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Wednesday, 13 January 2021

No (cash) dividend for you

Egyptian banks are barred from paying out cash dividends to shareholders on 2020 returns under instructions (pdf) issued yesterday by the Central Bank of Egypt designed to protect bank liquidity as covid-19 continues to affect the economy. Banks will not be allowed to “make [currency] payouts from this year’s profits, or profits carried over eligible for distribution to shareholders,” CBE Governor Tarek Amer said in the statement.

Not affected: Employee bonuses and compensation to board members.

The move aims to help banks comply with new capital requirements introduced under the Banking and Central Bank Act, Pharos Holding’s head of research Radwa El Swaify told us. Banks need to increase their capital reserves tenfold to EGP 5 bn in a little less than three years’ time. Paying out less in dividends will reduce the need for banks to enact capital increases, as well as improve banks’ capital adequacy ratios, helping them comply with updated Basel III requirements on managing operational risks, El Swaify added.

Shareholders will still be kept happy: El Swaify pointed out that banks will still be able to issue stock dividends to make up for the lack of cash payouts.

The CBE may also be positioning the system to be prepare for potential loan defaults as covid-19 affects borrowers’ ability to repay, particularly after the moratorium on loan repayments is now over, Naeem Brokerage’s Allen Sandeep tells Reuters. “The central bank certainly wants banks to shore up on balance sheet liquidity to be on the safe side,” Sandeep said. The central bank had extended the tenor of all bank loans for six months in March for both individuals and businesses to alleviate the financial burden on borrowers.

How have banks fared during the pandemic? Banks have been shoring up loan loss provisions since last year in anticipation of a rise in bad loans after the moratorium expired last September. Analysts have said that most Egyptian banks have healthy amounts of capital in reserve, with low loan-to-deposit ratios and ample liquidity. Industry watchers have suggested that we may have to wait until the middle of 2021 before we begin to see the true effects of the pandemic on loan quality.

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