Singapore Banks - CGS-CIMB Research 2020-07-30: MAS Caps Dividends At 60% Of FY19 DPS

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DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - MAS Caps Dividends At 60% Of FY19 DPS

• MAS has called on SG banks to cap FY20F dividends at 60% of FY19’s DPS, and to offer a scrip dividend option. This is the first of such a move by MAS.
• The restriction effectively lowers the yields of SG banks to 3.5-3.9% from 4.5- 6.5%. The scrip option will aid cash conservation, sustaining c.14% CET1.
• We expect negative share price movements for banks as investors switch into higher yield names. Prefer DBS for investment income strength.

Conservative move from MAS in retaining banks’ capitalisation

• The Monetary Authority of Singapore (MAS) has called on banks to cap FY20F dividends at 60% of FY19’s DPS, and to offer shareholders the option of entering into a scrip dividend scheme. This is the first of such a preemptive move by the MAS – spurred on by sustained global uncertainty due to the Covid-19 pandemic.
• This follows similar moves taken by regulators in Europe, UK, the US, and Australia in restricting dividend payouts and/or share buybacks in 2020 in a bid to conserve capital amid potential asset quality deterioration as a by-effect of the pandemic.
• While the scrip option will serve as a cash conservation tool, MAS also calls for banks to be restraint in terms of expenses and management compensation.
• The regulator had decided to take this move despite stress tests showing Singapore banks as well-placed to weather the economic uncertainties ahead. Notably, capital levels at Singapore banks remain robust, at c.14% as at end-Mar 2020.

Payout levels will dip to c.40%; FY20F yields slashed to 3.6-3.9%

• Prior to this announcement, banks have guided the market to expect c.80-130bp of credit costs over FY20-21F, implying in a 23-31% y-o-y decline in FY20F EPS.
• Although NPLs have largely stayed benign, banks have front-loaded provisions through management overlays to preempt against the potential wave of defaults.
• DBS has confirmed FY20F DPS of S$0.72, implying a yield of 3.5%. We expect OCBC and UOB to cut FY20F DPS to c.S$0.32 and c.S$0.78, respectively, yielding 3.5-3.9%. See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
• Expect negative share price movements for banks as investors switch into higher-yielding names. We expect Singapore banks to record stronger trading and investment gains in 2Q20F on the back of better market performance, offsetting some of the headwinds from narrowing NIMs (we project c.15-23bp q-o-q compression).
• DBS could see relatively more share price pressure compared to peers as its dividends were a key investment thesis previously. UOB could be least affected by this announcement, given lower expectations from investors.
• In the longer term, DBS is our top pick for its firepower in sustained trading and investment gains, which should offset some negative sentiment. We think OCBC may surprise on the upside from a rebound in portfolio revaluations (MTM gains) from Great Eastern Holdings (SGX:G07).
• Reiterate NEUTRAL. Trading below long-term mean, valuations are inexpensive. DBS trades at 1x FY20F P/BV, OCBC at 0.9x. and UOB at 0.8x.

Singapore banks

• See
  • DBS Share Price; DBS Target Price;
  • OCBC Share Price; OCBC Target Price;
  • UOB Share Price; UOB Target Price.
• See also previous report: Singapore Banks - CGS-CIMB Research 2020-07-16: 2Q20 Watch Out For The Margin Cliff.
• DBS and UOB to announce 1H20 earnings on 6 Aug; OCBC to announce 1H20 earnings on 7 Aug. See 1H2020 Earnings Schedule for STI Constituents.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-30

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