The New CBN Regulation on Dividend on Bank Shares – Likely Impact

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Tuesday, February 20, 2018  07.39AM / Arthur Steven Asset Management Research / Image Source is The Telegraph 

The CBN recently released the criteria that will guide the dividend policy to be adopted by Deposit Money Banks and Discount Houses. According to the CBN, this is an attempt to prevent banks from paying out huge cash dividends despite having huge non performing loan exposure and weak risk ratings.

The highlights of the policy are stated below:
1. Banks that do not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.

2. Banks that have a Composite Risk Rating (CRR) of “High” or a Non Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend.

3. Banks that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or an NPL ratio of more than 5% but less than 10% shall have dividend payout ratio of not more than 30%.

4. Banks that have capital adequacy ratios 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.

5. 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 5%. However, it is expected that the Board of such institutions will recommend payouts based on effective risk assessment and economic realities.

6. No Bank shall be allowed to pay dividend out of reserves.

7. Banks shall submit their Board approved dividend payout policy to the CBN before the payment of dividend shall be permitted.

2017 Non Performing Loan and Capital Adequacy Ratios for Quoted Banks
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Thoughts on this CBN policy - Arthur Steven Asset Management Research   
We must reiterate that this policy is not new as it has been guiding the decision of the CBN to approve banks account for some years . This however is the first time this criteria are being made public .This might affect banks’ share prices in a number of ways: 

1.      The Tier one banks that have complied with the regulation such as GTBank, Zenith Bank, UBA and Access Bank will continue to pay increased dividends and could get more investor patronage. 

2.     The Tier 2 Banks such as Diamond Bank , FCMB ,  and Sterling Bank that are contemplating paying dividend to shareholders in order to juice –up investors interest ahead of potential capital raising exercise will have to rethink their strategy as this might not happen. 

Tier 3 Banks such as Wema Bank and Skye Bank will definitely need to come and raise capital in order to be able to pay dividends in the near future or take a few years to accumulate profit. 

We expect a shift in investors focus away from banking stocks towards industrial goods and consumer goods stocks that are not regulated such as Wapco , Flourmills, and Unilever etc. 

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