As per a press statement issued by SBP, all commercial banks / Development Financial Institutions (DFIs) have been advised to suspend payments of dividend for the two quarters ending March and June 2020. However, banks/DFIs that have approved dividend declaration for quarter ended March 2020 have been advised to suspend dividend distribution for June and September quarters 2020.
Like other central banks, State Bank of Pakistan (SBP) is continuously monitoring the evolving situation owing to COVID-19 pandemic. Various regulatory measures including Refinance Schemes have been already been announced by the SBP to ensure availability of sufficient liquidity in the market and enhance banks’ lending capacity to support the economic activities while ensuring the soundness of banking sector. Our story on various measures taken by SBP can be read here.
Accordingly to SBP, the banks/DFIs in Pakistan have much higher capital levels than globally prescribed limit. Therefore, SBP does not foresee immediate signs of systemic capital fragility across the banking industry.
This decision to advise banks / DFIs to suspend dividend payments is seen as a precautionary measure against the probability of loans defaults and enabling them to absorb any losses.
Earlier, SBP had reduced Capital Conversion Buffer (CCB) requirement to 1.5% from 2.5% prescribed under Basel-III standards. It is worth mentioning here that as of December 2019, out of 33 banks in total, 21 banks have Capital Adequacy Ratio (CAR) of over 15% while only 3 banks have CAR of less than the prescribed ratio i.e. 12.5%. There are 9 banks having CAR of above the minimum prescribed percent and less than 15%. Moreover, CAR for all banks stand at 17.0%. CAR is a measure of assessing capital adequacy and is computed as the ratio of Capital to Risk Weighted Assets.
The decision by central bank may have negative impact on the share price of banks. However, this could be balanced out due to the prevalent sentiment that the activities of banking sector have not been hit as compared to other sectors of the economy.
