Share prices of banks fell sharply at the stock market Wednesday as investors reacted to the decision of the Monetary Policy Committee (MPC)'s decision to apply 50 per cent of Cash Reserve Requirement (CRR) to all government deposits with commercial banks.

A total of 13 banking stocks recorded price losses ranging from 2.2 per cent to 8.1 per cent, as investors feared the policy might affect their ability to generate more profit so long as the policy lasts.

Diamond Bank Plc opened at N6.75 but fell by 8.2 per cent to close at N6.20 per share. FBN Holding Plc shed 5.8 per cent, declining from N18.17 to N17.10 per share.

Zenith Bank fell by 5.5 per cent to close at N20.00 compared with its opening value of N21.17. United Bank for Africa (UBA) Plc and Guaranty Trust Bank (GTB) Plc shares were down by 4.3 per cent and 2.2 per cent, declining from N8.30 to N7.94 and N26.30 to N25.70 respectively.

Banks enjoy high level of liquidity and profit from deposits they collect from local, state and federal governments. It is believed that about N1.3 trillion of public sector deposits are currently with banks.

However, the Governor of the Central Bank of Nigeria (CBN), Mallam Sanusi Lamido Sanusi, said at the end of the MPC meeting in Abuja on Tuesday that it was decided that banks would retain 50 per cent of government deposits in their vaults.

According to him, the introduction of the 50 per cent CRR to public sector funds became necessary to tighten liquidity owing to increased spending in preparation for the 2015 elections, among others.

The CBN governor had explained that while 50 per cent CRR would be applied to public sector funds, other private sector deposits would remain at 12 per cent.

Sanusi said spending by politicians towards the 2015 elections might put pressure on the exchange and inflation rates hence the decision.

Analysts said some investors, mostly institutional ones, who feel the policy might have a negative impact on the profitability of banks, were selling down, hence the decline in prices of banking stocks.

The decline in prices has led to a drop of 4.2 per cent in the Nigerian Stock Exchange (NSE) Banking Index within two days. Yesterday alone, the Banking Index fell by 3.8 per cent, while the NSE All-Share Index declined by 0.87 per cent.

Commenting on the development, Vice-President and Head of Research at Dunn Loren Merrified, an investment bank, Mr. Tola Odukoya, said the decline in banking stocks was expected given the decision of the MPC.

"The development is expected considering the fact that the retention of 50 per cent of public sector funds would affect the ability of most banks to lend and make profit.

However, I am not perturbed by the development because it will ease away very soon. The decline will create a buy opportunity for investors who see value in the banks and return to the market. This will, again, drive up their share prices. So the decline we are seeing should not lead to any panic. It is a phase that will pass away," Odukoya said.