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CBN ambushes Fitch report, bans banks with high NPLs from dividends pay out
To stem continuous rise in non-performing loans (NPLs) amongst several Tier 2 banks, coupled with the urgency to stop further erosion of the capital base of banks and discount houses, the Central Bank of Nigeria (CBN), has placed a stop order on all dividend payout henceforth, unless authorized by it.
The CBN, in the latest circular, also directed that banks and discount houses, which did not meet the regulator’s minimum Capital Adequacy Ratio, not to pay dividends to their shareholders.
The CBN sets different minimum CARs for banks in the country: 16 per cent for those it considers to be systemically important; 15 per cent for those with international banking licences; and 10 per cent for the rest.
The terse directive is coming at a time several banks are set for the release of their 2017 financial year’s annual reports.
It would be recalled that late last week, Fitch Ratings had expressed fears of possible slump of some banks (mainly Tier 2), saying should dollar exchange rate deepens further to N450, some commercial banks will go under.
Though it was not if the apex bank was responding to the Fitch report, financial pundits say the directive and emerging scenario have jointly dashed the hope of many shareholders hoping to enjoy their dividends.
In the letter conveying the directive dated January 31st, sent to banks and discount houses, which was signed by the Director, Banking Supervision Department, CBN, Ahmad Abdullahi, CBN was very clear in stressing that “it had observed that rather than grow their capital with retaining earnings, some banks were paying out a greater proportion of their profits, irrespective of their risk profile and the need to build resilience through adequate capital buffers.
Business Hilights recalls that as at December 2016, the level of the NPLs in banks had rose by 50 per cent to N2.4tn.
The CBN circular read in parts: “Globally, retained earnings have been identified as an important source of growing an institution’s capital. 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.”
“In order to facilitate sufficient and adequate capital build up for banks in tandem with their risk appetite, the following directives will now apply:
“Any Deposit Money Bank or discount house that does not meet the minimum capital adequacy ratio shall not be allowed to pay dividend.
“The DMBs and DHs that have a Composite Risk Rating of ‘High’ or a non-performing loan ratio of above 10 per cent shall not be allowed to pay dividend.
“The DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR of ‘Above Average’ or an NPL ratio of more than five per cent but less than 10 per cent shall have dividend pay-out ratio of not more than 30 per cent.
“The DMBs and the DHs that have capital adequacy ratios of at least three per cent above the minimum requirement, the CRR of ‘Low’ and the NPL ratio of more than five per cent but less than 10 per cent, shall have dividend pay-out ratio of not more than 75 per cent of profit after tax.”
“There shall be no regulatory restriction on dividend pay-out for the DMBs and the DHs that meet the minimum capital adequacy ratio, have a CRR of ‘Low’ or ‘Moderate’ and an NPL ratio of not more than five per cent. However, it is expected that the boards of such institutions will recommend pay-outs based on effective risk assessment and economic realities.
“No DMB or DH shall be allowed to pay dividend out of reserves.
“Banks shall submit their board-approved dividend pay-out policy to the CBN before the payment of dividend shall be permitted. All ratios shall be based on financial year averages. This circular takes immediate effect,” the apex bank averred.