The Central Bank of Nigeria’s (CBN) recent efforts at ensuring that banks build statutory reserves in view of the seamless transition to Basel II and III so as to be internationally competitive may erode dividend pay out to shareholders, BusinessDay investigations have shown.
Specifically, the plan deals with the need for banks to meet the minimum capital adequacy ratio (CAR) before paying dividend to shareholders. Banks with a composite risk rating (CRR) of “high” or a none performing loan (NPL) ratio of above 10 percent shall not be allowed to pay dividend, as well as those that meet the minimum CAR but have a CRR of “above average” or an NPL ratio of more than 5 percent but less than 10 percent shall have a dividend payout ratio of not more than 30 percent.
There shall be noregulatory restriction on dividend payout for banks that meet the minimum CAR, have a CRR of “low” or “moderate” and an NPL ratio of not more than 5 percent.
However, it is expected that the board of such institutions will recommend payouts based on effective risk assessment and economic realities, as no bank shall be allowed to pay dividends out of reserves.
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The banks are to also submit their board approved dividend payout plan to the CBN before the payment of dividend shall be granted and all ratios shall be based on financial year averages.
The situation is compounded with the not too impressive performance of most banks in their third quarter financials.
According to CBN, banks operating within the country should have CAR of 10 percent, international, 15 percent, while those that are systemically important (SIBs) should have 16 percent, while CRR is an assessment of a banks’ overall risk profile, after considering the impact of capital and earnings on its overall net risk. It reflects on the assessment of the safety and soundness of the bank.
An institution’s composite risk rating is assessed as low, moderate, above average, or high, based on the direction of change assessed as decreasing, stable or increasing for a specified time frame, depending on the institution’s circumstances, and the business and economic environment.
But most analysts say that with the continued bearish run on the nation’s capital market, which is dominated by banks’ stocks, which have been experiencing losses for quite some time now, the shareholders are in for worst time in the area of dividend payout.
Also, they said that while most banks can meet the CAR and NPLs, the CRR, which is not usually published by banks, might be difficult to meet.
“The CRR is essentially part of CBN’s banking supervision framework for assessing the safety and soundness of an institution based on capital (quality, quantity and availability of externally and internally generated capital) and profitability (in reviewing an institution’s ability to generate capital internally, profitability is considered both on a consolidated and unconsolidated basis). The CRR ratings are low, moderate, above average, or high. Neither the CBN nor the banks publish/disclose the CRR rating,” says Ayodeji Ebo of Afrinvest.
“Traditionally, there has been great pressure on Nigerian banks to deliver higher dividends, without adequate consideration for the capital buffers that were in place. This was one of the reasons – arguably – behind the 2009 crisis: it was all about how banks appeared, not necessarily how healthy or safe those financial institutions actually were.”
