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Nigerian banks set for aggressive dividend payouts amid new capital rules – EY

Nigerian banks set for aggressive dividend payouts amid new capital rules – EY

Nigerian banks are likely to embark on aggressive dividend payouts in the next couple of years as they put a huge pile of their retained earnings to use, a report by Ernst and Young Global Limited (EY), a leading tax and advisory services has shown.

With the latest recapitalisation exercise by the Central Bank of Nigeria (CBN) and the subsequent exclusion of retained earnings from minimum capital, banks in Nigeria need at least N4 trillion to remain in business.

EY noted that by paying out dividends, the financial position of shareholders will be strengthened, adding that dividend payouts must however follow the due process stipulated by the CBN.

Read also: Nigerian banks can compete better with new capital base – S&P Global

“With the exclusion of retained earnings as a source of capital, we expect aggressive dividend payouts by banks over the next few years,” EY said.

“This is to strengthen the financial position of shareholders to enable them to take advantage of options such as right issues or placement that the banks may want to pursue as their preferred way to raise the additional capital,” it added.

Banks engage in dividend payouts as a way to distribute profits to shareholders. It’s a sign of financial health and can attract investors seeking regular income.

Additionally, consistent dividend payouts can enhance the bank’s reputation and increase shareholder loyalty.

In 2023 Access bank, a Tier 1 financial institution, declared a final dividend of N1.80 up from N1.30 declared in 2022.

Also, in the same period, Zenith bank, another financial institution with international licensing, pegged its final dividend at N3.5, a N0.6 increase from what it was in 2022 at N2.9.

Olaolu Boboye, lead economist at CardinalStone, noted that most banks have released their full-year reports, adding that while prices of bank stocks were higher, dividend yields came in low.

“The market was expecting higher dividends than was declared by the banks, because the prices of bank stocks were higher but dividend yields were lower,” he said.

“So I’m skeptical that there will be mixed feelings towards them but maybe when their Q1 number comes out, it may spur a bit of excitement,” he added.

The apex bank, on 28th March 2024, announced a new set of capital thresholds for Nigerian banks, requiring international, national, and regional banks to maintain minimum share capital of N500 billion, N200 billion, and N50 billion, respectively.

The recapitalisation of these banks will bring about N4 trillion into an economy whose target is to hit $1 trillion by 2026.

This effort will enhance the resilience of an industry faced with record high inflation, naira devaluation and weak economy.

In defining share capital, the CBN excluded retained earnings from the calculation. Instead, it specified that share capital comprises only the banks’ ordinary share capital and share premium.

Read also: These Nigerian banks have the highest capital importation

The assurance firm said in its report that about four out of the 33 banks have either started raising funds through rights issues, noting that mergers and acquisitions (M&A) may not be as common as it was in 2004/2005 bank recapitalisation.

“Of the 33 commercial, non-interest and merchant banks that we tracked, about four (4) have either started raising funds through rights issues or are currently planning to do so.

“Meanwhile, M&A activities may not be as rampant as was the case during the 2004/2005 banking consolidation that saw the number of banks reduce from 89 to 25 by the end of the exercise.

“However, the bulk of the M&A activities may be limited to the smaller banks who may struggle to raise the needed capital on their own,” the tax firm said.