CBN bans banks with high NPLs from dividends pay out

The Central Bank of Nigeria has placed a stop order on all dividend payout henceforth by commercial Banks unless authorized by it.

 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 terse directive is coming at a time several banks are set for the release of their 2017 financial year’s annual reports.

In the letter conveying the directive dated January 31^st, sent to banks and discount houses, which was signed by the Director, Banking Supervision Department, CBN, Ahmad Abdullahi, CBN was very clear in stressing that “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.

The CBN circular read in parts: “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.

“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.”

It would be recalled that late last  week, Fitch Ratings had expressed fears of possible slump of some banks (mainly Tier 2), saying should dollar exchange rate deepens further to N450, some commercial banks will go under.