Regulatory headwinds cast a pall on banks’ future dividends

In the last eight years, Nigeria’s five largest banks have paid a total of N1.25 trillion in dividends to their owners, but the recent stringent rules by the Central Bank of Nigeria (CBN) has cast a pall on future dividend pay-out.

“It will reduce their pay-out ratio as the recent crash in yields on fixed-income investment will undermine the top line or trading income,” said Wale Olusi, head of research at United Capital Limited.

“The hike in CRR to 27.50 percent from 22.50 percent means more deposit will go from lenders to the CBN and return zero which means their interest income, which is a major component of earnings, will reduce,” Olusi said.

The dividend pay-out ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends.

Guaranty Trust (GTBank) Bank, the largest lender by market value in Africa’s largest economy, has paid a total of N423.15 billion to its owners in eight years, according to data gathered by BusinessDay.

From 2012 to 2018, Zenith Bank has paid N490.95 billion to shareholders, and it has a dividend yield of 12.76 percent; this means an investor gets N120,760 in dividend income for every N1 million invested in the stock.

In the last eight years, Access Bank, the largest lender by total assets, has paid N163.15 billion to its owners, while it has a dividend yield of 4.8 percent.

Banks were able to consistently and generously reward their shareholders because they were taking advantage of the monetary environment to underpin earnings.

For instance, between 201-16, the devaluation of the currency was a boon for them as foreign currency revaluation gains added strength to profit.

Also, a high yield environment gave lenders the leeway to park their money in short term government securities, but a precipitous drop in yields at the start of 2018 resulted in slow growth in interest income from short term government securities.

The fear among experts is that banks could cut dividend pay-out because a slew of stringent rules by the apex bank have heightened regulatory risks.

The central bank had mandated Deposit Money Banks (DMBs) to maintain minimum Loans to Deposit (LDR) ratio of 65 percent, but analysts say forcing banks to lend to risky sectors will result in rising Non Performing Loans (NPLs).