Withholding dividends
Investors have recently left the general assemblies of several banks empty-handed. Sherine Abdel-Razek looks at why they are not getting any dividends this year
There was little joy at the general assembly meetings of a number of local banks over the past few weeks. Some 15 local banks were forced to tell their investors that, despite the fact that many of them realised profits over the past fiscal year (FY), no dividends will be distributed as per a decision taken by the Central Bank of Egypt (CBE).
After going through their financial statements and reports analysing their results, the Central Bank of Egypt (CBE) has asked these commercial banks not to distribute dividends for FY 2001-2002 and retain them instead as reserves to cover different provisions.
These banks, which include Al-Mohandes Bank, the International Islamic Bank and Al-Watany Development Bank, are mostly small-cap joint venture banks with relatively low non-performing loans provisions.
According to the CBE, this move came in a bid to enhance the capital of these banks and support their financial positions. The Egyptian banking sector and the economy in general were hard-hit by a number of default cases during the past year. Figures released by the CBE show that 14 per cent of bank loans are considered bad debts, a fact that was mirrored by a reduction in some Egyptian banks' international ratings recently.
While the move shocked investors who were waiting for their dividends, the board members of these banks, who will not receive any bonuses this year, did not object to the CBE's decision. According to Article 26 of the Banking Law, the CBE has the right to ask banks not to distribute any dividends and even has the right to interfere to stop the distribution of dividends if the bank does not have adequate provisions.
However, a bank's board has the right to object and resort to jurisdiction if the CBE refuses any further dividend distribution schemes, provided it includes feasible suggestions to cover the risks of non-performing loans.
"For sure the CBE has the right to do this," said Yasser Ismail Hassan, the managing-director of Al-Watany Bank, one of the banks subjected to the new regulations.
"It makes no sense that banks with portfolios burdened with non-performing loans distribute profits," he said.
Hassan explains that some of these banks have real problems in their financial positions. While he explained that there is no standard percentage of non-performing loans provisions to compare to and thus judge the credit position of these banks, he pointed out that some of the financial statements of these banks are misleading.
In calculating their revenues the banks include interest rates on loans, even non-performing ones, before their collection. "The accrued interest rate on loans that might never be collected are included in the statements as revenues and thus enhance the company's bottom line. Thus it's income statements are not indicative of real positions. In such a situation, [the distribution of] profits will put more burden on the bank and weaken its financial position," Hassan added.
It seems that the bank managers are convinced. But what about the small investor?
"He loses his coupon in the short-run but the value of his share will increase in the long-run as the new move will strengthen the bank's financial position," said Khaled El-Mahdy, head of research at HSBC Securities.
While some market observers expressed fears that the CBE's move might lead to small investors selling their shares to benefit from capital gains thus pushing share prices down, El-Mahdy ruled out this possibility. "A lot of investors buy shares as a long-term investment and are thus betting on the improvement in the banks' financial positions after such a move."
Hassan feels that this is the case with his bank. "Since the general assembly meeting where the move was announced, our share price has climbed, leading us to believe that there is strong [share] demand."
Enayaat El-Naggar, a banker and a consultant to the Capital Market Authority points out another positive aspect to the move. "By doing this we are meeting the requirements of the Basle Accords related to the capital adequacy ratio. This will strengthen the possibility of upgrading the credit ratings of local banks."
According to the Basle Accords, which govern banking activities globally, Egyptian banks must increase their capital adequacy ratios. In other words, they need to increase their capital to a level sufficient to comfortably cover their non-performing loans.
The CBE's move came amid news of a plan to reform the banking sector by merging a number of small-cap banks, or selling them to larger state-owned banks. So far, the National Bank of Egypt, Banque Misr and Bank of Alexandria are considering buying three small-cap banks: El-Togarioun, Misr Exterior and the International Islamic Development Bank.
