Culled—Proshare
February 20, 2018
A local newspaper reported today that CBN released a circular barring banks with significant NPL ratios from paying dividends.
While a circular was indeed released recently, unlike what the news article suggests, this ban is not a new development.
It was originally implemented on 8 October, 2014 in a circular which stipulated that a bank’s ability to pay dividend is based on;
1. NPL ratio ; where banks with NPL ratios above 10% shall not be allowed to pay dividend.
2. Capital position ; where banks which do not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.
3. Credit risk ratings (CRR) ; which are not typically disclosed by the banks.
The revised circular, however, includes an additional provision; banks that have capital adequacy ratios (CAR) of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5% but less than 10%, shall have a dividend pay-out ratio of not more than 75% of profit after tax. These restrictions only apply to the banking entity, and not the group ; FBNH for instance paid out ₦0.20k per share (51% dividend pay-out) in FY16, despite an NPL ratio of 24.4%. This was paid out of the other non-banking subsidiaries within the group.
Based on our conversations with management, we think that a 75% pay -out ratio is highly unlikely. We note that the highest dividend pay-out ratio for the banks in our coverage universe in FY17E is c. 50% (GTBank and Zenith).
We expect the banks to take a conservative stance on dividend pay-out in light of IFRS 9 capital requirements, which could reduce CAR by as much as 150bpts in a worst case scenario. Zenith, UBA and Fidelity offer attractive dividend yields of 7–8% based on our FY17 estimates while GTBank and Access stand closer to 5–6%.
Dividends will be declared with the release of FY17 numbers, which we expect in about two weeks.
| Figure 1: Nigeria Banks – dividend pay-out ratio | ||||||||||||||||||||||||||||||
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| Source: Company data, Renaissance Capital estimates |
| Figure 2: Nigerian Banks – dividend yield | |||||||||||||||||||||||||||
Source: Renaissance Capital estimates |
