Co-op Bank signals conservative dividend payouts

Co-operative Bank has notified shareholders to expect conservative dividend payouts to help the lender boost its capital ratios in line with the regulator’s fresh prudential guidelines.

The Nairobi Securities Exchange-listed bank Tuesday said it will be retaining a big portion of its profit to avoid making a shareholders’ cash call even as it keeps within Central Bank’s capital requirements.

Co-op Bank has maintained an average dividend payout ratio of 26.1 per cent in the past five years— meaning the lender has been keeping three-quarters of its net earnings to fund operations.

“We will pursue a progressive conservative dividend payout arrangement to build a strong core capital base,” said Co-op Bank group managing director Gideon Muriuki in an interview Tuesday.

The lender froze dividend pay at Sh0.50 per share or 23 per cent of net earnings in the period to December 2013 and ploughed back Sh7.01 billion into the business by way of retained earnings.

In total, Co-op Bank has accumulated retained profits to the tune of Sh22.1 billion in the past five years. The financier’s core capital stood at Sh34.5 billion as at June 2014.

It doubled dividend pay to Sh0.40 per share in 2010 and held the payout constant in 2011. The bank paid Sh0.10 a share in 2008, the year it was listed on the NSE.

Co-op Bank that is owned 64.56 per cent by Kenyan savings and credit societies (saccos), is ranked third in size out of Kenya’s 44 banks with 4.7 million customer accounts and a market share of 8.61 per cent.

Kenya’s listed banks paid an average all-time-low dividend ratio of 31.7 per cent last year as they sought to preserve cash for growth, according to an analysis by Standard Investment Bank (SIB) research.

Barclays Bank of Kenya paid out 56.5 per cent of last year’s profit as dividends despite cutting shareholders pay by a third to Sh0.70 per share followed by StanChart (49.3 per cent), KCB (45.5 per cent) and Equity (41.8 per cent).

CfC Stanbic paid the lowest dividend payout ratio of 16.6 per cent among the big banks even though the bank tripled dividend pay-out to Sh2.15 in the year to December 2013.

Fresh Central Bank of Kenya (CBK) guidelines expected to be in force in January 2015 require lenders to maintain a minimum core capital to total risk weighted assets ratio of 10.5 per cent from the current 8.5 per cent.

Co-op Bank’s ratio dropped from 15.66 per cent in December last year to 14.1 per cent as at June—which is 3.6 percentage points above the statutory minimum set to come into force in about four months.

“The new CBK regulations have forced banks which previously had high payouts to cut dividends and keep cash. It makes sense to raise capital through retained earnings which goes towards core capital,” said Francis Mwangi, a head of research at SIB.

Co-op Bank’s net profit for the first half of this year remained flat at Sh4.7 billion while the loan book surged by a third to Sh165.8 billion from Sh124.9 billion in June last year.

Mr Muriuki said the bank will in two weeks’ time receive Sh4.6 billion ($52.5 million) in long-term debt from the German Investment and Development Corporation (DEG).

READ: Co-op Bank secures Sh4.3 billion loan to boost borrowing

The credit facility adds to Co-op Bank’s tier II capital and will be used for onward lending to small and medium-sized enterprises (SMEs).

The seven-year loan comes with a two-year grace period and will be repaid in 10 instalments ending on 15th November 2020.

Co-op did not disclose the cost of the credit line, but said it is in ‘single digits’ and will be charged a floating interest rate pegged on the LIBOR (London Interbank Offered Rate).

“We will not do a rights issue or corporate bond. We will leverage on retained earnings and long-term debt to capitalise the bank,” Mr Muriuki said.

Kenyan banks have adopted several strategies to meet the new capital requirements with Barclays turning to its British parent firm for Sh4 billion,
DTB has done a rights issue, NIC Bank has raised funds through a corporate bond and National Bank has lined up a Sh13 billion cash call.