Don't Miss

Nigerian banks cut dividends as capital needs spur earnings retention

By on May 4, 2015

Nigerian banks are cutting their dividend payouts to shareholders as the need to conserve capital due to Basle 2 requirements leads them to retain earnings.

“Banks are increasing dividend retention ratios,” said Muyiwa Oni, a bank analyst with Stanbic IBTC.

“Payout ratios for the industry have shrunk to 35 percent from an average of 60 percent in 2013,” Oni said at a recent S & P conference.

The Central Bank of Nigeria (CBN) introduced Basel 2 and higher capital requirements for systemically important banks (SIBs), in 2013 as part of tighter regulations to help bring about financial system stability.

A transition to Basel requirements is being pushed by the CBN in a bid to keep Nigerian lenders on par with counterparts overseas.

International standards set by the Basel Committee demand that banks meet minimum capital requirements, measured as a percentage of their assets.

The amount of capital that must be held is linked to the riskiness of the assets.

“We view positively the implementation of Basel II on Oct. 1, 2014, and the potential forthcoming adoption of Basel III,” Matthew Pirnie, director of Financial Services Ratings, said in an April 16, 2015 presentation.

Some lenders expected to raise tier 1 capital over the next 12 – 24 months and that includes Skye Bank N30 bn ($150 mn); Stanbic and Ecobank Nigeria, according to investment Bank Renaissance Capital.

“Access Bank’s rights issue (NGN52.7bn/$265mn) closed recently while FCMB expects FY14 earnings retention to materially improve its CAR from 9M14 levels,” said Rencap analysts led by Adesoji Solanke in a March 23 sector update.

“On FBNH, we remain concerned about its light CAR of 15-16%, but expect the bank to focus on earnings retention and slower growth over the next 12-18 months, with the possibility of a tier 1 raise when market valuations improve.”

The CBN has also recently identified and created a framework for domestic systemically important banks (DSIBs).

Banks designated as DSIBs are required to adhere to a minimum capital adequacy ratio of 16 percent (including a 1% additional capital surcharge) out of which tier 2 capital should not constitute more than 25 percent of qualifying capital.

The DSIBs will be exposed to greater frequency and intensity of on-site and off-site supervision, and are also required to develop a specific recovery plan.

“The wave of regulation has caused some domestic banks to raise tier 1 and tier2 capital in 2014. In addition, we expect increased issuance over the next 12-18 months to support growth and to meet the new capital requirements,” Pirnie said.


[Business day]