Query:
Board of a conventional retail bank has been presented with dividend proposal by a bank
in bahrain. Advise its chairman in terms of what all to check from regulatory perspective
prior to approval?
Answer:
Based on the information provided, here is my advice to the chairman of the conventional
retail bank in Bahrain regarding regulatory considerations for approving a dividend
proposal:
Regulatory Considerations for Dividend Approval by Conventional
Retail Banks in Bahrain
1. Introduction
As the chairman of a conventional retail bank in Bahrain, there are several key regulatory
requirements and considerations that must be carefully evaluated before approving any
dividend proposal. These requirements are primarily governed by the Central Bank of
Bahrain (CBB) regulations.
2. Relevant Standard/Law References
a. The primary regulatory framework governing dividend distributions for conventional
banks in Bahrain is outlined in the CBB Rulebook, specifically in the Conventional Banks
module.
b. According to the CBB Rulebook, Bahraini conventional bank licensees must obtain
CBB’s prior approval for any proposed cash or stock dividend before any public
announcements or the Annual General Meeting Bahrain Conventional Part A Entire Section
_ Rulebook, para GR-3.1.1, page 125.
c. The CBB has set specific requirements for banks to follow when seeking approval for
dividend distributions Bahrain Conventional Part A Entire Section _ Rulebook, para
GR-3.1.3, page 125.
3. Detailed Explanations
To ensure compliance with CBB regulations and maintain the bank’s financial stability, the
following key aspects must be carefully considered and addressed before approving the
dividend proposal:
i. CBB Prior Approval: It is crucial to obtain the CBB’s prior written approval for the
proposed dividend before making any public announcements or presenting it at the Annual
General Meeting. This is a mandatory requirement for all Bahraini conventional bank
licensees Bahrain Conventional Part A Entire Section _ Rulebook, para GR-3.1.1, page
125.
ii. Submission Requirements: The bank must submit the following information to the CBB:
a. The intended percentage and amount of proposed dividends.
b. Impact analysis of the proposed dividends on:
º Capital Adequacy Ratio (CAR)
º Liquidity Coverage Ratio (LCR)
º Net Stable Funding Ratio (NSFR)
º Leverage Ratio (LR)
This analysis should show the ratios both before and after the proposed dividend
distribution.
c. The impact on cash flow position and shareholders’ equity level before and after the
proposed dividends.
d. Stress testing results demonstrating that the proposed dividends would not lead to any
breach of regulatory requirements (CAR, LCR, NSFR, and LR) in the last financial year and
the next two years under normal and stressed scenarios Bahrain Conventional Part A
Entire Section _ Rulebook, para GR-3.1.3, page 125.
iii. Adequacy of Impairment Provisions: The bank must satisfy the CBB regarding the
adequacy of impairment provisions during the review of annual/interim financial statements
Bahrain Conventional Part A Entire Section _ Rulebook, para GR-3.1.3, page 125.
iv. Exclusion of Unrealized Gains: Ensure that any unrealized gains arising from assets or
liabilities fair value assessment are excluded from net income when determining the
proposed dividends. The CBB does not permit distribution of unrealized profits Bahrain
Conventional Part A Entire Section _ Rulebook, para GR-3.1.3, page 125.
v. Sufficient Realized Profits: Verify that the amount of realized profits included in the
retained earnings as of the year-end is sufficient to cover the proposed dividend amount
Bahrain Conventional Part A Entire Section _ Rulebook, para GR-3.1.3, page 125.
vi. Impact of Negative Fair Value: Assess and ensure that any negative fair value on assets
held at amortized cost does not have any material adverse impact on the capital and
liquidity positions, especially where such assets may need to be liquidated before maturity
to satisfy financial obligations, including deposit withdrawals Bahrain Conventional Part A
Entire Section _ Rulebook, para GR-3.1.3, page 125.
vii. Minimum Capital Requirements: Ensure that the proposed dividend distribution does
not cause the bank to fall below the minimum capital requirements set by the CBB. For
conventional retail banks, the current requirements are:
º Minimum Common Equity Tier 1 (CET1) ratio: 9%
º Minimum Tier 1 ratio: 10.5%
º Minimum total capital ratio: 12.5% Bahrain Conventional Part A Entire Section _
Rulebook, page 238.
viii. Gearing Ratio: Verify that the proposed dividend does not cause the bank to exceed
the gearing limit set by the CBB. For conventional retail banks, deposit liabilities should not
exceed 20 times the bank’s capital and reserves Bahrain Conventional Part A Entire
Section _ Rulebook, para LR-2.5.6, page 50.
ix. Reserve Requirements: Ensure that the bank maintains the required minimum daily
cash reserve balance with the CBB, which is currently set at 5% of total non-bank Bahraini
Dinar deposits and Bahraini Dinar denominated Certificates of Deposit Bahrain
Conventional Part A Entire Section _ Rulebook, para LR-2.5.10, page 51.
