking.
Analysts say also that as the volume offered at the FGN savings bond auction are being increased , the Federal Government is eventually reducing the amount being offered at the DMO auctions – which then implies that yields will trend lower.
This could then have an adverse impact on commercial banks (a reduction in interest income) that has been the primary beneficiaries of the high yield on government bonds as major participants at the DMO auctions.
Nigerian banks charge as high as between 23 to 25 percent on customer loans and pay as low as 3 percent on deposits, thereby ensuring juicy spreads.
With June inflation in Nigeria running at over 17 percent, the savings bond could inadvertently help shake up its entrenched banking system as well as boost real returns for millions of bank customers with savings accounts.
Further investigations show that interest expense paid on current, savings and time deposits by customers of most tier one banks like Zenith, GTB, Firstbank, UBA, came in at an average of only 35-40 percent of interest income.
Analysts say at the rate the savings bonds are being marketed and with little more efforts, could push deposits out of commercial banks into Government bonds from which retail investors are yet to get fuller understanding and importance.