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Published On: Sun, Feb 25th, 2018

Dividend scare: investors panic on CBN order

FELIX OLOYEDE

Investors of at least five commercial banks may have their hopes of getting dividends for the 2017 financial year dashed following the Central Bank of Nigeria’s (CBN) reactivation of its earlier directive barring lenders that breach its regulatory requirements from paying dividends. Review of the third quarter 2017 financial statements of listed lenders show that only five of them are qualified to pay dividends without restriction as their non-performing loan (NPL) and capital adequacy ratio (CaR) meet regulatory benchmarks.

Surprisingly First Bank is not among the qualified because of its high NPL, which stood at 20.1 per cent at the end of September 2017, while the regulatory threshold is pegged at 5 per cent. However, it boasts of 17.2 per cent CaR, which is 1.2 per cent above the 16 per cent limit set by the apex bank. But investors of FBN Holdings, which is the entity listed on the Exchange could get some respite if other sister companies in the group are able to declare robust profits over the period. The holding company which paid N0.10 dividend per share last financial year, has recorded a31 per cent year-to-date (YTD) capital appreciation as the stock closed the previous week at N11.70.

The CBN last week restated that any Deposit Money Bank (DMB) or Discount House (DH) that does not meet the minimum capital adequacy ratio (CaR) and those that have Composite Risk Rating (CRR) that are high or with Non-Performing Loan (NPL) ratios above 10 per cent will not be allowed to pay dividends. It also that noted that DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR “Above Average” or an NPL ratio of more than 5 per cent but less than 10 per cent will not be allowed to present dividend payout ratios above 30 per cent, while those that have capital adequacy ratios of at least 3 per cent above the minimum requirement, CRR of “Low” and NPL ratio of more than 5 per cent but less than 10 per cent will only be able to have dividend pay-out ratios of not more than 75 per cent of profit after tax. It also forbids DMBs and DHs from paying dividend from their reserves and compelled lenders to submit their Board approved dividend payout policy to the CBN before the payment of dividend shall be permitted.

“The CBN directive to banks and other financial institutions is meant to shore up the capital base of financial institutions that are affected by the directive, (i.e. DMBs, Merchant Banks and Discount Houses). It is no more a news that the capital base of most of the banks has been significantly eroded due to high level of non-performing loans (NPL),” said Moses Ojo, head, Research, Pan African Capital Plc. He maintained that decided to take this step instead of directing them to increase their equity capital base, which some of them may find difficult to do considering the equity market is just recovering. “The apex bank decided that they should embark on organic growth of their capital base by retaining more of their earnings. Well, as we all know it is not a blanket directive, it is specific to the level of CAR and NPL that banks have in their books.

“The directive will impact the ability of the lenders to declare jumbo dividend pay-out as they used to do, especially those who have challenges with their NPL and CAR. In my view, the candidates that will be affected are mostly in the second tier and the tier category,”Ojo posited.

Investors in Unity Bank and Union Bank are unlikely to get dividends for 2017 financial year if their Q3 2017 is anything to go by, because their CaRs have plunged below the regulatory 15 per cent. While Union Bank’s CaR stood at 13.3 per cent as at September 2017, Unity Bank’s CaR for the period was unavailable, but its retained earnings was -N275.98 billion. Also in this category of banks which may not pay out dividend is Skye Bank, which was yet to release its FY 2016 result, following the sack of its board and management after the bank’s CaR dropped below regulatory requirement in 2016. However, Afrinvest analysts believed Union Bank CaR will slide up by the end of 2017 and adjusting for the N50 billion fresh capital it raised from right issue last year, the bank should have a sturdier balance sheet going forward.

Diamond Bank shareholders will only make do with the 203.57 per cent year-on-year capital appreciation that the stock has recorded, but no hope of dividend for 2017, because its 9.5 per cent NPL ratio and CaR standing at 15.8 per cent flouts the CBN directive.

Meanwhile, investors have been kicking since the CBN made its pronouncement on banks’ dividend payments. Bisi Bakare, National Coordinator, Pragmatic Shareholders Association of Nigeria, fumed that the apex bank is making investors pay for toxic loans in banks.”We are not happy about it and we are going to resist it, because those loans were not taken by investors. If a bank does not make profit, it is a different case, but any bank that makes profit and has enough to share among shareholders, it should declare dividend. The essence of investing is to get returns on investment.

“The CBN pronouncement may embolden bank debtors not to pay back their loans, because they would feel they don’t have anything to lose, unlike investors.”

Sir Sunny Nwosu, founder and the first National Coordinator, Independent Shareholders Association of Nigeria (ISAN) argued that the CBN directive was an overkill and supercilious, because there were already prudential guidelines which do not allow any bank with weak risk management to pay dividends.

“If a bank is a having a very weak risk asset, Central bank would not even approve its dividend proposal, so why are you overkilling the system to frighten shareholders about dividend or no dividend. The Central Bank is also interested in dividend payment because its members are also shareholders in these institutions. So, it is an unnecessary alarm, or rather, they are trying to bring shareholders against the directors of the banks,” he noted.

Fidelity, Stanbic, Sterling and Union cannot have more than 30 per cent payout ratio, because their NPL ratio has towered above the 5 per cent regulatory peg but less than 10 per cent. Ecobank is the only tier-1 lender that is restricted to restricted to a maximum payout ratio of 30 per cent as its NPL ratio stood at 9.6 per cent in Q3 2017. Fidelity has 5.9 per cent NPL ration and 17.3 per cent CaR, while Stanbic, Sterling and Union have 7.5 per cent, 6.1 per cent and 9.1 per cent NPL ratios respectively.

Only Access, FCMB, Guaranty, UBA, Wema and Zenith Banks successfully scaled over the CBN’s minimum CaR and NPL hurdles.

“These things have always been there. I think from the regulatory perspective, it is going to help the investors of these banks, because in order to manage possession, you have to manage the movement of funds in these banks,” Andrew Esene, analyst, Futureview Securities

Dr Boniface Chizea, managing consultant, BIC Consultancy Services, claimed what the CBN was trying to do was to emphasize prudence. “You pay dividend after clearing every other thing. It is the last thing that companies pay. It shows that banks are not making adequate provisioning.”

Meanwhile, investors have expressed negative sentiments towards the CBN directive as most of the banks affected by the apex bank’s directive had their value of stocks dipped last week. Unity Bank was the most hit, losing -8.59 per cent of its value between last Monday and Friday to close week at N1.49. It was closing trailed by Fidelity (N3.00) and FCMB (N2.55) which lost -8.54 per cent and -6.72 per cent respectively. Although FBNH stock dipped after the directive was issued, but it has recovered by Friday to N11.70, same amount it closed Monday trading. Also, Ecobank shed just -0.25 per cent to N19.7 last  week.

However, Tier-1 banks were able to sustain the growth of the banking sector as it was up 1.52 per cent week-on-week (w-0-w). The All Share Index (ASI) climbed 0.74 per cent on Friday, but slipped marginally -0.16 per cent w-0-w.

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