On the evening of June 24th, Bank of Zhengzhou (002936.SZ) announced that it had received a "Shareholder Inquiry Letter" from China Securities Association Small Investor Service Center, and made a response to small and medium shareholders regarding the issue of "no dividend for four consecutive years".

In the inquiry letter, small and medium investors pointed out that Bank of Zhengzhou has been profitable for four consecutive years since 2019, but has not distributed cash dividends.

From 2020 to 2023, Bank of Zhengzhou achieved a net profit attributable to shareholders of the listed company of 3.168 billion yuan, 3.226 billion yuan, 2.422 billion yuan, and 1.85 billion yuan respectively.

However, in the special explanation released in March, Bank of Zhengzhou still insists on "no cash dividends, no bonus shares, and no capital reserves to increase shares."

Bank of Zhengzhou responded that there is a rationality in not distributing cash dividends, mainly considering three factors:

The first is the continuous pressure on profitability.

Bank of Zhengzhou said: "The bank actively responds to national policies, serves the real economy, and is affected by factors such as the narrowing of interest rate spreads and the slowdown in credit growth，revenue growth is under pressure; the bank is increasing its provision for bad debts and accelerating the disposal of non-performing assets, which has led to a rising trend in operating expenses.

Bank of Zhengzhou stated that the negative impact of changes in foreign currency asset size and exchange rate fluctuations in 2023 will cause a further year-on-year decline in profitability.

The second is to comply with regulatory guidance and enhance risk resistance.

Bank of Zhengzhou stated that the foundation for economic recovery still needed to be strengthened. As of the end of 2023, the bank's provision coverage ratio was 174.87%, an increase of 9.14 percentage points from the end of the previous year.

"Compliance with regulatory guidance to retain undistributed profits will help the bank further enhance risk resistance and provide a guarantee for the bank to maintain stable operation," Bank of Zhengzhou said.

The third is that commercial bank capital regulatory policies are becoming increasingly stringent.

Bank of Zhengzhou stated that the bank has increased its support for the real economy，and the capital consumption has increased and the capital adequacy ratio has been on the decline. At the same time, since the implementation of the "Commercial Bank Capital Management Method", the measurement of credit risk assets such as real estate business, project loans, and asset management products is more prudent, which further increases the capital consumption.

At the end of the first quarter, Bank of Zhengzhou's revenue reached 3.4 billion yuan, an increase of 2.47% year-on-year; net profit attributable to shareholders of the listed company was 967 million yuan, a year-on-year decrease of 18.57%.

The core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and capital adequacy ratio were 8.54%, 10.58%, and 11.85%, respectively, a decrease of 0.36 percentage points, 0.55 percentage points, and 0.53 percentage points, respectively, from the end of the previous year.

"For small and medium-sized banks, external channel capital supplementation capabilities are relatively limited, and internal capital supplementation is an important way to ensure capital adequacy," Bank of Zhengzhou said. "The undistributed profits retained by the bank will be used to supplement core Tier 1 capital, which will help alleviate the pressure of capital supplementation and maintain the long-term interests of investors."

However, the above "zero dividend" situation may be broken in the future.

Nine supporting business rules including the "Stock Issuance and Listing Audit Rules" released at the end of April have made it clear that companies that meet the following three conditions will be subject to ST:

The first is that the net profit in the most recent accounting year is positive and the undistributed profit at the end of the reporting period of the parent company's statements is positive;

The second is that the total amount of cash dividends in the past three accounting years is less than 30% of the average net profit in the past three accounting years.

Thirdly, the cumulative cash dividend amount in the past three fiscal years has been less than 50 million yuan.

This rule will be officially implemented in 2025, and the "past three fiscal years" refers to the years 2022-2024.

This also means that if Bank of Zhengzhou continues to resist cash dividends, the company may be subject to a special treat (ST).

It may be related to the new regulations mentioned above. On June 27th, Bank of Zhengzhou added a proposal "Proposal on the Profit Distribution Plan of Bank of Zhengzhou Co., Ltd. for 2023" to the 2023 Annual General Meeting of Shareholders.