Capital Adequacy After a Dividend Request
A bank reports risk-weighted assets of GHS 2,400m. Common Equity Tier 1 capital is GHS 240m, Additional Tier 1 is GHS 30m, and Tier 2 is GHS 40m. The regulator's minimum requirements are CET1 7.0%, Tier 1 8.5%, and Total Capital 10.5%, plus a 2.5% capital conservation buffer on CET1 and a 1.0% systemic risk buffer on CET1. The bank has just posted GHS 55m profit after tax. Shareholders request a dividend of GHS 40m. Management is also considering a GHS 120m risk-weighted expansion of the loan book next year.
1. Assess the capital ratios against requirements, before and after the proposed dividend.
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Current ratios:
- CET1: 240 / 2,400 = 10.0%
- Tier 1: (240 + 30) / 2,400 = 11.25%
- Total: (240 + 30 + 40) / 2,400 = 12.92%
Required CET1: 7.0% minimum + 2.5% conservation + 1.0% systemic = 10.5%. Current CET1 of 10.0% is already below the combined CET1 requirement - the bank is inside its buffer and faces automatic distribution restrictions.
After a GHS 40m dividend: CET1 falls to (240 − 40) = 200m / 2,400 = 8.33%, which breaches the 10.5% combined requirement by 2.17% (≈ GHS 52m of CET1 shortfall).
Judgement: The dividend cannot be paid at GHS 40m. Even the current 10.0% is non-compliant with the buffered requirement, so distributions are restricted regardless.
2. Recommend a dividend amount and assess whether the loan expansion is affordable.
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Maximum prudent dividend: To keep CET1 at the 10.5% combined requirement, CET1 must be 10.5% × 2,400 = GHS 252m. Current CET1 is 240m - already GHS 12m short. So no dividend is permissible until the buffer is rebuilt; retained profit of GHS 55m would lift CET1 to 295m (12.29%), restoring headroom.
Loan expansion: Adding GHS 120m of RWA raises RWA to 2,520m. At the 10.5% requirement, required CET1 becomes GHS 264.6m. Post-retention CET1 of 295m covers this comfortably (11.7% CET1).
Recommendation: Declare zero dividend this year, retain the GHS 55m profit, and proceed with the GHS 120m expansion - which leaves CET1 at ~11.7%, above the 10.5% requirement with ~1.2% headroom. Revisit dividends next year once the systemic buffer is comfortably met.