KARACHI: The State Bank of Pakistan has advised all banks, development finance institutions (DFIs) and microfinance banks to suspend dividends for March and June quarters, according to a circular issued by the SBP on Wednesday.
As per the circular, the institutions have been advised to suspend distribution of profits by way of declaring dividends in any manner (cash or stock) for the quarter ending March 31, 2020 and half year ending June 30, 2020. However, these instructions will not be applicable on dividend declared for the year ended December 2019.
This decision was taken in order to conserve capital, and further enhance the lending and loss absorption capacity, to help mitigate the impact of the COVID-19 pandemic.
In a separate statement on the matter released later in the day, the SBP clarified: “The banks/DFIs in Pakistan have much higher capital levels than prescribed globally or minimum levels advised by the State Bank of Pakistan. Accordingly, SBP sees no immediate signs of systemic capital fragility across the banking industry”.
“This important decision has been taken keeping in view uncertainty arising out of COVID 19 pandemic and probability of higher infections in loan portfolios of banks as a result of that,” the central bank further added.
The State Bank has advised all institutions to place the letter before the Board of Directors to discuss any possible issues pertaining to an institution’s specific circumstances.
If the Board of Directors of any financial institution considers it necessary to declare the dividend, it can approach SBP to reconsider, based on merit.
The SBP will review the distribution of dividends after June 30, 2020, keeping in view the severity and impact of the COVID-19, and economic dynamics on the safety and soundness of the banking system, noted the circular.
This unusual decision is within the SBP’s mandate, as the regulator. In its statement, the central bank said that a number of other jurisdictions across the globe have also placed moratorium on dividend distribution, and payment of cash bonuses to executive officers and material risk takers.
However, the timing of the circular caught many off guard. Earlier on the same day as the issuance of the circular, three major banks – Habib Bank, MCB Bank and Allied Bank – had already declared dividends as part of their financial statements for the first quarter ending March 31.
HBL declared a dividend of Rs1.25 per share, MCB Bank declared a dividend of Rs5 per share, and Allied Bank declared a dividend of Rs2 per share.
Accordingly, the SBP released another statement later in the day, noting that those banks that have approved dividend declarations for the quarter ended March 2020 by April 22, have been advised to suspend dividend distribution for June and September quarters instead.
The circular is just one of many regulatory relief measures the SBP has taken in the past few weeks. These measures include lowering the Capital Conservation Buffer (CCB) and relaxation of criteria for restructuring of loans.
According to the SBP, the aim of these regulatory reliefs is to boost the lending capacity of the banks; avoid any adverse impact on their asset quality; and ensure a continuous flow of credit to support economic activity.
