Ahead of Next T-bills Auction Meristem Wealth Management Limited 8 Apr, 2014 T-bills Auctions Scheduled 9 Apr, 2014

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1 T-bills Auctions Scheduled 9 Apr, 2014 Summary of Previous Auction Stop Rate: 91-Day 11.90% 182-Day 13.18% Amount: 91-Day NGN21.534bn 182-Day NGN33.783bn Summary of Current Auction Auction Date 09/04/2014 Settlement Date 10/04/2014 Auction Size: 91-Day NGN20.159bn 182-Day NGN43.491bn 364-Day NGN bn Meristem Advised Stop Rates 91-Day 11.70% % 182-Day 13.15% % 364-Day 13.30% % Maturing TB Instruments 91-Day NGN20.159bn 182-Day NGN43.491bn 364-Day NGN bn Issue on Offer/Summary The Central Bank of Nigeria (CBN) is scheduled to hold a Treasury Bills (T-Bills) Primary Auction on the 9 th of April, T-Bills worth NGN bn will mature on the 10 th of April, while an equal sum will be issued in 91-day, 182-day, and 364-day instruments. The auction is expected to be comprised of NGN20.159bn in 91-day, NGN43.491bn in 182- day, and NGN120bn in 364-day instruments respectively. Outlook on Yields /Advised Stop Rates We analyze the current yield environment in light of the outcome of previous auctions on the respective instruments. Since the last auction held on the 26 th of March 2014, yields on the instruments listed have advanced by % on the 91-day instrument, while yields on the 182-day, and 364-day instruments declined by 0.51% and 0.47% respectively (current yields: 91-day: 13.03%, 182-day: 13.64%, 364-day: 14.78%). Yields on TB instruments have declined on the average by 0.41% to 13.33% since the last auction, as demand was not dampened by the MPC's decision to hold the MPR stable at 12%. The demand for the instruments has been strong across the spectrum, with both the long and short end of the curve witnessing increased demand over the period. We expect that yields might trend upwards going forward as market liquidity, and subsequently demand for the instruments is expected to be dampened by the impending CRR debit of 3% on private sector funds expected on Wednesday the 9th of April. With the expectation that there will be upward pressure on yields in the short to mid term given the headwinds on the horizon, we recommend that investors take position in shorter term maturities so that funds are available as yields trend upwards. Based on the current level of liquidity in the system and the current favourable yield environment, we advise the following stop rates for the respective instruments as listed below. We advise these rates with the dual purpose of achieving the best possible yield as well as ensuring the success of the bid. 91-Day NGN20.159bn % % 182-Day NGN43.491bn 13.15% % 364-Day NGN bn 13.30% % 1 P a g e

2 Investing through Meristem Wealth Management Limited Meristem Wealth Management Limited charges a transaction fee of 0.125% of the principal amount invested, and there will be three (3) days prior notification before maturity for all Treasury Bills investments. The income from investing in T-Bills is tax free, so interest received is not subject to withholding tax, and you will receive an immediate Investment confirmation letter for the Treasury bills. Also note that the T-Bills certificates can be used as collateral for securing loans. Participation Process The T-bills Primary Auction bid holds twice in a month (i.e. every other Wednesday). The above likely stop rates are our estimates and might not necessarily hold true, as the final decision always lies with the CBN based on the auction process. Recent Stop Rates on Past Auctions for 91-Day, 182-Day and 364-Day Instruments 91-Day 05/06/ /08/ /10/ /25/ /03/ Day 05/06/ /08/ /10/ /18/ /02/2014 Analysis of stop rates on recent auctions show that the spread between the prevailing market yield and stop on the 91-day, 182-day, and 364-day rates has narrowed since the last auction, though still significant. 05/06/ /09/ /11/ /22/2014 Source: CBN, Meristem Research 2 P a g e

3 About Treasury Bills Treasury Bills (T-bills) are marketable money market security that serves the purpose of raising money for the government and also helps in monetary policy management of the Central Bank. T-bills are short-term securities that mature in 1 year or less from their issue date. They are usually issued with 3-month, 6-month and 1-year maturities. How is Return Determined? T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. For example, if you bought a 90-day T-bill at N9,800 and held it until maturity, you would earn N200 on your investment. This differs from coupon bonds, which pay interest semiannually. The determination of rates on the instruments in the secondary market solely depends on the forces of demand and supply as occasioned by the prevailing macroeconomic environment. How does the Auction Process work? Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions. Primary market trading of Treasury bill instruments entails auctions by the country s monetary authority The Central Bank of Nigeria. T-bills are auctioned at established rates which determine the return to investors. Purchasing these instruments in the primary market and holding it till maturity would mean that the investor gets a fixed interest payment. Benefits of T-bills The biggest reasons that T-Bills are so popular are that they are one of the few money market instruments that are affordable to the individual investors. Other positives are that T-bills (and all Treasuries) are considered to be risk-free investments because the Federal Government backs them. Also, T-bills are tax free unlike equities. The only downside to T-bills is that investors will not get a great (alpha) return because Treasuries are considered exceptionally safe. 3 P a g e

4 Contact Information Wealth Management ( ) ( ) ( ) Tel: Brokerage Services ( ) Group Business Development ( ) Trustees ( ) ( ) Tel: Client Services ( ) 4 P a g e

5 Disclaimer Notice: Meristem and any of its associated or subsidiary companies or the employees thereof cannot be held responsible for any loss suffered by relying on the said information as this information as earlier stated, is based on publicly available information, analysts estimates and opinions and is meant for general information purposes and should not be construed as an offer to buy or sell or a solicitation of an offer to buy or sell securities or any financial instruments. The value of any investment is subject to fluctuations, i.e. may fall and rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or diminish. Hence investors may not get back the full value of their original investment. Meristem Wealth Management Limited is licensed and registered with the Securities and Exchange Commission (SEC). Meristem Wealth Management Ltd s registered office is at 3, Norman Williams Street, South West, Ikoyi, Lagos, Nigeria. Website: crmwaelth@meristemng.com. Meristem Wealth Management Limited P a g e