Recent dividend announcements by major Nigerian banks have highlighted a complex interplay between shareholder returns and Central Bank of Nigeria (CBN)’s recapitalization requirements.

    Despite the CBN’s push for a hefty capital raise, banks are not shying away from returning capital to their shareholders.

    Nairametrics has tracked data indicating that six major banks, which have recently published their 2023 audited accounts, are set to pay out a combined N379 billion in dividends in the coming months. This compares to N289.1 billion declared as final dividends a year earlier (+31.3%).

    When interim dividends are added to the 2024 figures, it escalates to N465.3 billion.

    As the deadline for the CBN’s recapitalization requirement nears, these banks are estimated to need a staggering N4.2 trillion in fresh capital over the next 24 months. However, rather than conserving their capital through reduced dividends, these institutions are proceeding to reward their shareholders.

    This includes plans for significant capital raises through rights issues following these hefty dividend payouts.

     

     

    What the data is saying?

    Taking a closer look, Access Bank, which is Nigeria’s largest bank by total assets, has declared a final dividend of N63.9 billion, despite facing a requirement to raise about N248 billion in fresh capital.

    Similarly, Zenith Bank, leading in profitability, plans to distribute N109.8 billion in dividends before addressing its capital need of N229 billion.

     

     

    • UBA, with plans to raise an estimated N384 billion, will first payout N78.6 billion in dividends as per its recently audited accounts.
    • Notably, Tier 2 banks like Fidelity Bank and Stanbic IBTC Holdings are distributing a high percentage of their profits, 19% and 20% respectively, the highest among the banks under review.

     

    Why banks are paying dividends?

    One key reason banks continue to pay dividends, even with looming capital requirements, is the CBN’s decision to exclude retained earnings from its calculation of share capital.

    In accounting terms, retained earnings represent the portion of net profits not distributed as dividends but reinvested in the business.

    • With this exclusion, banks have little incentive to accumulate retained earnings.
    • Additionally, some banking sector analysts argue that the CBN’s stringent oversight on how much dividends can be paid from profits should be relaxed, as these restrictions are less critical under the current regulatory framework.
    • Paying dividends under these circumstances serves a strategic function.
    • It allows banks to return some capital to shareholders, who can then potentially reinvest this capital back into the banks as fresh equity.
    • Indeed, banks might have opted to pay even more than the current average dividend payout ratio of 14.15% for the six banks reviewed.

     

    As banks adjust their dividend policies to align with the CBN’s regulatory framework, higher dividend payout ratios could become more common.

    This dynamic suggests that while the CBN may set the rules, Nigerian banks are finding savvy ways to navigate these regulations, balancing the need to strengthen their financial bases with the imperative to reward their investors.

    The road ahead for Nigerian banks involves a delicate balance between adhering to stringent capital requirements and maintaining robust shareholder relationships through dividends.

    As they strategize their next moves, the banking sector remains a focal point of interest for investors and regulators alike, each keenly watching how these financial institutions manage the dual challenges of compliance and profitability.

     

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