Many Nigerian banks may defy the International Monetary Fund (IMF) directive that they halt dividend payout in the face of the Coronavirus (COVID-19) pandemic. Such practice would help the banks build buffers and reduce the impact of the pandemic on their balance sheets.
IMF Managing Director, Kristalina Georgieva who disclosed this, said shareholders who sacrifice their dividends now will prosper when growth restarts. The Fund had asked Nigerian banks and their counterparts globally, to retain over $250 billion earnings from ongoing operations and stop dividend payment to shareholders.
Many of the Nigerian banks had already paid dividend before the IMF directive.
Still, there are strong indications that many bank shareholders will receive lesser or no dividends in 2020 as banks decide between strong financial positions and good returns to shareholders.
Thirteen banks listed on the Nigerian Stock Exchange are FBN Holdings Plc, Guaranty Trust Bank Plc, Access Bank Plc, United Bank for Africa Plc and Zenith Bank Plc. Others are Union Bank of Nigeria Plc, Sterling Bank Plc, FCMB Group Plc, Wema Bank Plc, Ecobank Transnational Incorporated, Fidelity Bank Plc, Stanbic IBTC Holding Plc, and Jaiz Bank Plc. Findings showed that between 2018 and 2019, quoted Nigerian banks paid out a total of N538.1 billion as dividends to their shareholders. In 2019, the total dividends paid by these banks paid over N277 billion.
The IMF chief explained in a report that as the world brace itself for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested.
IMF staff calculate that the 30 global systemically important banks distributed about $250 billion in dividends and share buybacks last year. This year they should retain earnings to build capital in the system.
For Georgieva, having in place strong capital and liquidity positions to support fresh credit will be essential adding that one of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations.
She explained that after the 2008 financial crisis, global regulators required banks to increase their prudential buffers of high-quality capital and liquidity.
That, move, she said, significantly strengthened the resilience of the financial system, adding that many observers now cite those buffers as a bulwark against the adverse effects of the Covid-19 pandemic.
“But as we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested. Having in place strong capital and liquidity positions to support fresh credit will be essential. One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant,” she said.
Georgieva said although holding back dividend is unpleasant implications for shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income, but in the face of the abrupt economic contraction, there is a strong case for further strengthening banks’ capital base.
She said that building stronger buffers is aligned with the array of actions undertaken to stabilise the economy.
“Governments are deploying fiscal measures in trillions of dollars, including financing that provides a backstop for borrowers who are tapping bank loans. Central banks have innovated and provided extraordinary liquidity support to a wide range of markets. Bank supervisors have exercised flexibility to the fullest possible extent by encouraging banks to restructure loan repayments, easing regulatory requirements, and allowing banks to draw down their buffers temporarily,”she said.
According to her, the interests of bank shareholders are aligned with those of bank supervisors and customers. “All stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic. Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts — indeed the more profits retained now, the larger the eventual payout,”she added.
Georgieva said the need to preserve capital is already being recognised and needs to be so more widely adding that in some countries, banks have voluntarily decided to collectively suspend shareholder payouts and buybacks.
In others, supervisors have had to push. In March, the Bank of England asked banks to suspend plans to pay dividends and cash bonuses to executives, indicating it was ready to use its supervisory powers if anyone refused. Eventually the banks all complied. In Brazil, supervisors have had to use their authority to suspend payouts in a collective manner.
“Collective decisions are vital. Banks that take action on their own could be penalised by investors who fail to understand the need to restrict payouts. All banks should be covered — whether state-owned or private, whether commercial or investment. But no bank can do it alone, and if banks’ collective will is not there, then supervisors should take the decision for them”.
Georgieva said that memories from the last global crisis still linger. She added that public sector is doing what it can to help prevent another banking crisis from happening again, insisting that shareholders have both an interest and an obligation to do the same.
