Investors risk zero bonuses as banks grow capital bases
Emma Abugu (l), executive director, Bank PHB, with Dimeji Bankole, speaker, House of Representatives, at an event tagged “An evening with the speaker” organised by the Leadership Coalition in London at the weekend.
Bank stocks’ Investors who are driven by bonus and dividend payments may be disappointed.
Banks which have so far grown their shareholders’ base and share capital stand the risk of not being able to pay bonuses due to declining earnings.This is because of growing fears that with so many shares on issue to their credit, earnings and dividends may not keep pace with the huge capital pulled in the wake of the continuing consolidation exercise in the sector.
Market operators say with so much in their kitty and many mouths to feed, earning and dividend per share would be on the downside even with absolute growth in the earning and dividend indices.
Abayomi Sanya, managing director of Goldman Assets, said many of such banks would pay zero bonuses, since their shareholders’ bases are already bloated.
According to Sanya, the large shareholders’ base and pool of capital would put pressure on earning, leading to drop in earning and dividend.
Sonnie Ayere, managing director and chief executive of UBA Global Market, agrees that with the increase in share on issue, payment of bonus would be difficult. While sharing the view that earnings and dividends would be threatened, Ayere said this would depend on banks ability to profitably deploy the huge capital. Already, many banks are aggressively searching for windows of opportunities to invest in. These include oil and gas, property, capital market, increased lending for financing of viable projects and offshore investments.
Sunny Oroge, chief executive of Crossword Investment, says such banks cannot afford ambitious bonus culture like one for one as this will further constrain returns on investment. If bonuses would be paid at all, he said, it would be in the ratio of 1 to 10.
This means that bonus-crazy investors may have to settle for the marginal dividend that could be squeezed out from these financial institutions.
Industry watchers say under the circumstances, chances for capital appreciation would abound, opening the market more to speculators and short term investors.
As a way out, some banks are already planning share reconstruction, in which case the number of share on issue would be reduced to pave way for a boost in earning and dividend per share as well as share prices.
Ayere says with share restructuring, which has led to reduction in the volume of shares, earnings and bonuses could be boosted. Sanya shares this view, noting that with fall in share on issue, share value would be enhanced. For Oroge, the reconstruction option would reverse the situation caused by bloated shareholders’ base. The decline in earning per share, dividend per share and bonus payment, according to him, would be corrected.
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Comments (1 posted):
Obviously, eps and dividends will have to fall and be cut respectively (basics of finance.) The pie is getting bigger although each shareholder share of that pie is getting smaller. Dividends might be cut or reduced so that the banks will have to use the raised capital to grow their business in the future through increased lending and investments. What sense does it make if the banks should raise capital only to return it in form of dividends to shareholders?
One thing that the Nigerian banks have failed to do over and over again which is one of the causes of our stunted growth is the inability to allocate capital efficiently. They all pursue the same investments and make loans to the same businesses primarily in the oil and gas, and properties sector. What happened to other sectors? Don't they have a lot of potentials?
Everyone keeps mentioning about the growth of the Nigerian stock market and hyped and debating whether it is poised for continuous growth or a crash. The fact of the matter is no one knows? The important thing is to look at the operating performances of the companies and not worry about prices today, tomorrow and next week. The important thing is what will the business look like in 5 or 10 years from now?
Lastly, the integrity of corporations needs to be established and watched over by regulators. Given what has happened in that country, I think it is of utmost importance that investors and shareholders are protected from corporate frauds and accounting scandals, accounting books are audited properly and conflict of interest (the other day I read that the head of SEC is on transcorp;if that is not a deep conflict of interest, I wonder what other questionable practices occur in Corporate Nigeria.) are prevented as one knows, our country is the easiest place for that to happen.
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