BusinessDay 26 Feb 2018

Monday 26 February 2018
34 BUSINESS DAY
C002D5556
FEATURE
New CBN directive to affect
dividend payouts of some banks
… Policy is in the right direction – analysts say
UMWENI KELVIN AND
BALIKEES ROTINWA
Some banks in the country
are likely going to be affected
by the new 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 NPL and
CAR is within regulatory threshold
of 5 per cent and 15 per cent respectively
have unrestricted DPR.
Banks with CAR at least 3 % but
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
(PAT). 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.
“DMBs and DHs that meet the
minimum capital adequacy ratio
but have a CRR of “Above Average”
or an 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 Holding alongside two other
banks – Skye bank and Unity bank
- will be unable to pay dividend to
shareholders based on the analysis
of their Q3, 2017 financial statements.
FBN Holdings with the highest
NPL ratio in the banking industry
of 20.10%, (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 per cent, 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’s dividend
payout is rather reduced 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 bpts difference
from the same quarter of the
previous year. An increase of about
108 per cent was however recorded
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 noted that they are targeting
a cost of risk of 2 per cent
by 2019.
FBN Holdings 9M 2017 financial
report reveals that 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
which had a monumental effect on
the oil sector.
While Access, Zenith, UBA and
Guaranty Trust banks have unrestricted
payout ratio, Diamond,
Fidelity and Sterling banks are eligible
to a payout ratio of 30 per cent.
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 via a telephone call
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 the banks have
hitherto 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 are not so highly regulated”
Adomi said.
Analysts 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”.