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Recapitalization: Exclusion of retained earnings seen increasing dividend payout

The exclusion of retained earnings from the computation of minimum capital by the Central Bank of Nigeria (CBN) will likely lead to increased dividend payouts by banks over the next few years.

This position is contained in EY’s Report entitled “Navigating the Horizon: Charting the Course for Banks amid Plans for Recapitalisation” seen by Naijaonpoint.

The report says the retained earnings exclusion could bolster the “financial position” of shareholders in these banks, enabling them to capitalize on opportunities such as rights issues or placements, which the banks may consider as their preferred methods of raising additional capital.

It was highlighted in the report that the CBN’s position on the exclusion of retained earnings is a deviation from the last banking re-capitalization, the recent recapitalization exercise carried out in Ghana, and the recapitalization of Nigerian insurance companies. In Nigeria, Basel III requirements consider retained earnings as a source of capital and recapitalization option.

Based on the CBN letter dated January 31, 2018, and referenced BSD/DIR/GEN/LAB/11/002, it can be deduced that for the past CBN leadership, retained earnings were part of a bank’s capital base. Hence, the exclusion of retained earnings from minimum capital computation is a departure from the norm.

EY’s report says that the exclusion of retained earnings has caused “divergent views” among banking industry stakeholders. Recall that in a recent Naijaonpoint report, it was noted that bankers were in opposition of the CBN’s decision to exclude retained earnings.

In Nigeria, there is a regulatory guideline for dividend payout;

Considering that many Nigerian banks meet the minimum CAR requirements and have NPL ratios of less than 5% annually, there have been very few regulatory constraints on dividend payouts for Nigerian banks.

Hence, banks have paid dividends at their discretion, converting a sizable chunk of their earnings to retained earnings, inadvertently leading to relatively large retained earnings for them over the years.

It is estimated that the 10 largest banks in Nigeria have cumulative retained earnings of about N4.2 trillion.

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