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Banks may reduce dividend payout

By on August 1, 2014

In order for Nigerian banks to retain more capital going forward, some will either reduce dividend payout ratios or float rights issues, a report has stated.

Another alternative, according to the report is for the financial institutions to stop growing loan books, the report added.

CSL Stockbrokers, a division of First City Monument Bank (UK) Limited, stated this in its latest report on Nigerian banks titled: “The Capital Cycle.”

The report covered Nigeria’s five largest banks –First Bank, Zenith Bank, United Bank for Africa Plc, Guaranty Trust Bank Plc and Access Bank Plc.
It stated that banks could supplement Capital Adequate Ratios (CARs) by issuing tier-2 capital (subordinated, long-term debt), noting that the financial institutions are restricted to using an amount no more than 25 per cent of tier-1 equity and, in practical terms, encounter tough conditions in the international debt markets.

Since the banking crisis of 2009 Nigeria’s largest banks have enjoyed four years of asset growth, with loan growth pronounced from 2011 onwards.
“Capital is the main constraint, we believe, and is becoming an issue much sooner than non-performing loans (NPLs),” it stated.

The report showed that aggregate gross loans of the five largest banks listed above grew by a CAGR of 15.7 per cent between 2010 and 2013. Furthermore, it estimated it would have grown by a CAGR of 16.4 per cent between 2010 and 2014 ending.

This growth, it pointed out had put pressure on banks’ capital base, given the Central Bank of Nigeria’s (CBN) requirement that the principal banks keep total CAR of 16 per cent.

“The key metric is how quickly banks can internally grow capital bases, that is, how quickly they can replenish equity capital with retained earnings. The weighted Returns on Average Equity (RoAE) of the five banks were 24.5 per cent in 2012;  20 per cent in 2013; and we forecast 19.3 per cent in 2014e.

“However, after paying dividends, the weighted average rates at which equity capital was retained were 13.8 per cent in 2012, 9.8 per cent in 2013, and we forecast 9.2 per cent in 2014 estimates.

“Growth in equity is not keeping up with customer loans and risk-weighted assets, and this is reducing CARs, in some cases to critical levels,” the report argued.

The CBN stipulates that systemically-important banks maintain a total CAR of 16 per cent. Tier-2 capital cannot exceed 25 per cent of tier-1 (although in the run-up to Basel II implementation it appears that 33% was allowable), which is equity.

This requirement is likely to be become more onerous after the application of Basel II rules later this year which, most banks had agreed, would lower their CARs between 200 and 300 basis points as they provide for operational risk.

Continuing, the report stated: “We believe that Access Bank, UBA and (despite a recent and successful issue of tier-2 subordinated debt) FBN Holdings face capital challenges and difficult choices of cutting dividend payout ratios or raising fresh equity over the coming two years, if they continue growing loan books.

“Zenith Bank does not retain earnings at a particularly high rate but has sufficient tier-1 equity for several years’ future loan growth, in our view. GTBank replenishes equity quickly and this is consistent with funding several years’ future loan growth, in our view.”

 

 

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