Global credit ratings agency Moody’s Investors Service has cautioned that Nigerian banks could face renewed profitability pressures following the Central Bank of Nigeria’s (CBN) recent decision to cut the Monetary Policy Rate (MPR) to 27 percent from 27.5 percent.

The CBN said the 50-basis-point reduction was aimed at sustaining disinflation, encouraging credit expansion, and stimulating economic recovery. However, Moody’s warned that the move could squeeze banks’ net interest margins (NIMs) — a key measure of profitability — unless lending volumes increase significantly to offset declining yields.

“We expect the lower policy rate to drive a decline in yields on loans and government securities that will outpace the related decrease in the cost of deposits,” Moody’s stated. “Deposit costs typically adjust more slowly than lending rates,” he added.

According to the rating agency, the narrowing of margins could erode banks’ earnings capacity in the near term, particularly in an environment of moderating inflation, volatile foreign exchange markets, and weak consumer demand.

Moody’s noted that net interest income—the difference between what banks earn on loans and investments versus what they pay on deposits—accounted for 62 percent of Nigerian banks’ operating income in 2024. A reduction in interest margins could therefore weigh heavily on overall profitability.

While the CBN’s simultaneous move to lower the Cash Reserve Requirement (CRR) may offer some liquidity relief, the ratings agency believes the benefit will be “only partial” and insufficient to fully offset the earnings impact of lower policy rates.

The report added that Nigerian banks are already navigating tight operating conditions, including high funding costs, rising credit risks, and an evolving regulatory environment linked to the ongoing recapitalisation exercise.

Moody’s advised that banks must diversify income sources and strengthen non-interest revenue streams—such as fees, commissions, and digital services—to cushion the effects of compressed interest margins.

Analysts also expect larger Tier-1 lenders, with stronger balance sheets and wider customer bases, to weather the impact more effectively than smaller banks that rely heavily on interest income.

The CBN’s latest policy move aligns Nigeria with global monetary easing trends, as several central banks across emerging markets adopt lower rates to stimulate growth. However, Moody’s cautioned that the long-term effect on the banking industry would depend on how effectively lenders adapt to thinner margins while sustaining asset quality and capital adequacy.

For now, the focus shifts to how Nigerian banks recalibrate their strategies in response to a lower interest rate environment—balancing growth ambitions with the need to safeguard profitability.

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