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29 February 2024

Bonus share issues set to bolster banks’ equity capital

By Mohamad Al Kady


Generous stock dividends in the form of bonus shares issued by UAE banks at the start of this year will bolster their equity capital and provide much-needed financial adequacy, analysts said.

The enhanced equity base will give the banks more leeway for expansion and investments intended to shore up their bulwarks against increasing competition, and to meet Basel II standards that came into force this year.

Investors were not expected to cheer the decision, however, as bonus shares increase the total number of shares, while lowering the value of each share. Most banks have announced both cash and stock dividends, despite the fact bankers and analysts agreed that the majority of shareholders prefer cash dividends.

Nonetheless, bankers said the distribution of cash and share dividends was preferable as it allowed banks to balance between distributing direct profits to shareholders and reinvesting a part of these profits through bonus shares, that will also increase the overall profits for shareholders.

Jamal Saleh, head of asset management at Commercial Bank of Dubai, said share dividends have three main advantages for both the banks and shareholders. “Stock dividends mean the bank gives bonus shares to shareholders for free. When reinvesting profits, the shareholders’ rights will increase and the value of their stocks will also surge.”

He added the UAE Central Bank’s standards limit lending for a sole obligator by seven per cent of the bank’s capital. Reinvesting profits, however, will increase banks’ capital and accordingly their lending limits. Sanjay Uppal, chief financial officer at Emirates NBD Bank, agreed.

“If we look at profits of banks and distribution of cash and share dividends during the past three years, we will come to the conclusion cash dividends are not necessarily better for shareholders and reinvesting profits could generate better return for investors in terms of stock value. Any earnings reinvested will give additional strength for future growth in banks,” Uppal said.

Meanwhile, Wadah Al Taha, head of strategies and business development at Emaar Financial Services, said UAE banks had to increase their financial adequacy through stock dividends to meet Basel II standards.

“Banks’ loans should be a limited percentage of their capital according to the agreement and if they want to expand their loans, they have to increase their capital to stay in line with Basel II obligations. The increasing competition in the UAE banking sector, especially with new players including Noor Islamic Bank and Al Hilal Bank, push existing banks to generate more funds for expansions and to deal with the competition. Banks are also looking for expansions and acquisitions in the regional banking sector, including the GCC and Middle East,” he added.

“We saw Al Rajhi Bank, the leading Saudi bank, making a very smart move by announcing a multi-billion expansion and acquisition plan, especially in Indonesia, to widen Islamic banking services. UAE banks are confident they have to increase their capital base in the near future to prepare themselves for expansion strategies.”

Al Taha said stock dividends will increase the technical ability of banks to provide certain services for their customers, loans in particular. “Psychologically, increasing banks operations will support their image among both shareholders and customers,” he added.

Nadine Whabe, senior market analyst at Orion Brokers, said banks in the Middle Eat, due to the high competition in the sector, will need to retain their earnings in order to reinvest them into areas where the bank can create more growth opportunities, such as developing new services and products, increasing their branches, or spending the money on more research and human resources development.

She said: “When banks, or companies in general, decide to distribute dividends as additional stocks to shareholders instead of as a cash dividend or cash payout, it is as if the company’s availability of liquid cash is in short supply.”