Determinants of Dividend Payout Ratio

Standard Chartered Bank

Submitted By:

Sabin Subedi (167109

Simran Adhikari (167002)

Shristi Panta (167065)

Shubekshya Kharel (167041)

Rajdip Bashyal (167008)

Group 8

BBA Term III

Kathmandu University School of Management (KUSOM)

Pinchhe Tole, Gwarko, Kathmandu, Nepal

Submitted to:

Dr. Pawan Kumar Jha

Faculty Member

Fundamentals of Financial Management

Bachelor of Business Administration (BBA- Honors)

December 27, 2017
 Abstract

The report examines the different determinants of the dividend payout ratio and I doing so the
data of Standard Chartered Bank is also analysed. It compares two year financials indicators
for the evaluation and the analysis of situation of financial resources of Standard Chartered
Bank. The paper also shows the vivid picture of the Standard Chartered Bank in relation with
the dividend and shareholders. This paper aims to show the different determinants that affect
the dividend payout ratio directly or indirectly.

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Contents
Abstract ......................................................................................................................................ii
1. Introduction ........................................................................................................................ 1
2. Objectives ........................................................................................................................... 2
3. Conceptual understandings ................................................................................................. 2
4. Methodology....................................................................................................................... 2
5. Literature review................................................................................................................. 3
5.1 Study variables ................................................................................................................. 3
6. Financial tools..................................................................................................................... 4
6.1 Cash Dividend per Share (DPS): ..................................................................................... 4
6.2 Earnings per Share (EPS): ............................................................................................... 4
6.3 Market value per share (MPS): ........................................................................................ 4
6.4 Price Earnings ratio (P/E ratio): ....................................................................................... 4
6.5 Net worth (NW): .............................................................................................................. 5
7. ANALYSIS ........................................................................................................................ 5
7.1 Earnings per Share (EPS)..................................................................................................... 5
7.2 Market value per share (MPS): ........................................................................................ 5
7.3 Price Earnings Ratio (P/E): .............................................................................................. 6
7.4 Cash Dividend per share (DPS): ...................................................................................... 6
7.5 Dividend pay-out ratio: .................................................................................................... 6
8. Determinants of corporate Dividend Policy and Dividend Payout Ratio ........................... 7
8.1 Ownership structure ......................................................................................................... 7
8.1.1 Share capital detail ........................................................................................................ 7
8.1.2 Share ownership detail .................................................................................................. 8
8.2 Age of corporation ...................................................................................................... 9
8.3 Investment Opportunity Sets: .......................................................................................... 9
8.4 Taxation: .......................................................................................................................... 9
8.5 Profitability .................................................................................................................... 10
8.6 Leverage ......................................................................................................................... 10
8.7 Board Size ...................................................................................................................... 11
9. Conclusion ........................................................................................................................ 11
10. References ..................................................................................................................... 12

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1. Introduction

1.1 Standard Chartered Nepal

Standard Chartered Bank Nepal Limited is the largest international bank operating in Nepal. It
was initially registered as a joint-venture operation and has been operating in Nepal since 1987
when it. The Bank is an integral part of Standard Chartered Group whose ownership in Nepal
is of 70.21% in the company with 29.79% shares owned by the Nepalese public.

Standard Chartered Bank has 15 points of representation, 23 ATMs across the country and
more than 450 local staff. Standard Chartered Bank Nepal Ltd. is in a position to serve its
clients and customers through an extensive domestic network. In addition, the global network
of Standard Chartered Group gives the Bank a unique opportunity to provide truly international
banking services. Along with that it offers a full range of banking products and services to a
wide range of clients and customers encompassing individuals, mid-market local corporate,
multinationals, large public sector companies, government corporations, airlines, hotels as well
as the DO segment comprising of embassies, aid agencies, NGOs and INGOs.

It is the first Bank in Nepal that has implemented the Anti-Money Laundering policy and
applied the 'Know Your Customer' procedure on all the customer accounts. It has been the
pioneer in introducing 'customer focused' products and services in the country and aspires to
continue to be a leader in introducing new products in delivering superior services.

Corporate Social Responsibility is an integral part of Standard Chartered's ambition to become

the world's best international bank and is the mainstay of the Bank's values. The Bank believes
in delivering shareholder value in a socially, ethically an environmentally responsible manner.
Standard Chartered throughout its long history has played an active role in supporting those
communities in which its customers and staff live. It concentrates on projects that assist
children, particularly in the areas of health and education. Environmental projects are also
occasionally considered. It supports non-governmental organisations involving charitable
community activities The Group launched two major initiatives in 2003 under its 'Believing in
Life' campaign- 'living with HIV/AIDS' and 'Seeing is believing'.

