Nigerian banks are unlikely to see a repeat of the robust profit margins recorded in their 2012 financial year following increasing pressure on earnings in the aftermath of the Central bank of Nigeria (CBN)'s policy reducing banks' cash reserve requirement on public sector deposits.

Fitch Rating Agency in a statement released yesterday, noted that the tougher regulations together with higher funding costs are likely to constrain profitability for banks in the country over the next 18 months.

According to the agency, the CBN is focusing on consumer protection and encouraging financial inclusion in this post-crisis period.

"We expect new limits on bank charges imposed by the CBN to dent what have been highly profitable fees and commissions, particularly for those with large retail franchises. The most significant impact is likely to arise from the gradual phasing out of "commission on turnover" - a customer transaction fee - by 2016.

Monetary policy continues to be tight with the central bank last week raising the cash reserve requirement on public sector deposits to 50 per cent effective August 7, 2013. Previously there was a 12 per cent requirement on all customer deposits. The revision applies to around NGN1.3trillion ($8 billion) of deposits and means that N500 billion of additional liquidity could be withdrawn. We expect banks to fill any funding short-fall with more expensive sources or by selling liquid assets, leading to a sharp negative impact on net interest margins," the agency projected.

Fitch noted that high treasury bill yields during 2012 boosted banks' interest income and though continuing tight monetary policy indicates that a sharp fall is unlikely, the yields have fallen slightly so interest income from banks' large sovereign bond portfolios is likely to be lower in 2013.

"The central bank has also stipulated that interest rates for savings deposits should not be lower than 30 per cent of the monetary policy rate, currently at 12 per cent. Overall, there could be at least an average 100-200bp negative impact on margins over the next 12-18 months. Further margin pressure may arise if the authorities impose caps on lending rates to nationally important sectors, such as SMEs or agriculture."