Analysts dispel fears over CBN’s circular on Capital Generation, Dividend Payout Ratio

Early this week, stakeholders and investors in the Nigerian financial market woke to a frenzy following the release of a circular by the Central Bank of Nigeria (CBN) titled “Re: Internal Capital Generation and Dividend Payout Ratio”.
Contrary to earlier jitters that trailed the release of the circular, many analysts yesterday allayed the fears as they think the directive more appropriately reveals the apex bank’s commitment to financial stability.
The CBN in the circular updated its policy on internal capital generation and retention policy for Nigerian banks. In addition to the existing guidelines, an additional clause was set for banks’ eligibility for dividend payments.
Summarily, the existing guidelines require that banks which do not meet the minimum regulatory capital requirement (CAR) for their scope of business may not pay a dividend. CAR thresholds are 15percent for international banks, 16percent for systemically important banks (SIBs) and 10percent for others.
Also, the guideline requires banks with a “High” Composite Risk Rating (CRR) and Non Performing Ratio (NPL) between 5percent and 10percent may not pay more than 30percent of their earnings after tax as dividend.
The CBN also restricts bank with satisfactory CRR and NPL ratio below 5percent from paying dividend. No bank may pay dividend out of reserves. The new guidelines have an added clause: banks with CAR of 3percent above their minimum requirement, “Low” CRR and NPL ratio greater than 5percent but less than 10percent may pay a maximum of 75percent of earnings after tax as dividend.
Research analysts at Cordros Securities said that there is “No Cause for Alarm,” adding that CBN’s latest directive is unlikely to, in the medium term at least, affect the dividend payouts they expect from the banks covered in their report.
“We should mention that many of the banks’ dividend payout ratios DPRs, in recent years, have barely reached the peak of the CBN’s requirements on DPR,” Cordros analysts said.
According to Renaissance Capital, “FBN Holdings for instance paid out N0.20k per share (51percent dividend pay-out) in financial year 2016, despite an NPL ratio of 24.4percent. This was paid out of the other non-banking subsidiaries within the group.”
“Based on our conversations with management, we think that a 75percent 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 circa 50percent (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 150basis points in a worst case scenario. Zenith, UBA and Fidelity offer attractive dividend yields of 7-8percent based on our FY17 estimates while GTBank and Access stand closer to 5-6percent. Dividends will be declared with the release of FY17 numbers, which we expect in about two weeks,” Renaissance Capital said.
United Capital analysts who made reference to their 2018 Outlook report stressed the need for banks to gear up for the negative impact of the implementation of IFRS-9 on both earnings and capital.
“The CBN’s renewed emphasis on these policy guidelines appear to be geared towards preserving banks’ capital in the run-up to the implementation of the new provisioning standards. Furthermore, the outlook for banks’ core earnings going into 2018 is weak as lower interest rates and political uncertainty are likely to pressure banks’ performance.
“The spill-over effects on earnings retention is likely to be significant, especially given that banks need to grow loan book post economic recovery, and would need sufficient capital to do so,” United Capital analysts added.

 

Iheanyi Nwachukwu