Recent dividend declarations by major Nigerian banks underscore a nuanced relationship between shareholder returns and the Central Bank of Nigeria’s (CBN) capitalization directives.
Despite the CBN’s push for substantial capital raises, banks are not refraining from returning capital to their shareholders.
According to data, six leading banks, having recently released their 2023 audited accounts, are poised to disburse a collective N379 billion in dividends in the upcoming period. This reflects a 31.3% increase from the N289.1 billion declared as final dividends a year earlier.
When interim dividends are factored in, the total climbs to N465.3 billion.
With the CBN’s recapitalization deadline looming, these banks are anticipated to require a formidable N4.2 trillion in fresh capital over the next two years. However, instead of conserving capital through reduced dividends, they are opting to reward their shareholders.
This includes plans for substantial capital raises via rights issues subsequent to these substantial dividend disbursements.
Insights from the Data
A closer examination reveals that Access Bank, Nigeria’s largest bank by total assets, has announced a final dividend of N63.9 billion, despite facing a need to raise approximately N248 billion in fresh capital.
Similarly, Zenith Bank, a profitability leader, intends to distribute N109.8 billion in dividends before addressing its N229 billion capital requirement.
UBA, aiming to raise an estimated N384 billion, is set to payout N78.6 billion in dividends based on its recently audited accounts.
Notably, Tier 2 banks like Fidelity Bank and Stanbic IBTC Holdings are dispersing a significant percentage of their profits, with 19% and 20% respectively, the highest among the reviewed banks.
Reasons Behind Dividend Payouts
One key rationale behind banks’ continued dividend payouts, notwithstanding impending capital requirements, is the CBN’s decision to exclude retained earnings from its share capital calculation.
Retained earnings represent the portion of net profits not distributed as dividends but reinvested in the business.
With this exclusion, banks have minimal incentive to accumulate retained earnings.
Furthermore, some banking sector analysts argue for a relaxation of the CBN’s stringent oversight on dividend payouts from profits, suggesting that these restrictions are less critical under the current regulatory framework.
Strategic Function of Dividend Payouts
Paying dividends under these circumstances serves a strategic purpose.
It enables banks to return capital to shareholders, who may then potentially reinvest this capital back into the banks as fresh equity.
Indeed, banks might have opted to pay even higher dividends than the current average 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 may become more prevalent.
This dynamic underscores Nigerian banks’ adeptness at navigating regulations, balancing the imperative to fortify their financial foundations with the need to reward investors.
The Road Ahead
The Nigerian banking sector faces the challenge of striking a delicate balance between meeting stringent capital requirements and nurturing robust shareholder relationships through dividends.
As banks chart their course forward, they remain a focal point of interest for investors and regulators alike, with both parties closely monitoring how these financial institutions manage the dual imperatives of compliance and profitability.