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The value of Standard Chartered Bank is, “Everything we do is about being here for good
– in business, through life, and when it matters most for our clients.”

1.2 Dividend Policy

Dividend policy refers to the policy used by the corporate company to decide how much it
will pay out to its investors or Shareholders in dividend. Through the dividend policy made
by the management they make different dividend payout decision, like the size and pattern of
cash distribution over a time to shareholders. Taking some financial indicators and
determinants for Dividend payout ratio, we have tried show the dividend and financial
situation of Standard Charter bank Nepal and the affects of determinants in financial
situation.

2. Objectives

 To find out the financial data of the Standard charter Bank and present its situation of
financial indicators of year 2015 and 2016.
 Relating the different determinants of Dividend policy with the bank and providing
clear situation of impact of Dividend payout in Standard Charter Bank.

3. Conceptual understandings

The report will be dealing with the information of the financial situation of Standard Charter
bank. It will be also discussing information regarding the determinants and Dividend policy
impact or the Dividend payment impact of Standard Charter bank. The theories relevancy in
the context of Nepal or do Nepal focuses on other aspects rather than the Dividend policy while
determining the payment.

4. Methodology

The report has used different data sources and calculation in order to get the information. The
methods used in the report are divided into two parts. They are:

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4.1 Primary Data source:

 The annual report of the Standard Chartered Bank 2015/2016.

4.2 Secondary Data source:

 The internet websites.

 Online PDFs, e books, reports to gather the information.

5. Literature review

5.1 Study variables

5.1.1 Profitability

Profitability results in the firm’s earnings. The size of the profits is one of major determinants
for the dividend payout ratio. When there is sufficient profits earned by the firm then firm
will be paying higher dividend to the investors.

5.1.2. Investment opportunities sets

The investment opportunities available to firm constitute an important market value. The
investment opportunities also represent the firm’s investment and growth. Investment
opportunities have been measured in various ways by the various writers.

5.1.3. Taxation

The taxation has also a very important determinant of dividend payout ratio. The increase in
the tax liability results in the decrease in the payment. There is a negative relationship
between taxation and dividend payment.

5.1.4. Leverage

The firm’s also finance their activities from debt. The debt financing of the firm also puts
pressure on the liquidity of the firm. The increase in the debts and the interest payments
results in reduce of the firm’s income to guarantee the dividend payment. There is a negative
impact of debt on dividend payments.

5.1.5. Board Size

This represents the number of board of directors and shareholders holding the investments
and shares in the company. The increase in the numbers of shareholders decreases the
dividend payment amount and portion. The increase in shareholder results in firm paying
high earnings as dividends.

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6. Financial tools
We used some of the financial tools to calculate the variables and getting the data in order to
relate it with the Standard Charter bank. The financial tools are as follows:

6.1 Cash Dividend per Share (DPS):

Cash dividend per share shows the earnings distributed to shareholders. It is the ratio
proposed cash dividend to paid-up share capital.

DPS = Proposed Cash Dividend

Paid up Share Capital

6.2 Earnings per Share (EPS):

Earnings per share refers to the ratio of net profit after tax deduction to total number of
common share outstanding before the bonus is proposed. It measures the return on each
equity shareholders. EPS shows the bank’s earnings per share over the years and estimated
as:

EPS = Net profit after tax

Total number of share

6.3 Market value per share (MPS):

It refers to the traded price of share at the stock market at the end of the year. In Nepal, the
price is decided by the demand and supply rules by the market at Nepal Stock Exchange
Market.

6.4 Price Earnings ratio (P/E ratio):

P/E ratio refers to the ratio of market value of share at the end of the year to earning per share
of the same year. P/E ratio is calculated:

P/E ratio = Market value per share

Earnings per share

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6.5 Net worth (NW):
This ratio refers to the ratio of shareholders’ equity to the number of shares. NW is calculated
as:

NW = shareholders’ equity

Number of Shares

7. ANALYSIS

7.1 Earnings per Share (EPS)

EPS is an important indicator for the performance of the commercial Banks. It is
expected that the EPS increases in gradually over the years if the financial market and other
environment remain s favourable which also shows the strength of the Bank.

Table 1:

Particulars Indicators Fiscal year 2014/15 Fiscal year 2015/16

Earnings per Share Rs. 57.38 45.96

The EPS increase is an indicator of the growing performance of the bank which shows the
better position of the bank in stock market. However the comparative between the two years
in Standard Charter bank shows the decline in the earnings per share and inconsistency. Thus
may result in decrease of dividend pay out to shareholders.

7.2 Market value per share (MPS):

MPS is more responsive to the market price of the share. Generally, increase in the MPS
refers to the better economic performance of the Bank.

