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CBN Cuts Rates By 350bps, But Banks Still Earn Above 17 Percent On Securities
CBN Cuts Rates By 350bps, But Banks Still Earn Above 17 Percent On Securities
OMO bills and government bonds continue to offer yields above 17 percent despite the CBN’s September rate cut.
Banks still earn 20 percent on surplus funds placed with the apex bank, although this is below the previous rate.
Analysts expect fixed-income yields to decline gradually, leaving banks’ earnings exposed to changes in asset yields and funding costs.
October 23, () – The Central Bank of Nigeria’s 350-basis-point interest rate cut has yet to translate into a comparable decline in yields across the fixed-income market, leaving banks with access to securities offering returns above 17 percent.
The CBN reduced its Monetary Policy Rate from 26.5 percent to 23 percent in September, signalling a shift towards a less restrictive monetary policy environment. However, yields on Open Market Operations bills and Federal Government bonds have remained elevated, cushioning the immediate impact of the policy change on banks’ investment income.
The CBN also adjusted its standing facilities corridor to 50 basis points above and 300 basis points below the MPR, placing the Standing Lending Facility rate at 23.5 percent and the Standing Deposit Facility rate at 20 percent. The Cash Reserve Requirement for deposit money banks remained at 45 percent.
The disparity between the policy rate and market yields raises a key question for bank investors: how quickly will the easing cycle reduce interest income, and can lower funding costs compensate for any decline?
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OMO Yields Rise After Initial Post-Cut Repricing
A representation of OMO. Photo credit: Shutterstock
The October 22 OMO auction showed that yields have not continued falling in line with the September policy adjustment.
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The CBN allotted N2.628tn in OMO bills against an initial offer of N2tn. The 138-day instrument cleared at 17.63 percent, while the 180-day bill recorded a stop rate of 17.14 percent.
At the October 6 auction, comparable 147-day and 182-day instruments cleared at 17.22 percent and 16.92 percent, respectively.
The latest rates represent increases of 41 basis points on the shorter-dated instrument and 22 basis points on the longer-dated bill compared with those October 6 stop rates.
Although the maturities differ, the movement indicates that the initial decline in yields following the CBN’s policy shift has not been sustained across subsequent auctions.
For banks with surplus liquidity, OMO bills remain an investment option offering returns above 17 percent. The latest allotment also shows that the CBN continues to use the instruments to manage liquidity in the banking system.
The development does not, on its own, establish a reversal of the easing cycle. However, it suggests that monetary policy changes do not automatically translate into lower yields at every auction.
Banks Retain Access To High-Yielding Assets
A representation of Government bonds. Photo credit: Shutterstock
The CBN’s deposit window provides another indication of the returns available to banks despite the reduction in the benchmark rate.
The Standing Deposit Facility rate now stands at 20 percent, meaning eligible banks can earn that rate on qualifying surplus funds placed with the apex bank, subject to applicable facility rules.
Reported placements at the facility reached about N8.85tn, while banking-system liquidity stood at approximately N7.26tn. The Nigerian Overnight Financing Rate also remained around 20 percent, alongside an Open Repo Rate of 20 percent.
The SDF rate is lower than the approximately 22 percent available under the previous policy corridor, reducing the return on funds placed with the CBN. Nevertheless, a 20 percent overnight rate remains substantial.
Government bonds are also maintaining elevated yields. Nigeria’s benchmark 10-year bond yield rose to 17.05 percent in the week ended October 16. At the October 19 bond auction, the September 2036 and June 2038 instruments cleared at 17.29 percent and 17.19 percent, respectively.
Together, these rates show that banks still have access to relatively high-yielding investment opportunities despite the reduction in the MPR.
However, the benefit will vary by institution. Actual earnings depend on the size and maturity profile of each bank’s securities portfolio, the rates at which its assets were acquired and the extent to which those assets are held to maturity or repriced.
Analysts Expect Gradual Adjustment
Market forecasts suggest that fixed-income yields may decline gradually rather than fall immediately following the CBN’s rate cut.
MorganCapital Investment Limited expects the yield on 364-day Treasury bills to range between 14.5 percent and 16 percent, while OMO yields could remain relatively attractive as the CBN continues managing liquidity.
Blue Marina Capital forecasts a 16 percent yield on 364-day Treasury bills by December, average OMO stop rates of 17 percent and FGN bond yields between 17 percent and 17.5 percent. The firm also expects inflation to ease to 13.80 percent, with the MPR remaining at 23 percent.
Futureview also expects inflation to continue moderating, although energy prices, exchange-rate movements and liquidity conditions remain risks to the outlook.
These projections indicate that the easing cycle may not immediately eliminate the high returns available on government securities. For banks, that could provide some support for investment income while other assets and liabilities adjust to lower rates.
The timing of that adjustment is important. Existing loans and securities generally continue earning their contracted rates until maturity or repricing. Consequently, a reduction in the MPR does not immediately reset the yield on a bank’s entire portfolio.
Lower Funding Costs Could Cushion Margin Pressure
Isaac Valentine Osaro, Head of Research at First Securities Brokers Limited. Photo credit: LinkedIn: Isaac Valentine Osaro
The impact of the rate cut will depend on both sides of banks’ balance sheets.
Lower interest rates could reduce returns on newly acquired securities and loans, putting pressure on net interest margins. But cheaper funding, stronger credit demand and improved borrower repayment capacity could partly offset that decline.
Isaac Valentine Osaro, Head of Research at First Securities Brokers Limited, has argued that lower borrowing costs could improve borrowers’ cash flows, reduce default risks and eventually slow the growth of non-performing loans. That could help banks contain impairment charges.
The benefits, however, will depend on how quickly lending rates, deposit costs and asset yields adjust.
If returns on loans and securities fall faster than funding costs, margins could narrow. Conversely, if funding costs decline more quickly while OMO and bond yields remain elevated, banks could sustain stronger earnings for longer.
The September rate cut therefore presents different risks for banks depending on their asset mix, deposit structure and exposure to government securities.
FY2026 Results Will Offer Clearer Evidence
The full impact of the CBN’s September decision is unlikely to be evident in the nine-month results alone, given the timing of the policy change. Full-year 2026 and 2027 earnings should provide a clearer picture of how banks are adapting.
Portfolio composition will be important. In the first half of 2026, investment securities accounted for a smaller share of interest income at Wema Bank, GTCO, Zenith Bank and FirstHoldCo, while FCMB recorded a slight increase.
At Wema Bank, for instance, the share of interest income from investment securities fell from about 40.4 percent to 22.3 percent, indicating a greater contribution from loans and other interest-earning assets.
That shift suggests that the impact of lower fixed-income yields will differ across banks, depending on how much they rely on securities income and their ability to expand quality lending.
For investors, the key indicators will be net interest margins, interest income by asset category, funding costs, impairment charges and dividend capacity.
The CBN’s rate cut may eventually reduce returns across the market, but the persistence of OMO and bond yields above 17 percent suggests that the transition could be gradual. Banks that control funding costs, grow performing loans and maintain asset quality will be better positioned to protect profits and shareholder returns.
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