As the financial markets awaits the release of 2017 full-year results of Deposit Money Banks (DBMs), the Central Bank of Nigeria (CBN) on Wednesday amended the rules on internal capital generation and dividend pay-out ratio.
The new rule which takes immediate effect states that banks and Discount Houses (DHs), (now merchant banks) that have capital adequacy ratios of at least three percent above the minimum requirement, Composite Risk Rating (CRR) of “Low” and Non-Performing Loan (NPL) ratio of more than five percent but less than 10 percent, shall have dividend pay-out ratio of not more than 75 percent of profit after tax.
The minimum capital requirement for banks with national license is 10 percent and 15 per cent for banks with international license. The new restriction is expected to affected tier-II banks.
This is to facilitate sufficient and adequate capital build up for banks in tandem with their risk appetite. The CBN had in October 8, 2014 issued a circular on this subject.
“It is clear that the CBN is trying to create a safety buffer by compelling banks to limit their dividend pay-out. However, to the extent that the minimum cash reserves and liquidity ratios are met by a bank, it is not necessary to impose additional restrictions. This new directive should make banks financially stronger but may upset shareholders who rely on their regular dividend pay-out”, Taiwo Oyedele, head of tax and regulatory services, PWC, said.
In a new circular released on Wednesday and signed by Ahmad Abdullahi, director, banking supervision department, the CBN said all other provisions remain unchanged.
One of the provisions which is still upheld is that Any Deposit Money Bank (DMB) or merchant banks that does not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.
Banks and merchant banks that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or an NPL ratio of more than five percent but less than 10 percent shall have dividend pay-out ratio of not more than 30 percent.
Ayodeji Ebo, managing director, Afrinvest Securities limited said the new rules are welcome as indication are that Nigerian banks will have to shore up their capital in 2018.
The implication on dividend payout for the banks, he said, will be that some of the banks may not be able to maintain their historical dividend pay-out ratio as a result lower dividend paid per share.
“This may affect investors sentiment around their share prices. On the other hand, it is only rationale for the bank to retain as much capital in its statutory and general reserves to shore up its capital base”, Ebo said in an emailed response.
The CBN said there shall be no regulatory restriction on dividend pay-out for DMBs and DHs that meet the minimum capital adequacy ratio, have a CRR of “low” or “moderate” and an NPL ratio of not more than five percent. However, it is expected that the Board of such institutions will recommend pay-outs based on effective risk assessment and economic realities.
“No DMB or DH shall be allowed to pay dividend out of reserves and banks shall submit their Board approved dividend pay-out policy to the CBN before the payment of dividend shall be permitted”, the circular reads.
HOPE MOSES-ASHIKE