Alternative strategy
Given the regulatory requirements and potential impact on the bank’s financial position,
consider the following alternative strategies:
1. Phased Dividend Distribution:
º Instead of a single large dividend payment, consider distributing dividends in
smaller, phased amounts throughout the year.
º Pros: Helps maintain better control over capital ratios and liquidity, allows for
more frequent reassessment of the bank’s financial position.
º Cons: May be less attractive to some shareholders who prefer larger, one-time
payments.
2. Combination of Cash and Stock Dividends:
º Propose a mix of cash and stock dividends.
º Pros: Preserves capital while still providing returns to shareholders, potentially
more favorable from a regulatory perspective.
º Cons: May be less appealing to shareholders seeking immediate cash returns.
3. Dividend Reinvestment Plan (DRIP):
º Offer shareholders the option to reinvest their dividends in additional shares of
the bank.
º Pros: Allows for capital retention while giving shareholders the choice to increase
their stake in the bank.
º Cons: May require additional administrative efforts and regulatory approvals.
4. Retained Earnings Capitalization:
º Instead of distributing dividends, propose capitalizing a portion of retained
earnings to strengthen the bank’s capital base.
º Pros: Improves capital ratios and potentially allows for future growth
opportunities.
º Cons: May disappoint shareholders expecting regular dividend payments.
For each alternative, conduct a thorough impact analysis on capital ratios, liquidity
measures, and stress test results as required by the CBB. Present these alternatives to the
board with their respective pros, cons, and regulatory implications for informed
decision-making.
4. Used Cases/Interpretations & Disclosures by the listed entities
Bank ABC (Arab Banking Corporation B.S.C.) – 2021:
In its 2021 Annual Report, Bank ABC disclosed its compliance with CBB capital
requirements, including the minimum ratios for Common Equity Tier 1 (9%), Tier 1 (10.5%),
and total capital (12.5%). The bank also reported on provisions eligible for inclusion in Tier
2 capital, demonstrating adherence to regulatory capital disclosure requirements Group
Annual Report 2021, page 78.
National Bank of Bahrain B.S.C. – 2020:
The National Bank of Bahrain’s 2020 Annual Report indicates that the bank sought and
obtained approval for increasing its issued and paid-up capital through an Extraordinary
General Meeting. This demonstrates the bank’s compliance with regulatory requirements
for capital changes and shareholder approvals Annual-report-2020-English National Bank
of Bahrain B.S.C., page 47.
GFH Financial Group – 2020:
In its 2020 Annual Report, GFH Financial Group outlined its process for approving
connected counter party transactions, which includes considering factors such as arm’s
length negotiations, commercial advantage, and compliance with CBB-defined limits. This
demonstrates the bank’s adherence to regulatory requirements regarding related party
transactions and disclosures GFH-Annual-Report-Accounts-2020, page 97.
5. Summary
In conclusion, as the chairman of a conventional retail bank in Bahrain, it is crucial to
ensure that the proposed dividend distribution complies with all CBB regulations and
maintains the bank’s financial stability. Key considerations include:
1. Obtaining prior CBB approval before any public announcement or shareholder
meeting.
2. Submitting a comprehensive analysis of the dividend’s impact on capital ratios,
liquidity measures, and stress test results.
3. Ensuring adequate impairment provisions and excluding unrealized gains from
dividend calculations.
4. Verifying that realized profits are sufficient to cover the proposed dividend.
5. Assessing the impact on capital and liquidity positions, especially considering any
negative fair value on assets.
6. Maintaining compliance with minimum capital requirements, gearing ratios, and
reserve requirements.
By thoroughly addressing these regulatory considerations and exploring alternative
strategies if needed, you can make an informed decision that balances shareholder
expectations with regulatory compliance and the bank’s long-term financial health.
Other relevant standards that should be considered in conjunction with the dividend
approval process include:
º CBB Rulebook Module CA: Capital Adequacy
º CBB Rulebook Module LR: Licensing Requirements
º CBB Rulebook Module PD: Public Disclosure Requirements
6. Attribution
The information provided in this response is based on the Central Bank of Bahrain (CBB)
Rulebook, specifically the Conventional Banks Module, as issued by the Central Bank of
Bahrain. The specific rules referenced are primarily from the GR (General Requirements)
and LR (Licensing Requirements) sections. For complete and authoritative guidance,
please refer to the full CBB Rulebook available through the Central Bank of Bahrain’s
official website.
Approval for dividend from CBB
