Key Take-Away from CBN’s ICG and Dividend Payout Policy

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Wednesday, February 21, 2018 / 10:55 AM / Investment One Financial Services Limited 

On the 31st of January 2018, CBN released its amended internal capital generation and dividend payout policy. Below we summarize key take away from the policy into four categories.


Category 1
There shall be no regulatory restriction on dividend pay-out for Deposit Money Bank (DMBs) and Discount House (DHs) that meet the minimum capital adequacy ratio (CAR), have a Composite Risk Rating (CRR) of “low” or “moderate” and an Non-Performing loan (NPL) ratio of not more than 5%. However, it is expected that the Board of such institutions will recommend pay-outs based on effective risk assessment and economic realities.

Category 2
DMBs and DHs that have CARs of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5% but less than 10%, shall have dividend pay-out ratio of not more than 75% of profit after tax.

Category 3
DMB and DH that meet the minimum CAR but have a CRR of “Above average” or NPL  ratio more than 5% but less than 10% shall have dividend pay-out ratio of not more than 30%.

Category 4
That any DMB or DH that does not meet the minimum CAR of 15% applicable to banks with international authorisation and Systemically Important Banks (SIBs) and CAR of 10% applicable to other banks shall not be allowed to pay dividend. That DMB and DH that have CRR of “High” or NPL ratio of above 10% shall not be allowed to pay dividend. 

Currently, the non-performing loans ratio threshold for all banks is 5% while the capital adequacy ratio threshold for systematically important banks and banks with international subsidiaries stands at 15% and 10% for . While CAR limit for systemically important bank was to be increased to 16% in July 2016, plans appear to have been deferred due to significant pressures the Banking sector was facing at the time.

Implication for banks under our coverage:

In our opinion, the detailed circular from CBN is unlikely to impact most Tier 1 banks; Access Bank, Guaranty Trust Bank, UBA and Zenith Banks given their relatively strong CAR (averaging c.21%) and NPLs below the 5% threshold.

FBN Holdings - First Bank’s CAR at 17.2% as at 9M 2017 (which would rise to 18.5% if 9M 2017 earnings were capitalized according to management), the bank would fall into “Category 4” given its 20% NPL ratio as at 9M 2017. While First Bank accounts for c.90% of the FBN Holdings revenues, there may still be a dividend declaration driven by the performance the holding company’s other subsidiaries. This was the case in 2016, when FBNH declared a 20kobo per share dividend.
Stanbic IBTC – CAR of 19.5% and NPL ratio of 7.2% as at 9M 2017 at bank level would place the bank in “Category 2”.

FCMB – Reported a 17.9% CAR and 4.7% NPL ratio for its banks, following the audit in 9M 2017. Falls marginally into “Category 3”.

UBN - Successfully raised capital via its c.N50billion rights issue, which management highlighted would take its CAR to c.18% level. However its CAR is currently at c.15% with 9.1% NPL ratio as at 9M 2017 is likely to place the bank in “Category 3”.

Diamond Bank - Raised c.N25billion from its divestment of its Francophone business, which could take its CAR towards c.17% according to management, before capitalizing FY 2017 earnings. However, currently CAR is at 15.8% as at 9M 2017 while its 9.5% NPL as at 9M 2017 would place the bank in “Category 3”.

Fidelity Bank - 5.9% NPL and 17.3% CAR as at Q3 2017 would place the bank in “Category 3” restricting its dividend payout to 30%, in line with the low end of management’s guidance of 30-50% dividend payout for FY 2017.

In our view, there remains a potential for banks to move the FX rate used for translating foreign currency positions closer to the Nigerian Autonomous Foreign Exchange rate (fixing at the Investors’ & Exporters’ FX window) as they publish FY 2017 results (from N305/NGN for most banks). This could boost earnings and consequently CAR, there remains the likelihood of further provisioning on 9Mobile (formerly Etisalat), the sale of which has yet to be concluded

Also, we highlight the implementation of IFRS 9 in 2018, which is estimated to pressure CAR by 100-200bps, could be a further hindrance to an increase in the dividend payout of most banks.

With this said, we believe these restrictions may likely be more on Tier 2 banks given that most Tier 1 names have stronger capital positions and net long foreign currency positions.

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