A new rule by the Central Bank of Nigeria (CBN) to stop banks which do not meet minimum capital requirement from paying dividends to shareholders may have set the stage for share price crash at the equities market.
A circular the CBN sent to lenders and discount houses on October 8 said the amount banks can pay in dividends depend on their capital levels, statutory reserve requirements, and the proportion of non-performing loans.
But analysts at Renaissance Capital Limited have expressed concern that this may hurt the share prices of banks in less favourable capital position which are likely to have deeper dividend cuts.
They stated that FBN Holdings, United Bank for Africa (UBA), and FCMB have capital ratios close to the minimum requirement and that GT Bank, Zenith, and Stanbic may not be affected much by these directives.
With improved capital adequacy ratio, Access Bank also got the nod from shareholders to raise up to N68 billion this month and may not get affected, while Sterling Bank plans to seek approval to raise $320 million to shore up its balance sheet.
Also, UBA has announced plans to raise capital while Diamond Bank and Unity Bank have just concluded rights issues.
The circular said “there shall be no regulatory restriction on dividend payout for banks that meet the minimum capital adequacy ratio, have a cash reserve requirement of ‘low’ or ‘moderate’ and a non-performing loan ratio of not more than 5 percent.”
This is a sharp departure from the past, when deposit money banks paid out a proportion of net profit as dividends, despite their risk profiles and capital levels. Now, the regulator wants to correct this situation with the new rules.
The CBN vowed to prevent a repeat of the circumstances that led to banks’ bailout in 2009 and has moved towards strengthening rules and tightening capital requirements.
Regulatory headwinds have swept many banks off profit targets since last year. Much of the measures were partly designed to get banks to lend more to domestic businesses and consumers.
Banks had been making bumper profits by mopping up government deposits and using the cash to buy high-yielding treasury bonds and declaring huge dividends. They had little incentive to lend to the real economy.
Analysts welcomed the new rules on dividends but said they might hurt banking stocks if cash payments to investors fall. The rules may also lower loan growth as banks try to conserve more cash, which in turn could hit profits.
The CBN has had to compel banks to adopt stricter international capital requirements, a development which has seen capital ratios for most lenders drop by 100-400 basis points to near the minimum of 16 per cent under the new rules, according to Reuters.
Nigeria’s banking sector index, which accounts for around 40 per cent of total market capitalisation, has gained 32 per cent so far this year. It lost 10 per cent last year, owing to heavy burden from tight regulation which cramped profits.
