CBK to determine bank dividend payouts in new rules

CBK Governor Patrick Njoroge. FILE PHOTO | NMG 

By PATRICK ALUSHULA
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Summary

• The CBK’s directive, confirmed by multiple bank executives, indicates that investors on the Nairobi Securities Exchange will forego dividends running into billions of shillings.
• The regulator has given banks up to the end of October to submit their revised capital levels through changes to their ICAAPs.
• Governor Patrick Njoroge introduced the capital-measuring process in November 2016, requiring banks to identify, measure and monitor risks and use this as the basis for allocating their funds.

Banks will have to get the approval of the Central Bank of Kenya (CBK) before declaring dividends for the current financial year, according to a new directive by the regulator that is focused on ensuring lenders have enough capital to ride out the Covid-19 pandemic.

The CBK’s directive, confirmed by multiple bank executives, indicates that investors on the Nairobi Securities Exchange will forego dividends running into billions of shillings.

“We have received guidance from CBK asking us to revise our ICAAP (Internal Capital Adequacy Assessment Process) based on the pandemic,” a bank CEO told Business Daily, seeking anonymity for fear of CBK reprisals.

“The regulator now requires that if we are to pay dividends this year, we get approval from CBK on the size of payouts. The boards of banks intending to pay dividends will really have to justify the decision.”

The regulator’s order, coupled with banks’ own risk aversion, looks set to break the lenders’ record of incremental dividend payouts. KCB

, Absa , Co-operative Bank , Stanbic , I&M and DTB

paid total dividends of Sh33 billion for the year ended December 2019, indicating the size of loss that income-focused investors are staring at this year.

The regulator has given banks up to the end of October to submit their revised capital levels through changes to their ICAAPs.

Governor Patrick Njoroge introduced the capital-measuring process in November 2016, requiring banks to identify, measure and monitor risks and use this as the basis for allocating their funds.

The CBK will now have the final decision on whether or not it agrees with the new capital levels that each bank will submit.

This will then determine if it will endorse any board’s decision to pay dividends.

The CBK relies on ICAAP among other tools to assess whether a bank’s capital levels are adequate and consistent with its business plans, strategies, risk profiles and prevailing operating environment.

The CBK sees Covid-19 as a major disruption that requires banks to change their current models and assumptions by making them more conservative.

The move by the CBK mirrors what has happened in markets such as South Africa where the regulator told banks to make capital preservation a priority by freezing dividend payment or bonuses to top executives.

The pandemic and public health measures taken to contain its spread has already led to lower bank earnings and erosion of their capital from defaults and provisions for the same.

The lenders restructured loans worth Sh844.4 billion between March –when the first coronavirus case was reported in Kenya — and June.

Defaults over the same period stood at Sh29.9 billion and the strain on banks’ balance sheets is expected to persist for months ahead.

Some of the best capitalised and most consistent payers of dividends including KCB, Standard Chartered Bank Kenya and Absa Bank Kenya, have already skipped interim payouts for the half year ended June as their earnings contracted by double digits. A CEO of one of the lenders told Business Daily that dividend droughts is the new normal, at least in the short-term.

“At best, the dividends will be a fraction of what they were before,” he said.

The CBK order also risks depressing bank stocks which had started recovering from lows seen in the second week of this month, dealing investors a one-two punch. Besides banks, other blue-chips including Bamburi have also suspended cash payouts, a signalling a historic dividend drought this year.

The dividend freeze is expected to see some investors seek to raise cash by selling shares, putting new downward pressure on the stock market that is at a 17-year low as measured by the benchmark NSE 20 Index.

The regulator appears keen on avoiding scenarios where banks pay dividends on capital levels that soon turn out to be inadequate, leading to search of new funds and pleas for regulatory forbearance.

Some lenders’ balance sheets are already struggling to absorb the coronavirus fallout, exposing depositors to risk of losing their funds.