Business

Dividend, retained earnings crisis hits Wema, Union bank

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… as Tier II banks record N559bn retained deficits

By Ayobami Adedinni

A group of  Tier II banks  led by Wema Bank Plc, Union Bank Plc and others have reported negative retained earnings of N559 billion for the year ended 2016, to further diminish shareholders’ Return on Investment (ROI),Nigerian NewsDirect can authoritatively report.

Investigation by Nigerian NewsDirect revealed that these Tier-II banks reported N394.65 billion in retained deficits in 2015 despite announcing significant increase in profitability.

The enormous macro economic challenges facing banks in the country have exposed these banks to high volatility in share prices over uncertainties.

 Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders’ equity on the balance sheet.

With a negative balance in retained earnings, companies also typically can’t make dividend payments to shareholders or owners. This means shareholders should not expect return on their investment.

Specifically, Union Bank of Nigeria in 2016 reported N244.18 billion from N242.06 billion retained earnings in 2015.

For the same year, Wema Bank retained deficit hits N38.45 billion in 2016, an increase of 8.9 per cent over N35.3billion recorded in 2015.

The Chief Finance Officer, Wema Bank, Mr. Tunde Mabawonku had explained that, “WemaBank has not paid dividend in a while. First, we have negative retained earnings. We are in the final stage of regulating approval. Out of the five regulators, we have received approval from four which means one more has to approve and we hope to get approval in 30 – 60 days.

“Once we get the final approval, then we take from our share premium to retained earnings. That should clean up the negative retained earnings. The shareholders fund will remain the same. The shareholders have approved the process but we await the regulator to give the go ahead.

“Before October, we will be calling an extra-ordinary General Meeting. Pending  when that happened; we will continue to grow internal capital. By the time we get approval and cleaned up, we will be in a position to start providing returns.

“Once investors see that the regulators have finally given approval, it will open up a new opportunity for shareholders and the bank.”

Analysts are of the opinion that investors looking for dividend stocks to play in the banking sub-sector should steer clear of these banks, regardless of their price appreciation.

According to them, dividend investors should therefore keep an eye on the balance sheets of the companies whose stock they hope to get an early warning of any potential problem with paying dividends in the future.

The Central Bank of Nigeria (CBN) had maintained that finance institutions are to make good retained earnings before dividends are paid to shareholders.

Still, in the vast majority of cases, companies cannot pay dividends that exceed their retained earnings.

Data from the above banks’ finance statements show that Union Bank Plc reported N244 billion  negative retained earnings for the period under review compared with N242 billion reported in finance year, 2015.

The Chief Financial Officer, Union Bank of Nigeria, Oyinkan Adewale, on the Nigerian Stock Exchange (NSE) had disclosed that the CBN policy on negative retained earnings would delay dividend payment to investors who invested in the commercial bank.

She stressed that the commercial bank was abiding by CBN laws on dividend payment.

According to her, “the stark reality is that as long as we continue to have negative retained earnings, there is absolutely nothing Union Bank of Nigeria can do about paying dividend to its shareholders. We will keep on appealing to ownership of the company to understand that it is absolutely out of our hands.”

Wema Bank Plc reported N38.4 billion negative retained earnings for the period under review, a drop from N35.3 billion reported in 2015.

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