On the 31st of January, 2017, the Central Bank of Nigeria (CBN) released an update on an earlier issued (8th October, 2014) Circular on Internal Capital Generation and Dividend Pay-out Ratio of Nigerian Banks.
According to Afrinvest Research, the major focus of the circular is on the capital reserves of the banks as well as the proportion of Non-Performing Loans in a bid to forestall any threats to customer deposits in the system. The circular affirm some of existing provisions while some have been updated as a proactive step by the CBN in light of current economic realities. Some of the unchanged provisions are:
1. Every Bank shall maintain a reserve fund and shall, out of its net profits for each year, after due provision for taxation, and before any dividend is declared, where the amount of the reserve fund is:
Less than the paid-up share capital, transfer to the reserve fund a sum equal to but not less than thirty per cent of net profits; or
Equal to or in excess of the paid-up share capital, transfer to the reserve fund a sum equal to but not less than fifteen per cent of the net profit; provided that no transfer under this subsection shall be made until all identifiable losses have been made good.
2. No bank shall pay dividend on its shares until All its preliminary expenses, organisational expenses, share selling commission, brokerage, amount of losses incurred and other capitalised expenses not represented by tangible assets have been completely written off; and adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off balance sheet commitments and such unearned incomes as are derivable therefrom.
However, in line with recent developments as well as perception of potential risks on the horizon, the apex bank released further guidelines for Nigerian banks with regards to dividend payment. We present an analysis on the current state of the banks and the potential impact this can have on the banks, below;
Analysis of Impact of Revised Dividend Payment Policy on Nigerian Banks (Data as at 9M: 2017)
1. Any Deposit Money Bank (DMB) or Discount House (DH) that does not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.
All the Nigerian banks under our coverage save for UNITY and UNION meet the minimum requirement stipulated by the CBN.
For UNITY, the current CAR (as at 9M: 2017) is unavailable while UNION had a CAR of 13.3% (below CBN requirement of 15.0% in H1:2017). We envisage UNION’s CAR will improve by FY: 2017, adjusting for the capital raise of N50.0bn via rights issue in 2017.
2. DMBs and DHs that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10.0% shall not be allowed to pay dividend.
Only FBNH has an NPL ratio above 10.0% which should disqualify the entity from paying dividend. However, given the Holding company structure operated by FBNH, we believe dividend can be paid from earnings of subsidiaries, other than the bank.
3. DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or an NPL ratio of more than 5.0% but less than 10.0% shall have dividend payout ratio of not more than 30.0%.
Under this condition, ETI is the only Tier-1 bank restricted to a maximum payout ratio of 30.0% on the basis of the fact that its NPL ratio stood at 9.6% in 9M: 2016. Similarly, DIAMOND, FIDELITY, STANBIC, STERLING and UBN are also restricted to a maximum of 30.0% maximum payout ratio with respective NPL ratio above 5.0% but below 10.0%.
4. DMBs and DHs that have capital adequacy ratios of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5.0% but less than 10.0%, shall save dividend pay-out ratio of not more than 75%of profit after tax.
Under this Condition, ETI is the only Tier-1 bank that is restricted to 75.0% maximum dividend payout ratio, while STANBIC is the only Tier-2 bank eligible to pay up to 75.0% as dividend payout.
5. There shall be no regulatory restriction on dividend pay-out for DMBs and DHs that meet the minimum capital adequacy ratio, have a CRR of “low” or “moderate” and an NPL ratio of not more than 5%. However, it is expected that the Board of such institutions will recommend payouts based on effective risk assessment and economic realities.
Only 6 banks – ACCESS, FCMB, GUARANTY, UBA, WEMA and ZENITH- simultaneously meet the CBN’s minimum requirement for CAR and Non-Performing Loans. Hence, these banks are excluded from the stated restrictions on dividend payment.
6. No DMB or DH shall be allowed to pay dividend out of reserves
Our analysis shows that none of the Nigerian banks currently breaches this provision.
7. Banks shall submit their Board approved dividend payout policy to the CBN before the payment of dividend shall be permitted.
We believe the CBN will ensure compliance with the set guidelines before approval of dividend payment by Nigerian Banks.
In light of these new guidelines and based on our analysis of the banks using their 9M:2017 results, most of the banks, especially the Tier-1 banks (ACCESS, GUARANTY, UBA and ZENITH) save for FBNH, are not likely to be significantly impacted and are expected to sustain the historical dividend payment trend.
ETI meets the regulatory requirement for CAR, but has NPL above recommended maximum by the CBN; hence a maximum payout ratio of 30.0% is placed on the bank.
For the banks affected by the restrictions, we opine more attention will be turned towards improving NPL and shoring up capital buffers in order to ensure dividend payment. Already, DIAMOND sold off its African operations for a consideration of US$75.7m (N27.3bn) in order to improve its CAR buffers. Similarly, Union Bank concluded a N50.0bn rights issue in order to improve its capital base.
Furthermore, given the premium Nigerian investors place on dividend paying stocks, we believe banks will strive to improve on dividend payment.
Nevertheless, we do not rule out the possibility of some kneejerk sell-off reactions by investors especially in stocks that are affected by the dividend payment restrictions.
Hence, we advise that investors trade cautiously, especially ahead of the release of full year earnings.