- A number of bank executives told Business Daily that the CBK, citing economic uncertainty, required a high level of capital reserves before allowing lenders to pay billions of shillings to shareholders.
- Banks must get approval from the industry regulator before declaring dividends for fiscal 2020 under a new directive that aims to ensure lenders have enough capital to weather the Covid-19 pandemic.
- This has seen a number of banks downgrade dividends that had received board approval to ensure that payments were only a fraction of last year’s disbursements.
Banks are facing resistance to their dividend distribution plans from the Central Bank of Kenya (CBK), dampening shareholders’ hopes of net returns from cash-rich lenders.
A number of bank executives told the Daily business that the CBK, citing economic uncertainty, required a high level of capital reserves before allowing lenders to pay billions of shillings to shareholders.
Banks must get approval from the industry regulator before declaring dividends for fiscal 2020 under a new directive that aims to ensure lenders have enough capital to weather the Covid-19 pandemic.
This has seen a number of banks downgrade dividends that had received board approval to ensure that payments were only a fraction of last year’s disbursements.
“The CBK was initially reluctant to approve our results because they wanted more details on our decision to pay dividends, especially in the face of the third wave of Covid-19 infections,” a CEO of the bank told the Daily business, seeking anonymity for fear of reprisals from the CBK.
“While there may be a legitimate concern about the level of dividends, the focus should be more on governance. If banks are not well governed, the dividend freeze cannot bring stability. “
The regulator’s order, coupled with banks ‘risk aversion, looks set to beat lenders’ record for progressive dividend payments.
KCB, Absa, Co-operative Bank, Stanbic, I&M and DTB paid total dividends of 33 billion shillings for the fiscal year ended December 2019, indicating the scale of the loss that income-oriented investors envision this year .
Banks are expected to report another round of pandemic-inspired loan loss charges when they finish reporting their annual results next Wednesday, although the impact on profits is expected to be smaller than expected.
The CBK’s move reflects what has happened in markets such as South Africa, where the regulator has asked banks to make capital preservation a priority by freezing the payment of dividends or bonuses to senior citizens. leaders.
But bankers believe the CBK is overreacting.
They cite strong liquidity and capital positions on the back of last year’s loan cuts and dividend cuts as a case for the CBK to ease restrictions on payments to shareholders.
Data from the CBK shows that the banking sector’s liquidity ratio closed in January at 54.9%, the highest in 43 months. It was not until May 2017 that it was above this level (55.7%).
“There is a lot of money locked in the system, but the CBK wants to consolidate all the banks, whether large or small. This is an overshoot on the part of the regulator, ”said another executive, adding that the banking regulator should adopt the European perspective on dividends.
Bank dividends will likely lead to the rebound in payments in 2021, according to a report based on the Global Dividend Index from investment manager Janus Henderson.
It came about after the European Central Bank and the Bank of England relaxed general bans on lenders on dividends and redemptions.
These were imposed during the first wave of the crisis to prepare for a potential increase in bad debts.
UK lenders Barclays and NatWest resumed payments last month.
Kenyan bank executives also cite the first quarter performance for the need to ease dividend restrictions. Pre-tax bankers’ profits in January rose 14.4 percent to 15.1 billion shillings.
Stanbic Bank, KCB and Cooperative Bank have so far offered dividend payouts, with the spotlight turning to other lenders ahead of the March 31 reporting deadline.
Co-op Bank kept its payment at Sh1.1 per share for a total of Sh5.86 billion while Stanbic reduced its payment by 46.2% to Sh1.5 billion.
KCB declared a dividend of Sh1 per share or a total of Sh3.2 billion, which is a decrease of 71.4% from a payment of Sh3.5 per share.
The pandemic and the public health measures taken to contain it have already led to declining bank profits and erosion of their capital due to defaults and related provisions.
Banks restructured loans worth 1.6 trillion shillings between March – when the first coronavirus case was reported in Kenya – and December, more than half of their total loans.
Defaults during the same period amounted to Sh 71.26 billion and the pressure on banks’ balance sheets is expected to persist in the coming months.
Kenyan banks took a 46 billion shillings hit on their profits last year, penalized by a sharp increase in provisions for default.