The Central Bank of Nigeria recently said banks with bad loan portfolios above 10 per cent and inadequate capital requirements should henceforth not pay dividend to their shareholders, raising fears among investors. But analysts believe investors do not need to worry about the directive, in the interim, as most of banks are strong enough to pay dividend in the short to medium term. Bamidele Famoofo reports
Jitters ran through the spines of investors, especially those who have banking stocks in their portfolios, on Monday, February 19, when the Central Bank of Nigeria, through a circular dated January 31, 2018, announced that banks with huge bad loan portfolios and inadequate capital requirements would no longer be allowed to pay dividend to their shareholders. In what appeared to be a quick reaction to the policy, shares of banks recorded noticeable losses after the announcement. But investment analysts, particularly those with Cordros Securities Limited, have said there won’t be any cause for alarm in the immediate time.
According to researchers at Cordros, only one out of the 11 banks it subjected to an acid test on Non-performing Loans (NPL) and Capital Adequacy Ratio (CAR) as required by the CBN, is not qualified to pay dividend in the short to medium term.
The apex bank had in a circular dated January 31, 2018, which was released on February 19, 2018, spelt out conditions to be met by Nigerian banks vis-à-vis dividend payment. The aim was to facilitate sufficient and adequate capital build up in line with the banks’ risk appetite. The circular was an updated version of the one first issued by the bank in 2014 on the same issue.
Three of the salient conditions contained in the old circular are that: banks with Non-Performing Loans (NPLs) ratio above 10 per cent shall not be allowed to pay dividend; banks that meet the minimum Capital Adequacy Ratio (CAR), but have NPL ratio above five per cent, but less than 10 per cent, are allowed a dividend pay-out ratio (DPR) of not more than 30 per cent; banks that meet the minimum required CAR, and have NPL ratio not more than five per cent have no regulatory restriction on their DPR.
However, the amendment in the new circular stated that banks that have CARs at least three per cent above the minimum requirement, and have NPL ratio of more than five per cent, but less than 10 per cent, are allowed up to 75 per cent DPR.
Meanwhile, details of a research carried out by a team of analysts with Cordros Securities Limited showed that about 92 per cent of major banking stocks (Tier-One and Two) subjected to the dividend policy test will be cleared by the CBN to pay various degrees of dividend at the moment. According to the analysts, only First Bank Limited, a subsidiary of FBN Holding Plc, is not qualified to pay any dividend at the moment.
Capital Adequacy Ratio
The CBN has grouped Nigerian banks into three categories as regards capital adequacy, ranging from 10 per cent to 16 per cent. For Systemically Important Banks (SIB), which are required to have a minimum of 16 per cent Capital Adequacy Ratio (CAR), all six banks (Access, Zenith, UBA, GTB, FBNH, and Diamond) were sufficient in capital as at February 20, 2018, while FCMB and Fidelity, classified as international banks and are required to have a minimum of 15 per cent CAR, met the requirement as at the day of the research. National and Regional Banks, which include Wema, Stanbic and Sterling, also met the minimum 10 per cent CAR requirement for their category.
The banks’ NPL ratios, as disclosed by Cordros Research, show that First Bank has the highest NPL ratio, and is the only bank with an NPL ratio above the 10 per cent benchmark, while Access Bank has the lowest NPL ratio. Going by the apex bank’s directive, First Bank with 19.85 per cent NPL, which is above the 10 per cent CBN benchmark, is not permitted to pay dividend. However, FBNH, the listed holding company, can still pay dividend to shareholders from profits declared by other subsidiaries within the group.
Diamond Bank, Fidelity, and Sterling fall in Category II, as they meet with the CBN’s CAR requirement, and have NPLs above five per cent but below 10 per cent. These banks are allowed Dividend Payment Ratio (DPR) of not more than 30 per cent.
Stanbic benefits from the updated circular, hence, despite having NPL of seven per cent, the bank’s CAR 19.5 per cent is more than three per cent above the CAR requirement of 10 per cent, thus qualifying the bank for DPR of up to 75 per cent under the latest circular.
Despite the opinion expressed by analysts with Cordros Securities Limited, that the CBN’s latest directive is unlikely to, in the medium term at least, affect dividend expectations from the banks they covered in their report, Managing Director, Afrinvest Securities Limited, Mr. Ayodele Ebo, says now is the right time for banks to take steps to increase their working capital. Ebo challenged the banks in the different categories to make use of the Rights Issue and Eurobond instruments to further boost their capital.
“Part of what we expect banks to do in the light of the favourable investment condition in the Nigerian capital market at the moment is to seize the opportunity to raise equity capital, either via Rights Issue or Public Offer, to further shore up their capital adequacy ratio,” Ebo said.
Ebo’s recommendation was in line with a recent outcry by the International Monetary Fund that Nigerian commercial banks needed to raise fresh capital and boost their CARs to allow them effectively drive growth in the domestic economy.
It would appear that a few of the banks are already yielding to experts’ recommendation on boosting their capital base, as Union Bank recently raised about N50 billion through Rights Issue from the market. The bank said it was aimed at bolstering its capital reserves, while Diamond Bank’s move to sell its West African banking operations (in Benin, Togo, Cote d’Ivoire and Senegal) and focus on the vast retail banking potential in Nigeria is equally consistent with the move to consolidate the bank’s capital buffers.
While the other banks are expected to borrow a leaf from Union Bank Plc to raise equity capital as, recommended by experts, analysts with FSDH Research recommend that investors should maintain long-term investment strategy in the equity market. According to them, “This will help to hedge against portfolio losses associated with short-term stock price volatility.
Our analysis of historical returns shows that investors make good returns in the equity market if they invest in stocks that have strong fundamentals and maintain a long-term view.
An investor who maintains a long-term strategy will earn capital appreciation, cash dividend and/or bonus over the investment horizon.”
An analysis of the yearly returns of the equity market as measured by The Nigerian Stock Exchange All-Share Index (NSE ASI) between 2008 and 07 February 2018, conducted by FSDH Research, shows that capital appreciation contributed the highest return to investors, accounting for 54 per cent of the return. Bonus and cash dividend contributed 26 per cent and 20 per cent, respectively.
The research conducted by Cordros research team revealed that most banks short-change their shareholders in the aspect of dividend pay-out, as only Wema Banks has met the CBN’s stipulated Dividend Payment Ratio (DPR) in the last three years. Zenith Bank followed at a distance with a three-year average of about 60 per cent.
However, contrary to the research findings by Cordros, the CBN said it had observed that rather than grow their capital with retaining earnings, some banks were paying out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.