Fall out of CBN’s Circular on Retained Earnings, Dividend Payout by Banks  

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The central Bank of Nigeria, CBN said in its recent amended circular that globally, retained earnings have been identified as an important source of growing an institution’s capital.

The circular which was signed by Ahmad Abdullahi, Director, Banking supervision department in the central bank contained some advantages of retained earnings include: being a source of long term finance; being easier and cheaper to raise than external finance; curtailment of financial risks; and improving liquidity and profitability.

However, it has been observed that rather than take advantage of this beneficial means of capital generation, some institutions pay out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.

Prior to now, CBN said dividend payout policy for banks has been as stipulated in Section 16(1) of BOFIA 2004 (as amended) and Prudential Guidelines for DMBs of 2010, which state that “Every Bank shall maintain a reserve fund and shall, out of its net profits for each year (after due provision for taxation) and before any dividend is declared, where the amount of the reserve fund is:

Less than the paid-up share capital, transfer to the reserve fund a sum equal to but not less than thirty per cent of net profits; or Equal to or in excess of the paid-up share capital, transfer to the reserve fund a sum equal to but not less than fifteen per cent of the net profit; provided that no transfer under this subsection shall be made until all identifiable losses have been made good.

3.1 Section 16 (3) also states that: Notwithstanding (a) and (b) of subsection (1), the Bank may, from time to time specify a different proportion of the net profits of each year, being lesser or greater than the proportion specified in paragraph (a) and (b) to be transferred to

That said, it is view that the CBN’s latest directive is unlikely to, in the medium term at least, affect the dividend payouts we expect from the banks covered in this report.

Many of the banks’ DPRs, in recent years, have barely reached the peak of the CBN’s requirements on DPR.

Analyst called CBN circular titled “RE: Internal Capital Generation and Dividend Payout Ratio” as the market awoke to a frenzy.

According to analyst, the circular which was dated January 31, 2018 is an update to an earlier circular issued in 2014  and the updated version stipulates the conditions to be met by Nigerian banks vis-à- vis dividend payment, with the aim to facilitate sufficient and adequate capital build up consistent with banks’ risk appetite.

In the old circular, there are three salient conditions contained in there include;

Banks with Non-Performing Loans (NPLs) ratio above 10% shall not be allowed to pay dividend,
Banks that meet the minimum Capital Adequacy Ratio (CAR), but have NPL ratio above 5%, but less than 10%, are allowed a dividend pay-out ratio (DPR) of not more than 30%, Banks that meet the minimum required CAR, and have NPL ratio not more than 5% have no regulatory restriction on their DPR.

While in the amendment (new) circular states that: • Banks that have CARs at least 3% above the minimum requirement, and have NPL ratio of more than 5%, but less than 10%, are allowed up to 75% DPR.

CBN Capital Adequacy Ratio Requirements

There are three categories of the required CAR for banks in Nigeria, which analyst tagged as CAR1, CAR2, and CAR3 respectively.

The banks covered in this report and the respective categories they belong include: International Banks National and Regional Banks 16% 15%  10%  CAR1 CAR2 CAR3


Banks’ Non-Performing Loans

Banks’ Non-Performing Loans

The banks’ NPL ratios, according to chart below, show that First Bank has the highest NPL ratio, and is the only bank with an NPL ratio above the 10% benchmark, while Access Bank has the lowest NPL ratio.
The further findings disclosed that First Bank Limited has the highest NPL ratio of 19.85%, which is above the 10% CBN benchmark, and as a result, is not permitted to pay dividend. However, FBNH, the listed holding company, can still pay dividend to shareholders from profits declared by other subsidiaries within the group.

Diamond Bank, Fidelity, and Sterling fall in Category II, as they meet with the CBN’s CAR requirement, and have NPLs above 5% but below 10%. The stated banks are allowed DPRs of not more than 30%.

Stanbic benefits from the updated circular. Despite having NPL of 7.2%, the bank’s CAR 19.5% is more than 3% above the CAR3 requirement of 10%, thus qualifying the bank for DPR of up to 75% under the latest circular.

The Category IV includes many Tier-1, and a few Tier II banks – Access, Guaranty, UBA, Zenith Bank, Wema Bank, and FCMB – as they have NPL ratios of less than 5%, and meet the CBN requires CAR. The banks in this category have unrestricted DPRs

Analyst thinks the directive more appropriately reveals the apex bank’s commitment to financial stability. It would be recalled that the International Monetary Fund (IMF), over Q4-17, had stressed the need for Nigerian commercial banks to raise fresh capital and boost their CARs to allow them effectively drive growth in the domestic economy.

Amehnews recall, the recently concluded NGN50.00 billion rights issue by Union Bank was aimed at bolstering the lender’s capital reserves, while Diamond Bank’s move to sell its West African banking operations (in Benin, Togo, Cote d’Ivoire and Senegal) and focus on the vast retail banking potential in Nigeria is equally consistent with the move to consolidate the bank’s capital buffers. That said, it is our view that the CBN’s latest directive is unlikely to, in the medium term at least, affect dividend expectations from the banks we covered in this report.

It worth of note that many of the banks’ DPRs, in recent years pass, banks barely reached the peak of the CBN’s requirements on DPR.

Means while First Bank Limited, a subsidiary of FBNH, may not be allowed to pay dividends, FBNH, the listed holding company, can still pay dividend to shareholders from profits declared by other subsidiaries within the group.

Also, Fidelity Bank’s 3-year average DPR is only 8% above the CBN’s stipulated 30% DPR; consequently, the bank’s dividend-paying culture is not expected to be particularly affected by the enforcement of the directive.


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