Kenya Commercial Bank and Zenith Bank Nigeria: When 12% dividend yield is not enough

Dear Africa Interested Professionals:

                                                           Zenith Bank on February 27, 2017, released its fiscal year 2016 result; Kenya Commercial Bank did the same on March 9, 2017.  Zenith Bank offered its shareholders a final and second dividend for the 2016 fiscal year of N1.77 per share.  This equates to a final dividend yield of approximately 12% which is one of the best dividend yields for a bank in Nigeria's stock market history in relation to its current price.  The market did not budge as the stock was marked down on March 13, 2017, at pretty much the same price it was when the result and dividend declaration was announced on February 27, 2017.  What could have caused this?  The chatter among investors is the announcement of of hybrid capital raising in excess of N100B to commence later this year.  I do not agree that the imminent capital raising announcement was the major cause of the investor apathy towards Zenith's eye-popping dividend yield.  I see it more of wrong signals to investors by management based on decisions taken.  

1. Issuing dividend when debt is more than equity in your capital structure (see my article on Dangote Cement and Access Bank for more on this).  Paying down debt and reducing leverage would have been wiser and put the bank on a better footing moving forward.  

2. Bloated outstanding shares of 31.4B that is set to increase likely to about 40B before the end of 2016.  The approximately N57B spent as final dividend payment, could have reduced outstanding shares by about 10% through a share buyback.  

3. Issuing a dividend to investors and then taking it back from them and asking for extra through a rights issue.  It is better not to receive than to receive and more be demanded from you than you even received.  Zenith is putting its investors in a cash negative position.  Not nice,  

There may be a lot more to this lackluster response by investors to Zenith Bank's earnings release and subsequent announcements than is clearly obvious.  

Kenya Commercial Bank (KCB) released its fiscal year 2016 result on March 9, 2017.  The Kenyan banking industry has had it rough over the past twelve - eighteen months with banks closing down and/or going into receivership, auditing scandals and six months ago, President Kenyatta signed into law a bill compelling the Central Bank of Kenya (CBK) Governor, Patrick Njoroge, to ensure Kenyan banks cap their lending rates at 4% above the CBK interest rate of 10.5% (at the time and now reduced to 10%) and pay a minimum interest rate of 70% of the CBK rate on deposits.  The law came into effect on September 14, 2016.  

Over in Nigeria, we had policies aimed at enriching the banks during a recession, being crafted and rolled out officially and unofficially with explicit or tacit approval of the Central Bank Governor who was at the helm of Zenith prior to taking up his current position in June 2014.  

• Banks were charging arbitrary currency exchange rates for online or point-of-sale transactions using their debit cards.  Obtaining dollars from the CBN at N305 and debiting their customers with diverse figures ranging from N330 - N450 with N380-90 being more prevalent.  
• The removal of commission on transactions has been delayed.
• The spread between lending and deposit rates is now at 20%, (6% deposit and 26% lending) one of the highest in the world. The CBN governor spoke recently defending why these obscene lending rates have to remain in place as the cost of doing business in Nigeria is high and banks need to appropriately price the risk of its intending borrowers.  
• The fee for withdrawal and deposit of cash from banks has been increased and will commence in the states with the lion's share of economic activity on April 1, 2017.  The fees are variable.  and apply to deposits and withdrawals. 

This is just to mention a few.  Despite the above, let us see how these two prominent banks fared.

Kenyan banks were typically charging 18% for lending prior to the lending cap law coming into effect and repriced them downward to 14.5% for the last three-and-a-half months of 2016 after the law came into effect.  Nigerian banks' lending rate was typically at 26% or higher.  Six-month NIBOR rate hovers around 23%.  

Despite the above, KCB's Interest earned on Loans/Net Loans for FY 2016 was 13.3% while Zenith's was 11.9%.  There is more.  Non-performing loans/Net Loans for FY 2016 was 7.1% for KCB and 3.1% for Zenith Bank.  Despite operating in a higher lending rate environment in excess of 50%, having better asset quality and business opportunities, KCB still earned more interest income on its loans than Zenith did.  To top it off, KCB was able to extract in a regulatory constrained business environment more pre-tax income from its assets of 4.9% compared to 3.3% for Zenith Bank that earned N48B from foreign exchange dealings alone.  

KCB only has the equivalent of 10% of its assets in the form of contingent liabilities, Zenith (after removing the contingent liabilities attached to Zenith Custodian) still has 20% of its assets in the form of contingent liabilities.  Let me remind you that Zenith is Nigeria's second largest bank by assets (after FBN Holdings).  ROE for 2016 (no averaging) was 20.4% for KCB and 18.4% for Zenith Bank.

KCB has been constrained from a regulatory perspective a lot more than Zenith but, still achieved a better performance than Zenith that is in a more relaxed, financially supportive, regulatory environment (led by their former CEO) embedded within an economy in recession.  

Zenith wants more capital from its investors; has it offered enough in performance based on what it has already been given?  Its investors may just be saying; Zenith Bank  you owe me and not the other way around.  Zenith Bank. your investors want to receive more from you and deservedly so.  WE are told that there is more joy in giving than receiving.  12% dividend yield may just be too little, too late.  

The market is sending Zenith Bank's management a message on behalf of its shareholders.  I will be watching with my 3-D glasses on to see how Zenith's management will respond to a changing investor perception.  My advice over the years has been, manage the business and let the business manage the shareholders.  Management of Nigerian banks continue to prioritize managing shareholders to the detriment of the business.  

When the drummers change their beat, the dancers must change their rhythm to avoid a disconnect.

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