Commercial banks woo moneybags with high deposit rates

Months after politicians were accused of hoarding US dollars ahead of Nigeria’s primary elections and causing the naira to depreciate, new facts have emerged that commercial banks are courting high net worth individuals and asset managers. funds with juicy interest rates in order to attract their naira deposits.

Experts say this is boosting activity within the money market fund space and has opened a new window of opportunity for investors to invest in the funds which can today offer returns of 10.0% per year, or more, net of fees.

According to experts, these yields are the best offered by money market funds for almost three years and are well above the yields of Treasury bills.

Over the past four months, the Central Bank of Nigeria (CBN) policy rate has fallen from 11.5% to 14.0%.

In their combined email comments, Coronation Research analysts said money market funds can invest in bank deposits and these are currently attractive as commercial banks are offering rates in the range of 13.0 % to 15.0% per annum for 90 days. deposits.

“This probably comes as news to the majority of individual deposit account holders, whose personal accounts can earn much less than this: but these high rates are generally only available for large deposits of N1.0 billion ( those with $2.3 million) and above.

“So it makes sense for individual savers to pool their money in money market funds to profit,” the analysts advised.

The interest rate on 90-day Treasury bills rose only from 2.81% to 3.93%, well below the CBN’s key rate.

Offering further explanation, analysts observed that most money market funds cannot simply invest in bank deposits, but are required to invest at least 25.0% of their holdings in government securities such as treasury bills or securities issued by the CBN.

So a money market fund today might invest in juicy bank deposits (assuming it has N1.0 billion or more in cash), but might need to dilute that return by also investing in money market bills. Relatively low-yielding treasury.

“This is where it gets interesting because money market funds can invest in the CBN Special Notes instead. mutual fund can combine bank deposit rates with special vouchers, as well as other instruments, to achieve much higher returns than before.” Today, the typical return of a money market fund can reach 10.0% per annum, net of fees, or slightly more,” according to Coronation Research analysis.

The company explained that banks offer high rates for term deposits, an indirect consequence of the cash reserve requirement (CRR).

The CRR is the percentage of customer deposits that banks are required to deposit with the CBN.

This percentage is officially 27.5% but is generally accepted to be, in practice, 50.0% or more.

A low CRR has little influence on deposit rates because people, for the most part, tend not to tap into all of their deposits.

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“Thus, banks are not affected by maintaining a proportion of deposits with the central bank: but at a certain level of CRR, the demand for deposits affects liquidity, and banks must offer high rates to maintain their high deposit levels,” the firm noted. further away.

A message from one of the wealth managers to clients and seen by Nigerian Tribune reads in part: “The AXA Mansard Money Market Fund is a vast pool of funds from different like-minded investors like you which is invested on your behalf in different securities which include treasury bills, term deposits and commercial paper.

“To take advantage of these benefits, all you have to do is buy units of the Fund, create a profile and watch your investment grow. By using your own client dashboard, you can always buy more units of the Fund, make a withdrawal and generally monitor your investment.

However, money market conditions are transient and constantly changing. Therefore, banks may offer high deposit rates for large term deposits today, and special bonds may enjoy high yields today, but nothing stays the same for long.

It’s just that money market fund returns look better now than they have for nearly three years, analysts insist.

Money market funds have very low risk since they invest in cash and government-backed securities, such as treasury bills, treasury bills and repurchase agreements, and commercial paper.

Commercial papers are money market securities issued by large corporations to obtain funds to meet short-term debt obligations such as payroll and are only backed by the promise of an issuing bank or company to pay the face amount on the due date, which is usually 270 days or less.

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