Business

Banks plot strategies to beat CBN’s ban on Shareholders’ Funds

Published

on

Deposits Money Banks (DMBs) operating in the country may have devised an ingenious way of circumventing the Central Bank of Nigeria’s (CBN) insistence on allowing only paid-up capital and share premium for banks new capital requirement, Business Hallmark can report.

According to BH findings, most banks may end up paying their shareholders jumbo dividends, which are then expected to be ploughed back into the system by shareholders through right issues to meet the new CBN requirement.

Recall that the CBN had on March 28, 2024, announced the commencement of the much awaited recapitalization exercise for DMBs, which mandates substantial increases in their minimum capital base according to their scope of operations.

For instance, while commercial banks that want to get international licence will need to upgrade their capital base to N500 billion, national banks must capitalized to the tune of N200 billion, regional banks N50 billion, non-interest banks seeking national licence N20 billion and non-interest banks seeking regional approval N10 billion.

According to CBN’s acting Director of Corporate Communications,Mrs. Sidi Ali, the apex bank will not allow banks Shareholders’ Fund as part of the new capital requirement, which it insisted must consist solely of paid-up capital and share premium.

Sidi Ali advised the banks to consider raising fresh equity capital through rights issues, private placements, and offers for subscription, as well as pursuing mergers and acquisitions, and that they are all required to meet the minimum capital requirement on or before March 31, 2026, she

“The minimum capital shall comprise paid-up capital and share premium only and shall not be based on the Shareholders’ Fund.

“Additional Tier 1 (AT1) Capital will not be eligible for meeting the new requirement. Despite the increase in capital, banks must ensure strict compliance with the minimum Capital Adequacy Ratio (CAR) requirement applicable to their license authorisation”, the CBN circular had stated.

The announcement that the new capital requirement for financial institutions shall be restricted to paid-up capital and share premium, however, caught stakeholders in the banking industry napping, with most of them erroneously concluding that virtually all the financial institutions, especially Tier-1 banks, had already surpassed any figure that might be announced by the CBN

They had largely based their assumptions on the belief that the CBN will allow the banks to add their Shareholders’ Fund to their paid-up capital and share premium in the computation of their capital bases.

However, with the CBN’s exclusion of banks shareholders’ fund from the minimum capital requirement, all the bank fell short of the new requirement.

For instance, Zenith Bank’s capitalisation, which stood at N2.07trillion (with the addition of its Shareholders’ Funds) before the apex bank’s new requirement, fell to N270.75 billion. Zenith Bank will need additional N229.26 billion to scale the new requirement.

Also, Access Bank, with a capitalisation of N1.92trillion pre-CBN’s announcement, is now left with only N251.81billion and will need additional N248.19 billion to reach the new threshold.

Likewise, Ecobank, with a pre-CBN announced capital base of N353.51 billion, must raise N146.49 billion to remain an international bank; First Bank of Nigeria Holdings Plc with N251.34 billion must raise another N248.66 billion to retain its licence; GTBank with N138.19 billion capital base must scale up by another N361.81 billion; Fidelity Bank with N115.31 billion, will need to raise N384.70 billion; FCMB with N125.29 billion must secure additional N374.71 billion in capital; while UBA will need to raise additional N384.18 billion in addition to its current capital of N115.82 billion.

Also, Stanbic IBTC with N109.26 billion capital, will need to raise N390.74billion. Sterling Bank with N57.15 billion on the other hand, must source for a whooping N442.85 billion.

While speaking recently on the new capital requirement for banks, the Head of Financial Institutions at Agusto & Co, Ayokunle Olubunmi, had warned that the CBN must shore up its regulatory functions and oversight of the banking industry to prevent the flow of illegitimate funds into the banking industry.

Advertisement

“While everyone was expecting recapitalisation, the format, which the CBN went about it is not what was expected. Everybody was thinking about shareholders fund but they surprised everyone by coming from the angle of paid up capital instead of shareholders fund that was traditionally used. All the banks will be required to actually go to the market and raise capital.

