No dividend for bank shareholders — DDEP erodes profits
IF 2020 was tough for banks and their shareholders, then 2022 was tougher. Management and shareholders of the lenders are set to miss out their bonuses and dividends for last year after the domestic debt exchange programme (DDEP) eroded the banks’ profits, making it almost impossible for such payments against the 2022 financial year.
Banks held more than 30 per cent of the GH¢83 billion bonds that were recently swapped for new instruments. The downgrade in the coupon rate and the extension of payment under the DDEP means that the lenders have suffered significant losses.
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Worse still, they have to provide for such losses in line with prudential requirements, making it difficult for some to meet regulatory thresholds for dividend payments.
Indeed, the Bank of Ghana (BoG) has already directed all the 23 banks to suspend such payments until a time when the situation stabilises.
In a January 5, 2023 letter to the Ghana Association of Banks (GAB), the central bank said banks must: “suspend the declaration and payment of dividends and other distributions to shareholders, effective December 31, 2022.”
The GAB, which is the umbrella body of banks, did not respond to a request for comment.
The reality
Sources in the treasury, audit and finance units of some banks have told the Graphic Business that had the central bank not issued the directive, not a single bank would have been able to pay dividend this year as a result of the effects of the DDEP.
The country head of one of the big four auditing and accounting firms and chief finance officer (CFO) of one of the tier one banks told the Graphic Business on condition of anonymity that a proper application of the accounting rules means that no bank would be in a dividend paying position.
“The losses to the industry are not easy because the banking sector’s exposure to the bonds is very huge.“So, I will be surprised if any bank will have money to pay dividend in the first place. Because after this thing is done, if you do not take time, all your retained earnings will be gone,” the source, whose firm audits a number of the banks, said.
The Companies Act (Act 992), 2019 requires that firms pay dividend from their retained earnings.The CFO said: “Even if you are strong, you cannot be in a position to pay dividend because if you attempt it, it will deplete your capital and that will create bigger problems,” he added.
Difficult situation
The President of the Shareholders Association of Ghana, Sas George, said in an interview that the development was a difficult one for shareholders, especially pensioners like him.“But what can we do if the bank cannot pay dividend?”
“When there is profit, they pay dividend but now that there is none, we cannot say much.If you invest, you expect dividend and so if you do not get it, you will not be happy; it is a problem,” he added.
Accounting rules
BoG suspended dividend payments in 2020 but allowed banks to apply to it for approval. Banks that assessed their finances to be strong did apply and were authorised to pay.
The sources, however, said they doubted if such applications would be made this year, given the situation.
According to the source in the auditing firm, it was only recently that the full effect of the DDEP on banks came to light after the accounting rules were applied.
The law requires that provision is made for every bad asset or impairment.
With the government reclassifying the bonds under the DDEP, the auditor said every bank now had to make full provision for the amount of government bonds on its books.
Also, it said auditors had downgraded all other government instruments from their initial position of non-risky assets to risky assets, similar to how other assets are classified.
Implications
A stock market analyst, Ms Enyonam Dagadu, said the development was a blow to the equity market.
She said with banks being the ‘blue chips’ on the Ghana Stock Exchange, their inability to pay dividend meant that excitement on the bourse would be curtailed further, Ms Dagadu, who is also the Executive Director of Amber Securities said, adding that the situation was worsened by the general fatigue in the listed companies.
She said manufacturing firms such as FanMilk Ghana Limited and Guinness Ghana Plc had also shown signs of financial weakness and wondered if they would be able to pay dividend for last year.“A few firms did well but generally, most of the listed firms are struggling and this is not good for shareholders,” Ms Dagadu said.
