Culled—Proshare

February 21, 2018/Proshare Research

Prelude 
Recently, the Central Bank of Nigeria published a circular introducing measures. That serves both as a perquisite and also dictates how residue owners of both deposit money banks (DMBs) and discount houses (DH) should be rewarded by the management.  Such measures include:

• No deposit money bank  or discount house that does not meet the minimum  Capital adequacy ratio (CAR) shall not pay dividend

• DMBS or DHS that have a composite risk  rating (CRR) tagged to high or non-performing loan ratio considered to be above 10%  cannot pay dividend

• DMBs and DHS that meet the minimum CAR but have a CRR referred to be above average or an NPL ratio more than 5% but less than 10%  shall pay dividend ratio of not more than 30%

• DMBS that have CAR of at least 3% above the minimum and CRR referred to be low and a NPL ratio of above 5% but below 10%. Such bank cannot pay more than  75% of profit after tax as dividend

• No DMB or DH shall pay dividend out its Reserves

• Bank shall submit  their board approved dividend pay out to CBN before it is permitted

Inevitably, the Central Bank has scribbled the rules that govern dividend policy on the sand.

Body
Prior to the 2008 recession, litany of banks such as Bears, Lehman Brothers, Merry Lynch and a host of others bring to memory the scenario where strong dividends were paid by such deposit money banks.  Even though they had high credit risk rating   varying from poor asset quality , high loan to deposit ratio, dented balance-sheet,  astronomical rise in margin loans  and  thin  capital adequacy ratio.

The present scenario in Nigeria is not far-fetched, even though banks have shown resilience in the face of strong shocks.  However, it portrays a ragging reality whereby bank boards are more aligned to favouring pure equity capital ahead of capital buffers.

The rippling effect of expending cash outflows to residue owners’ triggers appreciation in equity due to investor’s positive reaction to dividend.  At the same time denying the banks the ability to fully repair their balance sheet and replenish their buffers; Leaving depositors with a thin cover.

Thus, it not surprising to see the regulators put in place such administrative measures to force banks preserves their reserve.  At the same time improve their capital buffers and repair their balance-sheet.  

Implication
Deposit Money Banks such as, ZENITH, GTB, UBA, ACCESS and WEMABANK   remain unscathed  by this new  policy measures  as their macro prudential ratio such as CRR and Non-Performing Loans (NPLs) is robust. Thus, it is expected that their dividend policy will remain unshackled moving forward.  

Although FBN Holdings (FBNH) find itself in a blurring position as the deposit money bank’s subsidiary threaten its dividend position due to its high non-performing loan, but its holding structure create a leg wind for  dividend pay-out. Thereby, FBNH can expend cash outflow to residue owners from its income stream in other subsidiary such as its insurance and merchant bank arms. 

In the same vein, Union Bank is relatively with low non-performing loans and consistent shoring up in capital base also put the deposit money bank in a position to have its dividend policy not affected by regulatory measures. 

Certainly, deposit money banks such as Unity and Skye Bank who have their non-performing far above the regulatory ratio cannot pay dividend.  

Although it is expected that deposit money banks which have their dividend policy dented by the new regulations are left with raising counter-cyclical capital or carrying out divestment to shore up their capital base.  

One must highlight that at this point banks affected have finetuned their dividend policy in tad with the new regulation.