The Central Bank of Nigeria has stopped the payment of dividends
to shareholders by Deposit Money Banks and discount houses with
huge bad loans and low capital base.
This is due to the rising non-performing loans and the need to
stop further erosion of the capital base of the banks and discount
houses.
The directive is coming barely a week to the release of the 2017
financial year’s annual reports by commercial banks and discount
houses in the country.
The development has dashed the hope of many shareholders as a
number of the banks will be affected by the directive and
consequently unable to pay dividends.
The CBN said the move was aimed at stemming the tide of rising
non-performing loans and the consequent weakening and erosion of
the banks’ capital base.
The directive was handed down in a letter dated January 31,
2018.
In the letter to the banks and discount houses, which was signed
by the Director, Banking Supervision Department, CBN, Ahmad
Abdullahi, the regulator said 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.
As a result, the apex bank barred the DMBs and discount houses
with the NPLs above 10 per cent from paying dividends to their
shareholders.
The CBN’s minimum NPL threshold for banks is five per cent,
meaning lenders’ bad loans should not exceed five per cent of their
loan books.
As of September 2017, the banking industry’s NPLs had hit 15.18
per cent.
The level of the NPLs in banks rose by 50 per cent to N2.4tn
from N1.6tn in December 2016, according to the Nigeria Deposit
Insurance Corporation’s data.
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 circular, which was made public on Sunday, read in part,
“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.”
It added, “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 Central Bank of Nigeria has stopped the payment of dividends
to shareholders by Deposit Money Banks and discount houses with
huge bad loans and low capital base.
This is due to the rising non-performing loans and the need to
stop further erosion of the capital base of the banks and discount
houses.
The directive is coming barely a week to the release of the 2017
financial year’s annual reports by commercial banks and discount
houses in the country.
The development has dashed the hope of many shareholders as a
number of the banks will be affected by the directive and
consequently unable to pay dividends.
The CBN said the move was aimed at stemming the tide of rising
non-performing loans and the consequent weakening and erosion of
the banks’ capital base.
The directive was handed down in a letter dated January 31,
2018.
In the letter to the banks and discount houses, which was signed
by the Director, Banking Supervision Department, CBN, Ahmad
Abdullahi, the regulator said 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.
As a result, the apex bank barred the DMBs and discount houses
with the NPLs above 10 per cent from paying dividends to their
shareholders.
The CBN’s minimum NPL threshold for banks is five per cent,
meaning lenders’ bad loans should not exceed five per cent of their
loan books.
As of September 2017, the banking industry’s NPLs had hit 15.18
per cent.
The level of the NPLs in banks rose by 50 per cent to N2.4tn
from N1.6tn in December 2016, according to the Nigeria Deposit
Insurance Corporation’s data.
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 circular, which was made public on Sunday, read in part,
“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.”
It added, “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.”
Read more https://nairalaw.com/cbn-bars-banks-with-huge-bad-loans-from-paying-dividends/