There was no real income during the Covid-19 pandemic, but private commercial banks in the country did not compromise on cash dividend payout.
In fact, they have disbursed higher cash dividends for the year 2020 than that of the previous year, keeping directors happy.
In stark contrast to the Bangladesh Bank's encouraging banks to be conservative in disbursing cash dividend amid the pandemic, the banking sector has so far experienced a 12% increase in cash dividend payout for last year compared to a year ago.
Private commercial banks seem liberal in disbursing cash dividends to their shareholders instead of retaining earnings to prepare for unforeseen losses they are feared to incur in the post-pandemic era.
Out of 31 private banks listed on the Dhaka Stock Exchange, 22 have disbursed cash dividends for 2020. Dividends declared by most of these banks for last year are higher than or similar to that of the previous year.
The total cash dividend payout by these banks stands at around Tk2,300 crore for pandemic-hit 2020, of which around Tk1,000 crore will go to directors' pockets.
Credit growth in the banking sector hovered around the 8% level throughout last year, while the lending rate was between 7% and 8%.
This means there was no fresh lending and that the growth came from accrued interest from previous exposure.
Amid this situation, the only income source was investment in government bills and bonds.
Moreover, suspension of loan classification for a year from January to December 2020 gave banks relief from provisioning expenses, helping them to show inflated profit despite not having a real income.
Provisioning refers to an amount kept aside from banks' profits to cover up future loan losses.
When contacted, a top executive of a private bank that has declared a 10% cash dividend for 2020 – similar to the previous year, said the profit of a bank depends on maintaining provisioning this year.
"Banks have declared profit as per directors' desire and maintained provisioning according to this," he said requesting not to be named.
In April last year, the central bank kept cash dividend payout for the year 2019 halted till September the same year. The decision was aimed at making a strong capital base and retaining adequate liquidity in the banking system to support the virus-struck economy.
Later, it allowed banks to disburse dividends for the year 2019 with a maximum of 15% cash based on a strong capital base.
In February this year, the central bank, for the first time, came up with a permanent dividend policy mainly to limit cash dividend disbursement.
In the new rule, the highest cash dividend limit has been set at 15% subject to fulfilment of capital base requirement. Later, the ceiling was revised up to 17.5% in the face of banks' demand.
All these initiatives of the central bank were intended at making banks conservative in dividend payout considering the artificial profitability resulted in by policy relaxation during the pandemic situation.
The Bangladesh Bank also mandated 1% additional provisioning for the loan accounts which were given the payment pause facility.
Amid all these odds, three banks have declared the highest cash dividend of 17.5% -- also the highest allowable limit set in the dividend policy.
These three banks are City Bank, Eastern Bank and Jamuna Bank.
All of them are well-positioned in maintaining capital base as the capital adequacy ratio that measures risk-weighted assets of the banking industry was above 15% in December last year – far above the authorised requirement of 12.50%.
Most of the other banks have declared cash dividends according to their highest capacity in line with the dividend policy.
That some banks have declared the highest cash dividend even after maintaining all these required provisioning reflects their strong capacity, observed a senior executive of the Bangladesh Bank.
It is also expensive for banks to maintain higher retained earnings because of taxation by the government, he said.
According to the Finance Act 2019, a company will have to pay a 10% tax, if its stock dividends exceed cash dividends.
The government also imposed a 10% tax on retained earnings and reserves exceeding 50% of paid-up capital – the amount of money earned from shareholders in exchange for shares – of companies.
The cash dividend trend shows that banks have declared dividends from 30% to 90% of net profit in the year 2020.
Encouraging banks to declare cash dividends was a good decision up until the Covid-19 crisis hit the country, opined the Bangladesh Bank executive.
"The situation has changed now. Banks' capital bases will be weaker in coming years as default loans are expected to jump. So, declaring cash dividends will not benefit investors if the performance of banks deteriorates," he argued.
Moreover, in spite of a year-long suspension on loan classification, banks' capital bases were still below the regulatory limit in December last year.
The average capital adequacy ratio (CAR) stood at 11.64% in December 2020 – below the regulatory requirement of 12.50%, as set in Basel III.
Basel III is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Bangladesh Bank set December 2019 for every bank to bring the capital adequacy ratio to 12.50%.
Many banks are not doing adequate provisioning and declaring higher profit, said Ahsan H Mansur, executive director at the Policy Research Institute and chairman of Brac bank.
"It will create a problem in the near future as the real health will reflect this year when banks will start classifying loans after a year-long break," he said while speaking at an online discussion with The Business Standard recently.
"What actually was needed – but many are not doing – is provisioning. Bankers have nothing special to do."
Citing the instance of Brac Bank, he said, "We have made 100% provisioning against loans as per requirements. We have 170% provisioning for classified loans."
"I do not think they have done much. If they have not, they have made a big mistake. What will happen then? Political pressure will come. The Bangladesh Bank will give regulatory facilities further," he said.