There is uneasy calm in the financial services sector following the Central Bank of Nigeria (CBN) directive to Deposit Money Banks and Discount Houses with huge bad loans and low capital base to stopped payment of dividends to their shareholders.
The apex bank said its action is hinged on the rising non-performing loans in the banks which has impacted negatively on banks liquidity, hence the need to stop further erosion of the capital base of the banks and discount houses.
According to the directive which was conveyed through a letter signed by Director Banking Supervision Department, Ahmed Abdullahi to commercial banks and discount houses, the apex bank observed that rather than grow the capital by retaining earnings, some banks were paying out substantial proportion of their profits as dividends irrespective of their risk profile and the need to build resilience through adequate capital buffers.
The apex bank stated that, henceforth: “Any Deposit Money Bank (DMB) or Discount House (DH) that does not meet the minimum Capital Adequacy Ratio (CAR) shall not be allowed to pay dividend.
The CBN further explained that banks and discount houses that meet the minimum CAR would not be restricted from paying dividend to their shareholders. In furtherance to the new order, CBN has also mandated banks to submit to it, their Board approved dividend payout policy before payment of dividend shall be permitted.
The CBN noted that despite the circular it issued in October 2014, which detailed the advantages of banks retaining their earnings, it had observed that some of the financial institutions still take the risk in paying out a greater proportion of their profits.
Under the banking supervision regulation, the minimum non-performing loans threshold allowed for banks is five percent. That implies that bad loans incurred by banks should not exceed five percent of their total loans.
Most of the non-performing loans according to findings, come from the oil sector that have been groaning under the impact of the global meltdown in international oil price and the manufacturing sector that have over the years been experiencing operational difficulties that was worsened by economic recession.
The CBN sets different minimum CAR for respective banks in the country. According to the CBN banking supervision provision, 16 percent CAR is set for banks considered to be very strong, 15 percent for those with international banking licenses and 10 percent for the rest.
According to the Nigeria Deposit Insurance Corporation’s, NDIC data, as at September last year the total bad loan profile incurred by banks had hit N2.4 trillion from N1.6 trillion as at December 2016 representing an increase of 15.18 percent.
The directive is coming after commercial banks and discount houses had released their 2017 financial year’s reports that showed a deep non-performing loan in most of the bank’s books.
The development has generated ripples among the industry stakeholders namely, banks, shareholders and stockbrokers. For investors, the new directive may have dashed their hopes of getting dividends better than what was obtained in 2016 when the nation’s economy was swimming in recession which affected most sectors especially banking.
Some shareholders have argued that the directive amounts to robbing Peter to pay Paul as whatever loan engagement the banks go into with their clients should not be of any concern to them, neither should they be made to suffer the effect.
Chris Ozoemena, a employee of a manufacturing company who is a shareholder in one of the second generation banks is amused with the CBN order. He said as far as he was concern, his bank has the obligation of paying dividends to them which is an agreement in the books. He wondered what the banks will tell them at the Annual General Meeting that CBN said because of their heavy non-performing loans therefore dividends should not be paid to shareholders. He stressed that such would sound ridiculous.
Financial analysts believe that the new rules, which the apex bank said were aimed at curbing rising non-performing loans and the consequent erosion of banks’ capital base, could see many lenders either proposing dividends that will be far below shareholders’ expectations or not paying any dividends at all. This they reasoned is bound to upset shareholders and they foresee the new rule setting the shareholders and banks on a collision course, given the fact that shareholders had to grapple with a general reduction in bank’s dividend payment in the 2016 fiscal year at the peak of the economic recession and were looking forward to a better dividend this year as the economy is said to have gotten out of recession.
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Mike Okolo, a financial analyst is one of those who share this view. He maintained that though the new policy is a bitter pill to be swallowed by shareholders, but maintained that to say the truth, the facts on ground show that a good number of the banks would not be able to pay dividends this year as they have negative retained earnings going by their third quarter 2017 results. He said apart from the issue of bad loans, most of the Tier 2 banks which the new directive is going to have impact on have found it very difficult coping with the mandatory contribution to the Asset Management Corporation, AMCON sinking fund.
Sylvester Arinze, a stockbroker said even though the CBN directive is aimed at protecting the banks from insolvency, it would turn around to paint most of the banks bad in the eyes of their shareholders and potential investors because of the perceived rancor it would create between the banks and their shareholders.
Similarly, the banks are said to be in shock over the apex bank dividend payment policy, which some of them argued is bound to put them in the box. Findings revealed that most of the banks likely to be affected by the policy are now bracing up for likely show down with their shareholders.
The Next Edition found out that out of the16 banks quoted on the Nigerian Stock Exchange, NSE, only five are not going to be affected by the dividend payment restriction because of their strong CAR and manageable non-performing loans. They are UBA, Zenith Bank, Access Bank, First City Monument Bank, Guaranty Trust Bank and Wema Bank.
On the other hand, Diamond Bank, Fidelity Bank, Unity Bank, Stanbic IBTC, Sterling Bank, First Bank of Nigeria and Union Bank are some of the banks that may be affected by the dividend payment order.
However, a staff of Union Bank who pleaded for anonymity said they do not have a huge non-performing loan. On whether they would pay dividend, he answered “ When we reach the bridge we shall cross it.”
Tajudeen Ibrahim, Head of Research at Chapel Hill Denham Limited, an investment broking firm had reportedly predicted that some companies among the NSE 30 firms might not reward shareholders as they had been recording losses. He had Union Bank Plc and Sterling Bank as some that will not reward shareholders because of their negative retained earnings.
He also mentioned that Oando Nigeria Plc, an upstream oil and gas giant, would not pay dividend due to an accumulated loss of N254.40 billion as at September 2017.
Mr Ayodeji Ebo, Managing Director of Afrinvest Securties Limited, a Lagos based investment firm has emphasized that recent statistics show that Nigerian banks would have to shore up their capital in 2018 if they are to survive.
The latest policy is one of the many that the Governor of Central Bank of Nigeria, Godwin Emefiele has introduced to either regulate banking operation in Nigeria as well as monetary policy as it affects the Naira.