Tier 2 lenders in Africa’s largest economy may cut dividend disbursement to shareholders in order to fend off the effect of the new capital adequacy requirement of the Central Bank of Nigeria (CBN).
Lenders, especially the small and the mid-sized one are struggling with rising Non Performing Loans (NPLs), but the new rules are to ensure that banks are adequately protected against shocks both domestically and internationally.
Asset quality has deteriorated with the industry’s NPL ratio climbing 1.7ppts to 14.2 percent as at 9M’2018 from 12.5 percent as of 2017, which constitutes a threat to capital itself.
“Several banks particularly among the tier-2 banks are struggling to meet up with existing CAR requirement as the CBN requires a minimum CAR of 10.0% for banks without international operations……,” said analysts at CSL Stock Brokers Ltd.
While the new rules could force lenders to raise additional capital and continue to refuse to turn the tap on lending, analysts say the safest option is to slash dividend disbursements.
However, an announcement of a dividend cut could send jitters through the market as investors and shareholders perceive a firm that reduces payment from profit as being financially unstable. In short most shareholders are attracted to divined paying stocks.
Analysis of dividend yields of tier 2 and 3 banks showed that amongst peers FCMB recorded the highest dividend yield of 4.81 percent. Lagging FCMB is Fidelity with a dividend yield of 4.76%.
Meanwhile, risk based capital adequacy ratio of all mid-tiers banks appeared to be above regulatory threshold of 10 percent and 15 percent respectively. However amongst peers, Sterling bank records the lowest ratio at 12.10 percent as at Q2 2018.
Dividend yield of sterling bank also stood as the lowest at 0.83 percent amongst banks that declared dividend in Q3 2018.
Move by the CBN is in a bid to shield the Nigeria banks “against shocks emanating locally and from abroad” by increasing the level of regulatory capital and the quality of the assets, as expatiated by the mail.
According to the mail, the central bank plans to “apply a leverage ratio to supplement existing capital ratios” for lenders as well as “additional loss-absorbency requirements for domestic systemically important banks.”
