Caught between sheer need for new equity capital and the Bank of Ghana’s regulations as set out by the Banks & Specialized Deposit Taking Act [Act 93O], most commercial banks in Ghana are unable to declare dividends on their profits for the 2O17 financial year. This is coming at a time that banks are returning to their customary high profitability levels and the Ghana Stock Exchange, GSE, is enjoying its best performance in several years, and this is leaving most shareholders in bitter disappointment.
However, there is little the banks can do about the situation and indeed, majority institutional shareholders are empathizing with their smaller counterparts, comprising household retail equity investors in the main.
Most importantly, all the banks that have not yet complied fully with the new GHc4OO million minimum capital requirement, announced by the BoG last September and effective by the end of this year, are legally barred, by provisions in Act 93O – specifically section 35 – from distributing any part of their 2O17 profits as dividends to shareholders, unless they are given written approval by the central bank.
This is to ensure that those profits are used towards meeting the new minimum capital requirement ahead of the December 31 deadline. This is because only banks’ stated capital and the monies in their income surplus accounts – which comprise their retained profits from their operations – qualify as capital that is eligible for computing their compliance with the new minimum.
Approval to circumvent this clause will only be given if the BoG is certain that a recapitalization plan, presented by a bank and relying on an equity injection from outside the bank itself, will go through successfully.
So far, barely one third of the 34 licensed banks in Ghana have met the new minimum, even after adding on their after tax profits for 2O17. Although they can expect to make more profits this year, only profits computed from audited financial statements are accepted by the BoG for the minimum capital computations and the quarterly accounts released by the banks are usually unaudited management accounts, rather than audited accounts and so the profits declared are ineligible for the computations.
This means banks yet to meet the new minimum and which are relying on 2O18 first, second and third quarter profits to do so, would have to audit their quarterly accounts in order to enable those profits to be eligible ahead of the BoG’s deadline.
Beyond this regulatory constraint itself, the banks are only too well aware of the implications of paying dividends to shareholders out of profits direly needed to meet the new minimum capital requirement ahead of the deadline for compliance.
Resultantly, one bank after the other, has, over the past couple of weeks, been announcing that they will not pay dividends on their 2O18 profits, despite those profits generally being a marked improvement over those of the previous year.
In order to ameliorate shareholders disappointment, most of the banks affected are opting to issue them with bonus shares created out of the retained profits now being transferred into stated capital in order to comply with the new minimum capital requirement.
For instance, CAL Bank is asking shareholders to authorize the transfer of GHc171.6O million from its income surplus account to its stated capital, from which they are to approve an initial transfer of GHc78.32 million. Altogether, over the coming months, the bank plans to transfer GHc25O million in this manner adding it to the current stated capital of GHc1OO million. The balance of GHc5O million required to meet the new minimum capital requirement is to be obtained from profits made during 2O18.
Similarly, shareholders of Access Bank, have already approved a capital increase of GHc45O million, comprising a long term bond issuance of GHc15O million and a rights issue of shares to existing shareholders of GHc3OO million. Importantly, the bank’s largest shareholder, which is its parent bank, Access Bank Plc of Nigeria, has committed to injecting new equity capital during the first half of this year.
Currently, the bank has stated capital of GHc144.738 million and another GHc43.298 million in its income surplus account which means that pending the bond issue, the rights offer and the equity injection from its parent bank, the bank still needs more than GHc2OO million to meet the new minimum.
It is still unclear whether the bank intends to seek BoG approval to pay shareholders any dividends on the GHc29.592 million it made in after tax profits for 2O17, considering that many of them are retail investors who invested in the bank during its Initial Public Offer, IPO, a couple of years ago that resulted in its stock market listing.
A more peculiar situation is that of Fidelity Bank, which has announced a dividend of GHc O.7O per share on earnings per share of GHc3.58. This is despite its still having a capital shortfall; it currently has stated capital of GHc264.486 million and another GHc39.344 million in retained earnings held in its income surplus account.
The bank has announced plans to issue redeemable preference shares to the tune of GHc7O million. And it is transferring a further GHc2O million from its income surplus account to stated capital following very strong profitability in 2O17, generated in part from loan loss recoveries after prudently making full provisions against possible losses facing it as the end of the previous year. Ostensibly, the BoG has thus given Fidelity the special dispensation required to allow it pay dividends despite its current capital shortfall, in the confidence that the bank is certain to bridge the gap imminently.
However, the handful of banks that have already met the new minimum capital requirement well ahead of the BoG’s deadline, have no such restrictions on dividend pay outs/ These include Ecobank, GCB Bank, Stanbic Bank and Zenith Bank among others and these now stand out as the most financially solid banks in Ghana, who can easily and conveniently afford to pay dividends to shareholders should they so wish.
Instructively however, these are the banks with the most conservative dividend policies, which is in part why they have been the first to cross the new capital threshold, having retained most of their earnings in the past rather than distributing them as dividends. Thus there is the possibility that despite being free to dish out their 2O17 profits as dividends, they will prefer to retain most of those earnings in order to become even stronger financially.
The restrictions on dividend payments will be a bitter pill for shareholders – especially retail, household equity investors who had been looking forward to an increase in their dividends following the significant improvements in profitability achieved last year. Returns on equity among most banks for 2O17 rose above 2O% again after dipping during the previous two years, but ongoing recapitalization requirements is making nothing of this for now as far as shareholders are concerned.