Table 2:

Particular Indicators FY 2014/15 FY

2015/16
Market value per Share Rs 1,943 3,600

Despite the inconsistence and decline in the EPS of standard Charter Bank. There is still
increase in the MPS resulting the better economic performance of the bank.

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7.3 Price Earnings Ratio (P/E):
It shows the relative performance of the bank. The ratio increases as both MPS and EPS
increases and decrease in EPS in compare to the MPS. In the case of Standard Charter Bank
the Ratio is shown:

Table 3:

Particulars Indicators FY 2014/15 FY 2015/16

Price Earnings Ratio Ratio 33.86 78.33

Even though there is decrease in the Earnings per Share but increase in the Market value per
share has increased the Price Earnings ratio. The increase isn’t considered as good due to the
decrease in the EPS.

7.4 Cash Dividend per share (DPS):

It is an important indicator of a firm’s value and image. A bank paying higher DPS shows the
better performance of the bank and to which the investors are also attracted to. In the case of
Standard Charter Bank, we see through the below table about the bank’s image.

Table 4:

Particulars Indicators FY 2014/15 FY 2015/16

Cash Dividend on Share Percentage 19.21 1.75
Capital

Since, the demand of share increases if the bank pays higher DPS. But in case of Standard
Charter Bank the DPS has been decreasing.

7.5 Dividend pay-out ratio:

It refers to the ratio of total amount of dividend paid out to the shareholders relative to the net
income of the company. It is also the percentage of earnings distributed to the shareholders.

Particulars Indicators FY 2014/15 FY 2015/16

Dividend payout ratio Percent 32.95 3.81

In the case of the Standard Charter bank the Payout ratio has been decreased. It is not due to
retain of investment but because of the decrease in the net profit of the company.

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The summary indicators show that the Standard Charter Bank financial performance has been
declining and inconsistent. The firm should re-evaluate their plans and try to increase their
performance in coming years as the company’s value might get later affected due to the
decrease resulting in the insufficiency of the resources.

8. Determinants of corporate Dividend Policy and Dividend

Payout Ratio
8.1 Ownership structure

Today the Bank is an integral part of Standard Chartered Group has an ownership of 75% in
the company with 25% shares owned by the Nepalese public. The Bank enjoys the status of
the largest international bank currently operating in Nepal. There are no basic shareholders in
the bank as no shareholder except the SCB Group, holds more than 1% of the paid up capital
of the Company. There has been no information received from the SCB Group in this regard
from the bank in the annual report. The Bank has not purchased its own shares in the year
under review that is 2016.

The ownership structure of the bank also affects the dividend policy. A company with higher
promoters’ holding will prefer low dividend payout and low paying dividend may cause a
decline in the value of stock. Whereas a high institutional ownership will favour high payout
as it helps them to increase the control over management. In the case of the Standard
Chartered Bank we see similar situation where the Standard Chartered Group has higher
ownership than the public.

8.1.1 Share capital detail

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 Share Capital Distribution

Authorised Capital
Issued Capital
Paid up capital

8.1.2 Share ownership detail

Share Ownership Detail

Foreign Ownership
Domestic Ownership

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8.2 Age of corporation

Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 when it
was initially registered as a joint-venture operation which offers a full range of banking
products and services to a wide range of clients and customers encompassing individuals,
mid-market local corporate, multinationals, large public sector companies, government
corporations, airlines, hotels as well as the DO segment comprising of embassies, aid
agencies, NGOs and INGOs.

Types of bank in Nepal

According to function and nature of bank, in Nepal banks are classified in following types:-
1) Central Bank
2) Commercial Bank (Class A)
3) Development Bank (Class B)
4) Finance Companies (Class C)
5) Micro Credit Development Bank (Class D)

Standard Charted bank is a commercial bank that is ranked Class A among the commercial
banks of Nepal. Since, it is an international Bank that branches in most of the Asian and other
countries. There is strong belief in the performance of the bank. The bank has a higher
expected rate of return (Dividend) by its shareholders and has a higher demand of shares due
to the firm’s image. The bank also tries to keep up with the expectation and try to maximize
the wealth of shareholders by providing higher dividend.

8.3 Investment Opportunity Sets:

Investment opportunity sets is the concept introduced by Myer (1977). It includes all the
investment opportunities that a company has in a given point in time. It presents any
company with the investment opportunities with the positive net present value. In other way,
it shows the firm’s value resultant from choices to make future investments. The higher the
growth opportunities, the more the need to finance expansion, and hence the higher the
chance to retain earnings. A company with more investment opportunities will pay out less in
dividends .A Company with fewer investment opportunities will pay out more in dividends.
Also, for the company strictly following the residual dividend policy, the dividend payout
will be less in case of productive investment opportunities.

