The Nigerian Stock Exchange (NSE) Banking Index set a new record last week after appreciating by 12.61 percent year-to-date (ytd) on the trail of Central Bank of Nigeria’s (CBN) plan to introduce a flexible foreign exchange (FX) policy.
The Banking Index had remained on a negative note this year as investors continued to sell-off banks’ share on the heels of weak profit, uncertain regulatory policy on FX and scarcity of liquidity.
Immediately after the Monetary Policy Meeting (MPC) meeting on 23 and 24 May, 2015, the Banking Index rose by 8.17 per cent in one week to 302.36 basis points from 279.53 basis points
The significant increase in Banking Index impacted positively on NSE All-Share Index as it erased the losses of ytd returns to a gain of 0.91 per cent having settled at 28,902.25 basis points, the highest in 2016.
The Managing Director of Highcap Securities Limited, Mr. David Adonri, attributed the increase in NSE Banking Index to deregulation of the downstream sector and MPC plans to introduce flexible FX policy in few days.
According to him, “the major factors that contributed to the spike in banking index is the introduction of two major policies which is one: the partial deregulation of the downstream oil sector, which led to increase in the price of oil, and recovery in that sector thus eliminating the crisis exposed to oil shares which a number of the banks had concerns.
“Also, the resumption of a flexible exchange rate policy, is a positive one for the economy as it gives room for the finance of a lot of trade.
“If you remember, the introduction of the Treasury Single Account (TSA) and release of the full year results as well as profit warnings issued by the banks in the first quarter of the year sent a wrong signal to investors and caused a significant dip in the value of shares, but subsequently when favourable policies started emanating, investor appetite began to grow, hence the demand for banking shares.
“In essence the Fiscal authorities need to market trendy policies that will benefit the economy as well as the banks which are the economy drivers,” he added.
Analysts at Lagos-based Vetiva Capital Management Limited, pointed out that the decision by MPC to introduce flexible FX policy cheers capital market rally and renews investors’ sentiment.
According to the company’s report, “In response to the challenges faced by the Nigerian economy (output contraction, rising inflation and high unemployment), the MPC appears to have favored growth over price stability with the CBN Governor noting that the balance of risk is now tilted against growth – reflecting a change in policy direction from the March meeting.
“Thus, it had become clear that the current FX regime was no longer sustainable in the face of fast depleting FX reserves.
We think this development, if successful, will move transactions from the informal parallel market to the formal interbank with likelihood of closing the gap between both markets in the medium term; first, we expect a knee-jerk reaction with the black market Naira rate further depreciating in the coming sessions.
“We note that the establishment of the two-tier market creates room for arbitrage. Hence, we would expect the CBN to keep a tight noose on access to the “critical” window to curb such profiteering.
“Whilst we await clarity on the new FX framework, we imagine that the N285/USD rate adopted in the setting of the N145/litre PMS price could serve as a pointer to where the interbank market would trade.”
They pointed out that the MPC has chosen its battle carefully, deciding to loosen one of the key impediments to economic growth (the FX illiquidity).
They foresee inflation rate to be worsen in the near term as a result of the pass through of a new exchange rate to consumer prices.
“Like we had noted in our April inflation note, we expect inflation to recoil in 2017 from base effects. We believe this view could have further emboldened the MPC’s resolve to adopt the more flexible FX framework,” the analysts at Vetiva explained.
They expressed that the news on flexible FX is expected to spike up investors interest in the equities market and fixed income markets in the coming sessions pending the unveiling of the new framework by the CBN.
“Any sustainability thereafter would be determined by how markets assess the new framework and its prospects of improving FX liquidity. Overall, we view this development as positive for Nigeria,” they added.