“But the banks have two years. It is not something that if they don’t do now, they will be in trouble. The other thing is that this is just the beginning and I’m sure that there will be a lot of engagement. The banks will push back, particularly with the paid up capital, they will push back and may even ask the CBN to add retained earnings to it.

“If the CBN sticks to its decision, the banks will have to bring in institutional investors, and some will either merge or leave the industry. There would also be the option of scaling down to meet the recapitalisation, so it is a lot of interesting times ahead

“The banks need to be careful, because if they are not careful with the merger and acquisition and other events that may come again, they might end up in a marriage of strange bedfellows.

“They need to ensure that the person they bring on board is someone they have the same vision with, because that can ultimately kill the brand”, Olubunmi had explained.

However, the banks, it was gathered, are not waiting until the expiration of the CBN’s March 31st, 2026 recapitalisation deadline, but are already looking for ways to legally deploy their encumbered shareholders funds, among several other options available to them.

The banks, some investment bankers and corporate lawyers informed our correspondent, may end up paying their shareholders jumbo dividends in subsequent months, which will then be ploughed back into the system to meet the new CBN requirement.

According to a corporate lawyer, Moses Adebola (not real names), since the CBN had foreclosed the deployment of banks shareholders’ Funds towards meeting the new capital requirement, limiting it to only their paid-up capital and share premium only, banks are left with no other option than to legally free the encumbered funds.

“And the best way to do that is to pay out the massive shareholders funds sitting idle in their vaults to shareholders as dividends with the expectations that they will bring it back to purchase additional shares through right issues.

“Don’t be surprised to see banks coming out to announce huge bonuses for year end 2023 in the next few days or weeks.

“Apart from this, they also have four windows in a year to declare quarterly bonuses, where funds can be sourced for the capitalisation exercise. And they have eight quarters and two full years to play with”, declared the corporate banker.

Another finance expert, who did not want his name in print said that banks have two ways of deploying the encumbered shareholders funds towards meeting the recapitalization threshold without infringing on the nation’s monetary laws.

According to him, they can do it directly by giving out huge bonus shares to shareholders or through the payment of dividends.

“However, the second option is fraught with some risks. Many cash-strapped shareholders, I believe, will end up spending the dividends on their own personal needs like health care, children’s schools fees, mortgages and the likes.

“So, the expectations that this category of shareholders will use their dividends to mop up new shares may be farfetched. Most of the funds, at least 50 percent, will not come back.

“But they (banks) will probably get back half of the money from big investors, who are the real owners. So, 50% is a good mark as it will go a long way towards meeting the CBN’s capital requirement”, said the financial expert.

Advertisement

Meanwhile, based on the year end 2023 financial reports released so far by some of the banks, it looks like the banks are already putting their shareholders funds to use.

For instance, BH checks revealed that the six banks that had so far presented their audited financial results for 2023, Guaranty Trust Holding Company Plc (GTCO), Stanbic IBTC Holdings, Access Holdings, United Bank for Africa (UBA), Zenith Bank Plc and Wema Bank Plc have proposed a total N366billion dividends to their shareholders.

Based on the analysis of the six banks 2023 audited financial results filed with the Nigerian Exchange Limited, the final dividend payout is 30.94 per cent higher than the N280.22billion paid out as dividends in 2022.

The most capitalised bank in the country, Zenith Bank, last week announced the highest final dividend so far of N3.50 for 2023, bringing the payout to shareholders to N109.89billion compared with the sum of N91.05billion paid out in 2022.

In addition to the N3.50 final dividend, N0.50 was also declared as an interim dividend, bringing the total dividend to N4 per share, which would be paid from the bank’s retained earnings accounts as of December 2023. Meanwhile, Zenith Bank’s retained earnings stood at N1.18trillion.

In the same vein, Access Holdings’ directors had proposed a final dividend of N1.80 per ordinary share of 50 Kobo each on the 35,545,225,622 issued ordinary shares.

In total, the shareholders would be getting N63.98billion as final dividend for the year 2023, higher than N46.21billion paid in 2022.

