Central Bank of UAE Limits Bank Dividends for 2009

AlKhaleej Newspaper (Dubai) reports that the CB UAE has written to banks advising them not to pay cash dividends more than 50% of 2009 profit and not to issue bonus shares more than 60% of 2009 profit.  You may have seen the article in The National (Abu Dhabi) which makes this sound like a "request".  The language here is of an "order" or "decision" -   قرار

Some experts are said to favor this move as it forces banks to strengthen their financial positions.  And some baniks as well no doubt relieved that a CBB order gives them cover from angry shareholders about a lower payout ratio.  On the other hands other banks objected asserting that the Board of Directors and shareholders were the ones best qualified to determine how much of current year profit needed to be retained.

7 banks are named as having received orders to lower their payout ratios: Dubai Islamic, Sharjah Islamic, Abu Dhabi Islamic, Investbank, United Arab Bank, Bank of Sharjah, and National Bank of Umm AlQuwayn.

The article states that the majority of the boards of national banks have proposed partial distributions of profit contrary to expectations of greater conservatism in dividend distribtuions in order to strengthen banks' financial positions in order to meet fundamental challenges in the coming stage.

That I think is understandable.  I was once told by an "old grey beard" from the GCC that there were two things GCC investors loved:  real estate and dividends.  No cash dividends would be a difficult pill to swallow.

The only question I'm left with is - why the restriction on dividends in the form of additional stock? As part of the process of granting stock dividends, the bank would capitalize the dividend amount in paid in capital removing it from retained earnings.  Once this is done that amount (like the rest of paid in capital) is not available for ordinary dividends.  In fact, it is not to be distributed to the shareholders -usually - until the dissolution of the company.  One would think the CBB would encourage stock dividends as a way of preventing cash dividends this year.    Anyone out there have any ideas?