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Liquidity in Nigerian Banking System Recovers to N572.8bn-Afrinvest
The liquidity in Nigeria’s banking system experienced a significant rebound in February, climbing to N572.8bn from a deficit of N307.5bn recorded in January, according to a report by Afrinvest.
This improvement was driven primarily by large inflows from primary market repayments, open market operations (OMO) repayments, and standing lending facility transactions, which exceeded the outflows from OMO sales, primary market auctions, and the standing deposit facility.
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A standing lending facility is a short-term loan provided by a central bank to commercial banks. A standing deposit facility is a tool used by central banks to manage liquidity within the financial system. Open market operations involve the purchase and sale of government securities by the central banking authority to regulate the money supply.
Afrinvest reported that “inflows from primary market repayment stood at N2.9tn, OMO repayment at N823.3bn, and SLF at N24.2tn. These outweighed the outflows via OMO sales (N1.4tn), PMAs (N1.4tn), and SDF (N4.2tn), leading to a net positive liquidity position.”
Due to the improved liquidity, the open repo rate and overnight rate declined by 2.4 percent and 2.2 percent month-on-month to 26.8 percent and 27.3 percent, respectively.
In the primary market, the Central Bank of Nigeria conducted auctions for both OMO and Treasury Bills, offering instruments worth N1.4tn each. The OMO auction saw strong investor participation, especially in the 355-day and 362-day tenors, which cleared at 21.3 percent and 21.5 percent, respectively.
The auction recorded an overall bid-to-cover ratio of 2.5x, with increased demand for longer-term instruments.
Similarly, the NT-Bills auctions recorded a total subscription of N5.6tn, although only N1.4tn was sold. Afrinvest noted that “the long end of the curve saw the highest interest, with a bid-to-offer ratio of 5.5x, while short- and mid-dated notes had lower demand at 0.8x and 0.3x, respectively.” The stop rates for the 91-day, 182-day, and 364-day bills dropped to 17.0 percent, 18.0 percent, and 18.4 percent, down from 18.0 percent, 18.5 percent, and 21.0 percent in the previous month.
Analysts explained that investors preferred longer-term instruments to lock in higher yields amidst expectations of further yield corrections following the significant decline in inflation figures post-CPI rebasing exercise.
The positive impact of improved liquidity was also visible in the secondary market, where average yields fell by 3.3 percent month-on-month to 20.2 percent.
Afrinvest reported that buy-side interest was noted across the yield curve, leading to declines of 2.6 percent, 2.8 percent, and 4.6 percent on short, mid, and long-term instruments, respectively, bringing their yields to 19.4 percent, 19.8 percent, and 21.3 percent.
Looking ahead, Afrinvest analysts anticipate that the bullish sentiment in the fixed-income market will continue, driven by net inflows of N2.6tn from bond coupon payments and maturities.
“Investors’ sentiment will be shaped by monetary policy decisions, liquidity conditions, and yield movements, with market participants taking a cautious yet opportunistic approach,” the report stated.