Rencap: Cut in Banks’ Dividend Payouts Imminent

Mr. Godwin Emefiele, CBN Governor

By Festus Akanbi

There were fears at the weekend that the implementation of the new Central Bank of Nigeria’s (CBN’s) policy on dividend pay-outs may compel some money deposit banks to withhold dividend payment or, at best, reduce the size of their profits to be set aside for dividend pay-outs to their shareholders at the end of the current financial year.

The apex bank had, in a letter to all banks and discount houses, dated October 8, spelt out new rules governing approval of dividends to bank shareholders, citing the need to curtail financial risk as one of the reasons for its action.

According to the CBN, any bank that does not meet the minimum capital adequacy ratio ( CAR) would not be allowed to pay a dividend, while banks that have a Composite Risk Rating (CRR) of “High” or an NPL ratio of above 10 per cent would not be allowed to pay a dividend.

The apex bank added that banks that meet the minimum Capital Adequacy Ratio (CAR) but have a CRR of “Above Average” or an NPL ratio of more than five per cent but less than 10 per cent would have a dividend payout ratio of not more than 30 per cent.

According to the regulator, there would be no regulatory restriction on dividend payout for banks that meet the minimum CAR, have a CRR of “Low” or “Moderate” and an NPL ratio of not more than five per cent. However, it is expected that the board of such institutions will recommend payouts based on effective risk assessment and economic realities. It warned that no bank would be allowed to pay dividends out of reserves.

The new policy also states that banks shall submit their board approved dividend payout policy to the CBN before the payment of dividend shall be granted and that all ratios shall be based on financial year averages.

However, a leading financial and investment advisory firm, Renaissance Capital, said at the weekend that apart from banks like Zenith Bank, GTBank, Access and Stanbic IBTC Bank, there are sufficient reasons to envisage a deep cut in dividend payment to shareholders of banks at the next annual general meetings.

Rencap believed the directive coupled with the transition to Basel 2/3 combine to move the Nigerian banking system into an era of lower dividend pay-outs. It said the directive essentially compels affected banks to either pay no dividend or cap dividend pay-out at 30 per cent, explaining that where there are no restrictions, the directive re-enforces statutory reserve, risk assessment and economic considerations in dividend pay-out decisions.

The research firm, in a special report titled: Nigerian banks: CBN Introduces Dividend Pay-out Controls, said while banks like GTBank, Zenith, Access and Stanbic appeared to be above board in terms of their ratios, other banks may pay very small dividends while others may not pay any at the next annual general meetings of the banks.

Reacting to the new policy, Rencap said, “We think outside GTBank, Zenith, Access and Stanbic, the risk that a number of other banks’ CRR rating affects their dividend payout ratio is high. We understand the best rating CBN assigns is Moderate for most banks and from our checks with management; we believe GTBank has a Moderate rating. If this is the case, we imply that a number of other banks are likely to be on Above Average or High. Having a CRR of Above Average implies that the bank’s payout ratio is capped at 30 per cent, while a CRR of High implies no dividend payment. In addition, we think some banks’ payout will also have to be reduced to comply with the re-enforcement of the rules around the setting aside of statutory reserves as stated in the circular.”

The report, anchored by Vice President – Banking Analyst (SSA), Equity Research of the organisation, Mr.  Adesoji Solanke, said, “We do not think GTBank, Zenith, Access and Stanbic get affected much by these directives but given the current nature of the Nigerian banking environment, we expect them to consider lowering payout ratios from FY14E. While their capital ratios are sufficient, we think it will be a prudent decision for some to lower the payout to conserve some capital given tightening capital regulations and to support future growth, as opposed to a reactionary tier 1 capital raise in the near future. Other banks in a less favorable capital position are likely to have deeper dividend cuts, particularly those affected by the grey areas of this circular. To compensate, we have heard some banks mention the possibility of scrip dividends.”

In its interpretation, Rencap believes the dividend payment restrictions are a function of: meeting the minimum CAR and statutory reserve requirements; the bank’s NPL ratio; and the bank’s CRR (composite risk rating), explaining that the first two are fairly easier to appraise given the fact that the banks publish this information periodically.

“As at 1H14, all the banks under our coverage (except Diamond, though this should normalise post-rights) met the minimum CAR requirement and had NPL ratios below five per cent. The banks which are too close to the minimum CAR requirement are FBNH, UBA (rights issue announced), FCMB (local currency tier 2 ongoing) and Stanbic (local currency tier 2 ongoing). The third criterion is however where the risk lies and is the grey area we cannot see through.”

The CRR is essentially part of CBN’s banking supervision framework for assessing the safety and soundness of an institution based on capital (quality, quantity and availability of externally and internally generated capital) and profitability (in reviewing an institution’s ability to generate capital internally, profitability is considered both on a consolidated and unconsolidated basis). The CRR ratings are Low, Moderate, Above Average, or High. Neither the CBN nor the banks publishes/discloses the CRR rating.

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