CBK in row with banks over dividend payouts


The Central Bank of Kenya head office. FILE PHOTO | NMG

Banks are facing resistance to their dividend payout plans from the Central Bank of Kenya (CBK), dampening shareholders’ hopes of tidy returns from the cash-rich lenders.

A number of bank executives told the Business Daily that the CBK, citing economic uncertainty, was demanding a high level of capital buffers before clearing lenders to pay out billions of shillings to shareholders.

Banks have to get the approval of the industry regulator before declaring dividends for the 2020 financial year under a new directive that seeks to ensure lenders have enough capital to ride out the Covid-19 pandemic.

This has seen a number of banks revise dividends that had received board approval downwards to ensure the payouts are a fraction of last year’s disbursements.

“CBK was initially hesitant to approve our results because they wanted more clarification on our decision to pay dividends especially in the face of the third wave of Covid-19 infections,” a bank CEO told the Business Daily, seeking anonymity for fear of CBK reprisals.

“Whereas there can be a legitimate concern over the level of dividends, the focus should be more on governance. If banks are not being governed well, dividend freeze cannot bring stability.”

The regulator’s order, coupled with the 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.

Banks are expected to report another hefty round of pandemic-inspired loan loss charges when they complete announcing their full-year earnings next Wednesday, though the hit on profits is expected to be smaller than earlier expected.

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.

But bankers reckon that the CBK is overreacting.

They cite a strong liquidity and capital positions on the back of reduced lending and last year’s dividend payout cuts as a case for the CBK to loosen restrictions on payouts to shareholders.

CBK data shows that banking sector liquidity ratio closed January at 54.9 percent—the highest in 43 months. Only in May 2017 was it above this level (55.7 percent).

“There is a lot of cash locked up in the system yet CBK wants to lump all banks together—whether big or small. It is an overreach by the regulator,” said another executive, adding the banking regulator should adopt the European outlook on dividends.

Banking dividends will likely drive the rebound in payouts in 2021, says a report based on investment manager Janus Henderson’s Global Dividend Index.

This emerged after the European Central Bank and Bank of England eased blanket bans for lenders on dividends and buybacks.

These were imposed during the first wave of the crisis to prepare for a potential increase in bad loans.

UK lenders Barclays and NatWest resumed payouts last month.

Kenyan bank executives also cite quarter one performance for the need to ease curbs on dividends. The bankers’ pre-tax profits in January grew 14.4 percent to Sh15.1 billion.

Stanbic Bank, KCB and Cooperative Bank have so far proposed dividend payouts, with the spotlight turning to other lenders ahead of reporting deadline on March 31.

Co-op Bank maintained its payout at Sh1 per share totalling Sh5.86 billion while Stanbic cut its payout 46.2 percent to Sh1.5 billion.

KCB declared a dividend of Sh1 per share or an aggregate of Sh3.2 billion, representing a 71.4 percent drop from a payout of Sh3.5 per share.

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

The banks restructured loans worth Sh1.63 trillion between March — when the first coronavirus case was reported in Kenya — and December or more than half of their total loans.

Defaults over the same period stood at Sh71.26 billion and the strain on banks’ balance sheets is expected to persist for months ahead.

Kenyan banks took a Sh46 billion hit on their profits last year, hurt by a sharp rise in provisioning for loan defaults.