However, the proposed dividend is still subject to shareholders’ ratification at the group’s next Annual General Meeting (AGM).

Before the latest pay out, Access Holdings had earlier paid an interim dividend of 30 kobo in 2023.

Another bank that have so far released its financial report, Stanbic IBTC Holdings, is proposing a N28.51billion final dividend for 2023, higher than the N25.91billion paid to its investors in 2022.

Following on their heels is UBA, whose shareholders will take home the sum of N78.66billion in final dividend payout at N2.30 per share from its retained earnings. The bank had in September 2023 paid N0.50 per share interim dividend, bringing the total dividend for the year to N2.80.

Meanwhile, Wema Bank’s shareholders will get a N6.43billion final dividend of N0.50 per share, a huge leap from the N3.86billion paid in 2022.

Unlike the shareholders of the first five banks, GTCO’s investors on the other hand, will see their final dividend payout decline to N79.46billion at N2.70 per share from N82.40billion at N2.80 per unit received in 2022.

In total, the six banks are paying the sum of N86.22billion more than what it paid out in 2022.

Other banks annual audited reports are still being awaited.

Meanwhile, experts, who spoke to BH on the substantial appreciation in the bank’s proposed dividends for 2023, maintained that subsequent pay out will be huge as most banks, with the exception of a few, which may have gotten wind of the CBN’s, had submitted their reports to the securities and exchange commission and the apex bank for vetting and could not do anything to alter them..

Advertisement

While reacting to the marked improvement in the dividend payout of banks that have released their results so far, President of the Pragmatic Shareholders Association (PSA), Bisi Bakare, said his members were happy with the growth.

“No doubt, they paid more than our expectations, but like Oliver Twist, we always want more.

“In a nutshell, we are happy and we hope the coming year’s dividend will be better than 2023”, the PSA president declared.

Meanwhile, financial experts are projecting that in their bids to beat the new CBN’s recapitalization hurdle, banks will likely incentivize their shareholders with jumbo dividend payouts.

According to a former President of the Chartered Institute of Bankers of Nigeria (CIBN), Okechukwu Unegbu, banks may be looking to empower minority investors with the aim of raising the required funds before the March 2026 deadline.

“The CBN is asking the banks to recapitalize and telling them that retained earnings that are on the books of the banks will not be regarded as part of the capital.

“If that is the case, the best that the banks can do is use their retained earnings to pay jumbo dividends to their shareholders so that those shareholders can use that money and more of theirs to buy more of the shares of the bank.

“While the CBN may want more foreign inflows of capital due to foreign exchange considerations, bank owners will be concerned about losing control to foreign interests.

“Most foreigners, if they want to invest, may want to have controlling interest in the banks and that is something the bank owners may not want to allow.

“For that reason, most of the banks will be careful of the controlling interest of the foreign investors and if the interest is too high, they will probably not want to go that route.

“In addition, the central bank should allow these banks to use their retained earnings and to issue bonds and other forms of capital raising”, the former CIBN boss advised.

Also speaking, a money and capital market analyst, Rotimi Fakayejo, said banks that have not yet announced their results will try to pay out as much dividend as possible.

“The CBN has said 2026, so there is still a long way to go. A lot of things can still happen. They are talking about shareholders’ funds not being part of the capital, but what we are expecting now, at least for the banks that have not yet announced their results, is for them to pay out as much dividend as possible.

“That way, shareholders would be empowered to buy more shares through the right issues. It may not be within one financial year, but the more important thing is that the government expects them to get more foreign capital than local.

“For a bank like Zenith Bank that has a share issue of 31 billion units with a share price of about N40, that means they would need to do about eight to five billion additional shares to raise that quantum of funds.

“So, their shareholding would be diluted and if the shareholders do not have the money to buy, it is going to be a loss to them.

Advertisement

“I think they are going to find every means possible to mitigate against that. So, we expect that there should be more jumbo dividend payments from the banks.

“Already, AccessCorp has declared N1.80. So, shareholders can have something to hold on to and use to get more shares”, Fakayejo noted.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Most Engaging

Exit mobile version