Last week we reported that the CBN had issued a new directive that could restrict the quantum of dividends that can be paid by deposit money banks in Nigeria.
The new rules basically caps dividend payment for banks that don’t meet CAR requirements to just 30% of profits. As such, investors in Nigerian banks now have to be mindful of the type of banks they invest in.
A new research from Renaissance Capital suggest Zenith Bank, GTB, STANBIC IBTC and Access Bank are probably the only banks that can meet that criteria. According to the report
We think outside GTBank, Zenith, Access and Stanbic, the risk that a number of other banks’ CRR rating affects their dividend payout ratio is high. We understand the best rating CBN assigns is Moderate for most banks and from our checks with management; we believe GTBank has a Moderate rating. If this is the case, we imply that a number of other banks are likely to be on Above Average or High. Having a CRR of Above Average implies that the bank’s payout ratio is capped at 30 per cent, while a CRR of High implies no dividend payment. In addition, we think some banks’ payout will also have to be reduced to comply with the re-enforcement of the rules around the setting aside of statutory reserves as stated in the circular.
The report also suggest even the banks that seem unaffected for sake of prudence may also cut back on dividend payouts and to compensate for that may rely on bonus issues to compensate shareholders.
We do not think GTBank, Zenith, Access and Stanbic get affected much by these directives but given the current nature of the Nigerian banking environment, we expect them to consider lowering payout ratios from FY14E. While their capital ratios are sufficient, we think it will be a prudent decision for some to lower the payout to conserve some capital given tightening capital regulations and to support future growth, as opposed to a reactionary tier 1 capital raise in the near future. Other banks in a less favorable capital position are likely to have deeper dividend cuts, particularly those affected by the grey areas of this circular. To compensate, we have heard some banks mention the possibility of scrip dividends.”
The report also goes on to name the following banks as those that are close to the minimum CAR, which essentially is not a good thing.
As at 1H14, all the banks under our coverage (except Diamond, though this should normalise post-rights) met the minimum CAR requirement and had NPL ratios below five per cent. The banks which are too close to the minimum CAR requirement are FBNH, UBA (rights issue announced), FCMB (local currency tier 2 ongoing) and Stanbic (local currency tier 2 ongoing). The third criterion is however where the risk lies and is the grey area we cannot see through.
A portion of this article was culled from Thisday