8.4 Taxation:

The tax rate on dividends and how dividends are taxed relative to capital gains affect
investors’ preferences and, hence, companies’ dividend policy. In case of double taxation
system, if personal tax rates are higher than corporate tax rates, a firm will have an incentive
to reduce dividend payouts. However, if personal tax rates are lower than corporate tax rates,
a firm will have an incentive to pay out any excess cash as dividends.

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8.5 Profitability
The size of a firm’s profit has been a long standing determinant of dividend policy. Directors
normally recommend the payment of dividend when the firm has made sufficient profit to
warrant such payments. Profitability is among the main characteristics that strongly and
directly influences the dividend policy. Current and past years’ profits, the year-to-year and
prior years’ dividend are the important factors that influence dividend policy. Thus, a highly
profitable company generally pays higher dividends and a company with less or no profit will
adopt a conservative dividend policy. The profitability of Standard Chartered Bank as per
their annual report of (2015/2016) is mentioned below:

Particulars Year 2015 Year 2016

Net Profit/Loss 1,310,351,917 1,292,494,632

The above mentioned table shows that the profitability of the bank has been decreased in
2016 as compared with the data of 2015.

8.6 Leverage
Banks that finance their activities mostly with debt put pressure on their liquidity. Debt
principal and interest payments reduce the ability of firms to have residual income to
guarantee dividend payment. Consequently, it is expected that debt would impact negatively
on the amount of dividend paid for a period. More indebted firms prefer to pay lower
dividends. So, dividend payout is negatively related to leverage ratio. Similarly, liquidity has
a direct relation with the dividend policy. If a bank has a strong liquidity and enough cash for
its working capital, it can afford to pay higher dividends. However, a bank with less liquidity
will choose a conservative dividend policy.

particulars Year 2016

Loans and borrowings 5,00,000,000

The above mentioned table shows the debt of Standard Chartered Bank as per the annual
report of 15 July, 2016. Similarly, the liquidity ration of Standard Chartered Bank is
mentioned in the table below:

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 Particulars Year 2014/15 Year 2015/16

Liquidity Ratio 24.03 7.98

The above mentioned figure shows that the liquidity ratio is very high in year 2014/15 which
shows that the opportunity cost for the bank was increased. For rs.1 of its current liability, it
has rs.24 of current assets to settle it which is supposed to be very high. Similarly in year
2015/16, the liquidity ratio of the bank is decreased in comparison to year 2014/15.

8.7 Board Size

This represents the total number of the members (executive and non-executive) in the
company board. It is believed that the greater the size of board membership, the higher is the
dividends paid to shareholders. It is because more people monitor the decisions made by the
chief executive officer. This means that, larger board size have an advantage over small board
size in terms of the spread of expert advice and opinion in monitoring the activities of
managers due to the members skills and experience. Standard Chartered Bank of Nepal has
an ownership of 70.21% in the company with 29.79% shares owned by the Nepalese public.
The bank has 5 directors on Board Composition and its Executive Committee (EXCO) is
represented by 9 members. The Bank enjoys the status of the largest international bank
currently operating in Nepal.

9. Conclusion
This report investigates the financial position of standard charted bank as well as the
effect of dividend policy on financing decision. The above study showed that the earning per
share has decreased which indicates lack of growth. However despite the decrease in EPS the
market price per share has increased which shows a good economic performance of the bank.
Similarly the significant reduction of dividend payout ratio is due to the decrease in net profit
of the company.

So from the above analysis we have concluded that the performance of Standard
Charted Bank has been decreasing as well as inconsistent. What the bank can do is revaluate
their plans and policies and try to have effective management so as to increase the company’s
growth and value.

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10. References

Standard Chartered. (2016). Annual Report 2015-2016. Retrieved From:

https://www.sc.com/global/av/np-ar-2015-2016.pdf

Eliasu NUHU. (2014). Determinants of Dividend Pay-out of Financial Firms and Non-
Financial Firms. Retrieved from
http://hrmars.com/hrmars_papers/Article_11_Determinants_of_Dividend_Payout_of_Financi
al_Firms--N.pdf

Aayushi Ruparel. (2016). Determinants of Corporate Dividend Policy. Retrieved From

https://www.slideshare.net/aayushi1996/determinants-of-corporate-dividend-payout-policy

Giraiti. (2015). Free Cash Flow, Dividend Policy and Investment Opportunity Sets. Retrieved
from: https://ac.els-cdn.com/S1877042816300738/1-s2.0-S1877042816300738-main.pdf

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