How new CBN directive will affect dividend payouts of some banks
Some banks in the country are likely going to be affected by the new Central Bank of Nigeria (CBN) directive which bars Deposit money banks and discount houses with high non-performing loans and poor capital adequacy ratio from paying dividends to shareholders, a report from Cowry Asset Management reveals.
Earlier in the year, the Central Bank of Nigeria in its circular dated 31st January 2018 asserted that most financial institutions in the country do not consider their risk exposure and the need to strengthen their capital base before dividend disbursement to shareholders noting that all over the world, retained earnings is an important source of fund in building institutions.
According to the apex monetary authority, banks whose non-performing loans (NPL) and cash-reserve ratio (CAR) is within regulatory threshold of 5 per cent and 15 per cent respectively have unrestricted DPR. Banks with CAR at least 3 per cent above the regulatory minimum of 15 per cent and NPL ratio greater than 5 per cent but not more than 10 per cent is restricted to a dividend payout ratio of not more than 75 per cent of profit after tax. Lastly, banks with CAR within the regulatory threshold and NPL ratio greater than 5 per cent but less than 10 per cent is restricted to a DPR of not more than 30 per cent of PAT.
“In order to facilitate sufficient and adequate capital build up for banks in tandem with their risk appetite, 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. DMBs and DHs that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend” the circular stated.
“Deposit Money Banks (DMBs) and Discount Houses (DHs) that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or a NPL ratio of more than 5% but less than 10% shall have dividend payout ratio of not more than 30%. 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% but less than 10%, shall have dividend pay-out ratio of not more than 75% of profit after tax”.
According to the report by Cowry Asset Management titled “Banking Sector Dividend Outlook”, FBN Holdings alongside two other banks – Skye bank and Unity bank – will be unable to pay dividend to shareholders from the analysis of their Q3,2017 financial report.
FBN Holdings with the highest NPL ratio in the banking industry of 20.10 per cent,(though down from 2016’s ratio of 24.90 per cent) and a CAR of 20.50 per cent (up by 0.50 per cent from 20 per cent in 2016) surpassed the regulatory minimum NPL and CAR of 5 per cent and 15 per cent respectively compared to NPL ratios of other tier one banks: Zenith (4.2 per
cent), GT bank (3.9 per cent), Access Bank (2.5 per cent) and UBA (4.2 per cent). This indicates that FBN Holdings quality of loan portfolio is quite poor compared to other tier one bank.
In an exclusive interview with the news Editor of BusinessDay recently, the Group Managing Director of FBN Holdings, Mr U.K Eke stated that the bank is targeting NPL ratio of below 5 per cent by the end of 2019. “We will see a normalisation of NPLs by 2019 and it will be sub 5 percent, we are very confident about that,” Eke said.
Though the circular was issued to all DMBs in the country, the prospect of affecting FBN Holding dividend’s is quite low as it is a financial holding company with other subsidiaries that could shore up earnings and buffer capital.
Looking at the risk management culture of the Tier 1 banks in the third quarter of 2017, Guaranty Trust Bank has the lowest cost of risk ratio of 0.53%, about 86 per cent decline in the previous year’s value. Access bank of Nigeria PLC on the other hand retained its cost of risk at 0.9 per cent, in Q’3 of 2016 and 2017.
The level of exposure of United Bank of Africa is also quite low due to the value of the bank’s cost of risk of 1.1 per cent, 2 bps difference from the same quarter of the previous year. An increase of about 108 per cent was however experienced by Zenith Bank PLC, as the cost of risk increased from 1.3 per cent in Q’3 of 2016 to 2.7 per cent for the 9 months period of 2017.
Out of the tier 1 banks, First Bank of Nigeria Holdings has the highest cost of risk of 6.9 per cent in Q’3 of 2016, tumbling to 5.6 per cent in September, 2017.
The wide margin between FBN Holdings’ cost of risk and the other banks in the tier 1 group is as a result of the significant impairment charge on their loan books of N114.7 billion and N97.6 billion in 2016 and 2017 respectively. Impairment charge is the cost incurred for loan losses.
Nevertheless, the GMD of FBN Holdings stated that they are targeting a cost of risk of 2 per cent by 2019.
In FBN Holdings 9M 2017 financial report, the total loan to oil and gas sector (encompassing the downstream, upstream and services subsectors) stood at N702.3 billion compared to N844 billion in the corresponding quarter of 2016.Other sectors that gained from increased credit inflow from the bank includes Manufacturing (12.8%), construction (4.3 per cent), general (4.3 per cent), real estate (7.9 per cent) and power and energy (5.1 per cent).
Though the NPL risk exposure for the oil and gas sector in the quarter under review was down by 11.2 percentage points from 75.1 per cent (N398 billion) in Q3, 2016 to 63.9 per cent (215 billion) in Q3 2017, the risk exposure in FBN Holdings’ balance sheet could be attributed to volatilities in oil prices.
Meanwhile, Access, Zenith, UBA and Guaranty Trust banks have unrestricted payout ratio.
Three banks (Diamond, Fidelity and Sterling banks)are eligible to a payout ratio of 30 per cent while another set of three banks (Stanbic IBTC, Ecobank Transnational and Union bank Plc) are eligible to a payout of not more than 75 per cent. On account of their negative retained earnings/accumulated deficit positions, Union Bank (N244 billion), Unity Bank (N276 billion) and Wema Bank (N38 billion) are not expected to pay dividend, the report stated.
Omotola Abimbola, an analyst at Afrinvest opined that “when you compare the dividend history of the banks, the new policy has no consequential impact at least in the short term because most of them have not surpassed the new regulatory dividend payout ratio in the past three to four years”. He stressed that most Nigeria investors are income investors and they value dividends a lot so they can punish banks if they do not receive dividend.
Looking at the underlined reasoning behind the CBN policy, we think it is in the right direction because it is going to stimulate the effort by the apex bank to keep the NPL within check and encourage appropriate behaviours by banks” he said.
Emakhu Adomi, Managing Director of 3A Capital on his part said that there is likely going to be a shift from banking stocks to stocks of sectors that pays higher dividend.
“Due to the fact that investors in the NSE places high premium on dividend paying stocks, it is expected that there will be a shift from banking stocks to other sectors like industrial and consumer goods that pay are not so highly regulated” Adomi said.
Analyst are of the opinion that banks that are contemplating paying dividends to shareholders to make their shares more attractive ahead of potential capital raising will be forced to rethink their strategy and possibly also consider using accumulated profits over time to shore up capital.
Basically what has happened is that the CBN in exercising is oversight regulatory function has deemed it necessary to restrict certain banks who do not meet certain financial ratios from paying dividends until they meet these requirements, Adomi noted.
“These banks who do not meet the new requirements can grow and shore up capital through the normal process of retained earnings. Overall, this policy is good for the banking industry and for the economy”.