Banks move to boost capital as Basel principle threatens dividend

A transition to Basel requirements by Nigerian banks is expected to hit dividend payouts as lenders move to conserve and boost capital.

The Central Bank of Nigeria (CBN) published two circulars in December 2013 indicating that it expected banks to begin adopting elements of Basel II and III relating to market and operational risk (by June 2014) when computing capital adequacy ratios (CAR).

After weighing the implications of the changes on banks’ capital and feedback, the CBN extended the adoption of the rules to September 2014.

“When we think about the outlook over the next 12-24 months, our take is that

we are likely to see more rounds of capital raisings by the banks, both tier-one and tier-two capital,” said Adesoji Solanke, Renaissance Capital’s SSA banking analyst, in an August 11 note.

“We expect most Nigerian banks to firstly consider lowering dividend payouts and loan growth, particularly due to the rapidly dropping liquidity ratio at a number of banks post the series of cash reserve ratio (CRR) hikes,” said Solanke.

The CBN hiked the cash requirements on public sector funds for lenders to 75 percent in a bid to stem excess liquidity and protect the naira.

Global regulators are weighing tougher constraints on how banks measure the risk of losses on their investments, in a bid to prevent them from downplaying the capital they need to guard against insolvency.

Banks have been accessing the capital market with more of tier-II capital via Eurobond issuance to shore up their capital base.

As at June 2014, Ecobank Transnational Incorporated (ETI) and FBN Holdings had the lowest CAR among tier-1 banks, of 16 percent and 17.6 percent, respectively, necessitating the ETI $200 million subordinated notes due in 2021 and FBNH $450 million Eurobond, according to Kayode Omosebi, equity analyst at UBA Capital plc, a Lagos-based investment bank.

“However, with the new CBN guideline which capped the banks’ tier-II capital at 33.3 percent of total tier-I capital, the banks will be doing more of tier-I capital raise (equity) option, either by rights issue or special placement,” Omosebi said in a response to questions.

“We expect a few banks to access this space via rights issue in 2015 to raise about N50 billion on average, by our estimate,” he said.

Stanbic IBTC announced last week it was raising N30 billion in capital, while Diamond has initiated a N50-billion rights issue.

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.

The total assets of Nigerian banks were about N22.64 trillion ($138 billion) at the end of last year, data compiled by BusinessDay show.

Most Nigerian banks’ CARs are now below 20 percent, according to Solanke.

Banks with international operations are required by the CBN to meet a minimum CAR of 15 percent, and 10 percent for those with strictly Nigerian operations, such as Stanbic IBTC.

The Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost -2.3 percent year-to-date (August 11), compared with the +1.65 percent rise in the NSE All-Share Index.

The cumulative net income for 12 lenders that have released HY 2014 results fell -4.2 percent to N180.99 billion from N188.66 billion in the earlier 2013 period.

“We expect the banks to plough most of their FY: 2014 earnings into retained earnings, thereby limiting dividend payments,” Omosebi said.

“However, the outlook for the banks is quite modest in terms of income generation and profitability,” he added.

BusinessDay