Last week, investors in the stock market went into frenzy after the Central Bank of Nigeria, CBN, directed banks with huge non-performing loans (NPL) and Capital Adequacy Ratio( CAR) below the required standard, not to pay dividend. In this interview, Alhaji Rasheed Ola Yussuf, Managing Director, Trust Yield Securities Limited, threw more light on the new dividend policy, saying that it is meant to protect stakeholders in those banks. Excerpt:
By Nkiruka Nnorom
LAST week, the Central Bank of Nigeria, CBN, came up with a directive restricting banks with high Non Performing Loans, NPL, from paying dividends. What is your view on this in the light of the clamour by the minority shareholders for dividend payment?
Two things; I don’t think the directive by the CBN is completely new. They are merely stressing what they have said before; they were just reminding the banks that this is the guidelines because the market is going into dividend season.
So, it is not exactly new; it has always been part of the CBN’s circular; the apex bank was simply pointing people’s attention to it. May be, there are some modifications, but in general term, what they are saying is not detrimental to the investors. Over all, what the central bank is trying to do with that circular is to protect shareholders so that the banks do not pay out the money that they need to run their business properly because they are under pressure from shareholders to pay dividend.
What the central bank is saying is “If you are stronger by retaining the money and using it to run the business, then don’t pay it out as dividend, but if you must pay it out, make sure you have money and you don’t have some bad loans that you are going to write off which is going to eat into your capital. But if you are healthy as a bank and you don’t have provisions that will affect your financial strength, then you can pay dividend if you want”. So, the directive is not to injure anybody, but if anything, it is to protect shareholders.
The second part is that historically, Nigerian shareholders believe that if a company does not pay out dividend, it is a negative indication. It is not.
So what you are saying is that the policy does not have any negative implication?
Yes, the circular is meant to protect the banks and their shareholders to make sure that the banks are strong and their liquidity is not threatened by the decision to pay out dividend. Two is that the market as a whole should not view the policy as a negative development even if a company does not pay dividend. As long as that company is making reasonable profit and reinvesting that profit back to the company, it strengthens the financial state of the company and that should be reflected in the share price.
Therefore, as a shareholder, you are not losing because if the price of the share goes up as a result of non-payment of dividend, then you can always sell a portion of your share to compensate for whatever dividend you would have received if the company had paid dividend. Therefore, by not paying dividend, the networth of the company will go up and that higher networth will be reflected on the share price. Overall, the central bank’s policy is meant to protect the shareholders and the companies to make sure that the banks continue to remain financially viable and do not have unnecessary liquidity problem as a result of dividend payment.
A day after the pronouncement, majority of the banking stocks went down. Do you see this still impacting investors confidence in the banks going forward?
That was the initial reaction of the investors because they did not fully understand the import of the circular, but you will see that some of the stocks that went down have started picking up because the more people understand that the directive does not necessarily portend negative impact on the companies, the more they buy those stocks again. So, in the long run, what matters is: Are those companies making profits?
If they are making profit, then it is good for the company. Are they paying out those profits? If they are not, then the companies are stronger and therefore, people don’t need to sell-off their stocks because of that. That is why after the initial reaction by the investors, some of them are picking up because people are now realizing that the circular will not necessarily have a negative impact on the share price of the stocks.
So, what will you say to shareholders who are still condemning the CBN over the directive?
My advise will be for the shareholders not to get unnecessarily panicky about it. It is not a negative development. Like I said, whatever you lose out in terms of dividend payment, you can gain in terms of price increase to replace the retention of that dividend by the company.