HoldCo Banks’ Investors Not Affected by Dividend Pay-out Policy

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Obinna Chima

Investors in banks that operate under a holding company (holdco) structure can still expect dividends from the holdcos irrespective of the amendments to the dividend pay-out policy by the Central Bank of Nigeria (CBN), a report by CSL Stockbrokers Limited has stated.

It explained: “Investors in banks that operate under a holding company structure such as FBN Holdings, FCMB, and Stanbic can still expect dividends from the holding companies irrespective of these directives.”

The CBN had in a recent circular made some amendments to its October 2014 policy on internal capital generation and dividend payout ratio. Prior to the 2014 circular, dividend pay-out policy for banks had been as stipulated in Section 16(1) of BOFIA 2004 and Prudential Guidelines fordeposit money banks (DMBs) of 2010.

However, the new policy among others stipulates that any 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 per cent shall not be allowed to pay dividend; and that DMBs and DHs 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 shall have dividend payout ratio of not more than 30per cent.

The central bank however pointed out that 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 five per cent. But it is expected that the Board of such institutions will recommend dividend pay-out based on effective risk assessment and economic realities.

Continuing, CSL Stockbrokers Limited stated: “All the banks in our coverage universe as at September 2017 meet the minimum capital adequacy requirements and since we do not anticipate any loss forfull year 2017 and any significant loan growth, we expect the banks should be in a better position at the end of full year 2017.

“We note that whilst systemically important banks were required to have a minimum capital adequacy ratio (CAR) of 16 per cent, the CBN had as at July 2015, postponed the effective date indefinitely. A change in the full year 2017 non-performing loan (NPL) ratios of the banks for better or for worse should also be noted.”

In a separate report, Afrinvest Securities Limited stated that only six banks, which it listed to include -Access Bank, FCMB, GTBank, UBA, Wema and Zenith Bank- simultaneously meet the CBN’s minimum requirement for CAR and NPLs, hence they are also excluded from the stated restrictions on dividend payment

“Only FBN Holdings has an NPL ratio above 10 per cent, which should disqualify the entity from paying dividend. However, given the Holding company structure operated by FBN Holdings, we believe dividend can be paid from earnings of subsidiaries, other than 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.
“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,” they added.