Last week, shareholders of Ecobank were somewhat surprised at their bank’s Annual General Meeting to learn that they would not be given cash dividends for the second year running, despite the fact that the bank’s industry leading profitability has not missed a beat.
Last year, was easily understandable; like virtually every other bank in the country dividends were not paid because the bank needed to reinvest all its profits into meeting the GHc400 million minimum capital requirement set by the Bank of Ghana ahead of the December 31, 2018 deadline. Besides, shareholders were handsomely rewarded with valuable bonus shares which are good as cash if the owner decides to sell.
However, this year, the bank has already comfortably exceeded the new minimum, and has made even bigger profit, with earnings per share exceeding GH1. Thus, shareholders had every reason to expect a generous dividend.
Under the circumstances they handled their obvious disappointment very well indeed and this is instructive. Even Ecobank’s retail shareholders accepted the Board of Director’s explanation that the bank needs even more capital for reinvestment in processes, technological infrastructure, and profit-making activities that require funding, such as new lending.
Undoubtedly this is a good thing for the bank, its shareholders and the Ghanaian economy as a whole. Eventually, the reinvestment of profits will translate into even bigger profitability and when dividend payments resume- expectedly from next year – they will be bigger than ever before, and probably bigger than what other banks can afford as well.
This is instructive in that it shows that all of Ghana’s banks can do the same; if Ecobank’s retail investor’s comprising average, middle class people, can realize the advantages of forgoing dividends for a second successive year, even though strong profitability has made them affordable, how much more the institutional investors and high networth individual investors who comprise the shareholders of most commercial banks in Ghana.
To be sure, now that the “sole proprietorship” and “partnership” banks have been removed from the industry by their failure or blatant refusal to share ownership with wider shareholder bases, it is time to acknowledge that even the new GHc400 million minimum should be regarded as just a start. Competition among the 23 banks left will be driven largely by their comparative balance sheet sizes and so those with ambitions of being top tier banks must raise their core capital much higher than the new minimum.
Bigger capital will be required to enable the banking industry resume loan book growth, which has suffered severely over the past couple of years of balance sheet cleansing. Indeed in real terms, the banking industry’s total lending has been contracting rather than expanding and this must rank as the biggest shortcoming in Ghana’s ongoing effort to use private sector capital to finance the country’s economic growth and development.
It is instructive that Ecobank itself grew its loan portfolio by over 90 percent last year and indeed is deliberately reinvesting its profits in more capital to underpin the growth in risk assets.
We ask the other banks to do the same. With new investment opportunities being opened up nationwide, bank credit is direly needed, but this can only be made available if the banks are willing to underpin bigger loan portfolios with bigger supporting core capital.
Ecobank is doing just this. The other banks can, and should do so too.