In a circular, BSD/DIR/CON/LAB/018/008, dated June 13, 2025, addressed to all banks, the Central Bank of Nigeria (CBN) announced a major policy shift as it phased out post covid-19 forbearance for commercial banks, resulting in the easing of key capital market performance indices, such as the All-Shares Index (ASI) and Market Capitalization, (MCAP), by 17 basis points on the above trading day.
The forbearance initiative was granted to commercial banks in line with other incentives necessary to cushion the harsh economic realities of the covid19 pandemia. Some banks are yet to exit the platform.
According to the apex bank, certain banks are under close regulatory oversight in a bid to ensure stabilization of the banking sector. To achieve this objective, a number of regulatory actions has been taken by the Nigerian central bank, to ensure that, there is capital adequacy in the banks: a development that led to the increase in the minimum capital requirement for all categories of banks within the country, to drive economic growth agenda.
Part of the directive is the imposition of lien on dividend payment by the affected banks, intended to spur earnings retention, enhance capital adequacy and commitment to international best practice. The whole idea is to drive de-risking of the banking sector and to create further impetus for the recapitalization exercise. Overall, this is a good policy initiative, aside the conflicting timing, as we shall see in the course of this discourse.
INVESTORS POST-ANNOUNCEMENT REACTION
There is a fundamental principle in the capital market that share prices reflect all available information with respect to firms, or economic sectors. This theory is known as the Efficient Market Hypothesis, (EMH) or the Random Walk Theory, (RWT).
For the perspectives, the EMH is divided into the Weak Form Efficiency, Semi-Strong Efficiency and the Strong Form Efficiency, with each alluding to the level of impact of historical, present and future information on equities pricing.
Of these three dimensions of efficient market theory, what played out upon the Central Bank Directive reaching the public domain, is the semi-strong efficiency, which states that current prices of equities are reflections of all available information such as historical prices, financial fundamentals and other announcements concerning a firm or business entity.
Among the corporate information capable of affecting share prices are earnings announcements, dividend declaration, corporate restructuring, mergers and acquisitions plans, information on competition and industry averages, new product launch and macro-economic expectations such as inflation rate, exchange rate, interest rates and GDP figures.
Coterminous with the above on Monday, June 16, 2025, the Nigerian equities bourse suffered significant loss in prices of major banking stocks as a result of the Central Bank directive, imposing restrictions on the payment of dividends by banks. Affected majorly by this policy are the FUGAZ banks – FirstHoldCo Plc (First Bank Plc), Fidelity Bank Plc, UBA Plc, Guaranty Trust Bank Plc, Access Bank Plc and Zenith Bank Plc. And of course, FCMB Plc.
The market shed a significant N121 billion, as investors with “hot money” and short-term speculators dumped the banking stocks, reflecting their sensitivity to the denial of the expected interim dividend, which will be pegged on the half-year 2025 performance of these banks.
MARKET OPPORTUNITIES
Amid the panic sell-off, in the wake of the announcement, by speculators and short-term profit-takers, a necessary condition for asset repricing has been set in motion, creating opportunity for new entrants into the market. The panic sell-off has led to the under-valuing of FUGAZ bank stocks, creating opportunities for rational investors to buy into equities with strong fundamentals at cheaper than their fair value. It is not without reason that Jim Ovia, Chairman of Zenith Bank Plc and Managing Director/Chief Executive, Dr. Adaorah Umeobi invested a whopping N3.3 billion in the shares of Zenith Bank Plc shares as at Thursday, June 19, 2025.
GOOD NEWS
While some investors are panicking, Zenith Bank Plc, FCMB Plc and Access Bank Plc, have come forward with strategic plans to exit the forbearance corridor before June 30, 2025. Zenith Bank Plc has already met and exceeded the minimum capital requirement likewise Access Bank Plc.
For FCMB Plc, a conversion of N23 Billion obligation, to exit the Central Bank forbearance list has been announced. It is reasonable to expect that other banks in the coming week, will be announcing and implementing their strategic exit plan out from the forbearance list, thus freeing them up to pay interim dividends in the current year.
LONG-TERM INVESTMENT PHILOSOHY AND RISK MITIGATION
Against the backdrop of the above policy directive and the panic investor-reaction, the need for “responsible investing”, which requires a clear understanding of the capital market, a strategic and tactical investment approach, consistent with an “Investment Policy Statement” (IPS) is brought to the fore. An efficient portfolio of investment, denominated in financial assets, must be based on a sound investment philosophy, tailored along the long-term. This enables investors to overlook short-term market fluctuations and focus on the long-term profit potentials inherent in equities investing and of course investment in fixed income instruments, such as FGN Bonds for income diversification effect and risk management.
POLICY DRAWBACKS
While the policy represents a pro-active measure aimed at strengthening the financial system, it is coming at a time, when the banks are saddled with the responsibility of recapitalization, with the deadline only 9 months away from now, as banks race to meet the minimum capital requirement by March 30, 2026.
For some investors and economic agents, dividends are sources of capital for re-investment into their businesses. A temporary restriction of dividend payment represents a disincentive to investment, even to foreign investors.
The directive has an implied “crowding out” effect, on the private sector and the capital market, which has shown resilience and supported economic development, in the face of elevated interest rates offered by the federal government on fixed income instruments such as Treasury Bills and FGN Bonds, to attract foreign investors
