How a rise in NPL’s just changed Dividend Policy in the Nigerian Banking Industry – Learnings for Zambia

Nigeria's President Buhari and Central Bank of Nigeria Governor Godwin Emifiele

NON PERFORMING LOANS – NPLs has become a very touchy topic especially in the era of International Financial Reporting Standard – IFRS (9) and also in the wake of tight monetary policy which was triggered by an era of commodity price plummet. The Nigerian economy was shocked by a dive in crude price that saw its export revenues slide deep causing budget deficit challenges. Usually when export revenues falls balance of payment is impacted along the way which puts immense pressure on currency. Nigeria pegged its Naira for a long time which caused most players to exit the economy as it had  caused asset pricing problems especially on the stock exchange. The Nigerian currency market had both an official and parallel -black market – whose spread widened due to scarcity of dollars. Usually when currency markets roil, the effects are easily transmitted to the money markets which saw yields soar and to bring sanity to the market benchmark lending rates had to be tightened by the Central Bank of Nigeria – CBN. Tightening the prime rate can arrest and curb currency slide but can also make borrowing costly to increase stress on repayment capacity of borrowers thereby resulting in rise in credit impairments what we all know as non performing loans. Why are we even reporting this on a Zambian website? Well, the Nigeria story is no different from the Zambia one starting 2015 when copper was at its lowest, currency volatility intensified and inflation was at its peak which triggered the Bank of Zambia to tighten monetary policy 300bps to 15.5% in December 2015. This move curbed the currency slide and arrested inflation to single digit but because the BOZ sucked out liquidity from the market interest rates rose due to a high MPR and scarcity of funds. This then caused rise in non-performing loans in excess of the 10% regulatory threshold at over 12.6%. With IFRS 9 implemented as at 01 January commercial banks can expect even higher NPL numbers.

The Central Bank of Nigeria -CBN just surprised the entire market by imposing a restrictive dividend policy for all commercial banks with high dividend policy. It’s a learning for all African commercial banks as to the powers that the regulator can exercise in light of the health of the banking sector. This move saw Nigerian Stock Exchange, NSE lose over N100.8 billion in two trading days of last week from listed banking stocks. The CBN that restricted dividend payments by banks with high Non-Performing Loans, NPLs, and low Capital Adequacy Ratio, CAR from paying dividend to their shareholders.

Full story is extracted from Vanguard Nigeria 

Vanguard’s trail of the implications and impacts on the banks quoted on the Nigerian Stock Exchange, NSE, shows that while 11 out of the 16 banks in the NSE began losing prices in the market on Monday 19 Feb, the remaining joined by Tuesday, except United Bank for Africa Plc (UBA).

The banks that appreciated include: Access Bank (5 kobo) per share to close at N12.56 per share from N12.60 per share, GTBank gained N1.00 per share to close at N47.50 per share, from N46.50 per share, Fidelity Bank gained (8kobo)  per share  to close at N3.28 per share from N3.20 per share and Jaiz Bank gained 4 kobo per share to close at N1.04 per share from N1.00 per share.

In the second day (Tuesday 20 Feb) trading session, investors reacted as the news on CBN’s directive filtered to the market, with virtually all the banks’ share prices dropping, except UBA which gained 20 kobo per share to close at N12.20 from N12.00 per share it closed on Monday.

The high point in the CBN’s revised guideline on payment of dividend which came to public knowledge through media reports on Monday, was that no bank shall pay dividend on its shares until all its preliminary expenses, organisational expenses, share selling commission, brokerage, amount of losses incurred and other capitalised expenses not represented by tangible assets have been completely written off; and adequate provisions have been made to the satisfaction of the bank for actual and contingency losses on the risk assets, liabilities, off balance sheet commitments and such unearned incomes as are derivable there from.

In line with recent developments as well as perception of potential risks on the horizon, the apex bank’s further guidelines had diverse impact on the different banks.

In its analysis of the impact, analysts at Afinvest West Africa, a Lagos based investment house, stated: “All the Nigerian banks under our coverage, save for Unity Bank and Union Bank, meet the minimum requirement stipulated by the CBN. For Unity Bank, the current CAR (as at nine months, 9M:2017) is unavailable while Union Bank  had a CAR of 13.3% (below CBN requirement of 15.0% in first half,  H1:2017). We envisage Union Bank’s CAR will improve by  full year, FY:2017, adjusting for the capital raise of N50.0billion  via rights issue in 2017.

“Banks that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10.0% shall not be allowed to pay dividend. Only First Bank Nigeria Holdings, FBNH has an NPL ratio above 10.0% which should disqualify the entity from paying dividend. However, given the Holding company structure operated by FBNH, we believe dividend can be paid from earnings of subsidiaries, other than the bank.

Banks that meet the minimum capital adequacy ratio but have a Cash Reserve Ratio, CRR of “Above Average” or an NPL ratio of more than 5.0% but less than 10.0% shall have dividend payout ratio of not more than 30.0%.

Under this condition, Ecobank Transnational  Incorporated, ETI is the only Tier-1 bank restricted to a maximum payout ratio of 30.0% on the basis of the fact that its NPL ratio stood at 9.6% in 9M:2016. Similarly, Diamond Bank, Fidelity Bank, Stanbic IBTC, Sterling Bank, and Union Bank are also restricted to a maximum of 30.0% maximum payout ratio with respective NPL ratio above 5.0% but below 10.0%.

“Banks that have capital adequacy ratios of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5.0% but less than 10.0%, shall save dividend pay-out ratio of not more than 75%of profit after tax.

Under this Condition, ETI is the only Tier-1 bank that is restricted to 75.0% maximum dividend payout ratio, while STANBIC is the only Tier-2 bank eligible to pay up to 75.0% as dividend payout.

“There shall be no regulatory restriction on dividend pay-out for banks that meet the minimum capital adequacy ratio, have a CRR of “low” or “moderate” and an NPL ratio of not more than 5%. However, it is expected that the Board of such institutions will recommend payouts based on effective risk assessment and economic realities.

Only six banks – Access Bank, First City Monument Bank , FCMB Holdings, Guaranty Trust Bank , GTBank, UBA, Wema Bank and Zenith Bank- simultaneously meet the CBN’s minimum requirement for CAR and Non-Performing Loans. Hence these banks are excluded from the stated restrictions on dividend payment.

“In light of these new guidelines and based on our analysis of the banks using their 9M:2017 results, most of the banks, especially the Tier-1 banks  (Access Bank, GTBank, UBA and Zenith Bank) save for FBNH, are not likely to be significantly impacted and are expected to sustain the historical dividend payment trend. ETI meets the regulatory requirement for CAR, but has NPL above recommended maximum by the CBN; hence a maximum payout ratio of 30.0% is placed on the bank.”

This article was written with reference to Vanguard Nigeria.