Singapore Banks - OCBC Investment 2020-07-30: Moderating Dividends

Singapore Banks - OCBC Investment | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Banks - Moderating Dividends

  • While acknowledging that capital positions are strong and stress tests have shown that the sector will remain resilient even under adverse conditions consistent with a prolonged public health crisis, the Monetary Authority of Singapore (MAS) has nevertheless called on Singapore banks to limit their total dividends per share (DPS) for FY20 at 60% of FY2019’s DPS and offer scrip dividends to shareholders in lieu of cash as a pre-emptive measure to bolster their resilience and capacity to support the lending needs of consumers and businesses. See MAS announcement.
  • The cap on the sector’s FY20 dividends was calibrated to balance the objective of capital preservation with shareholders interest. For banks which have paid interim dividends for 1Q20 (e.g. DBS), the dividend restriction and offering of scrip will be extended for another quarter until 1Q 2021.



Sector dividend yields will moderate to below 4%

  • As a recap: FY19 DPS for DBS and UOB were SGD1.23/share and SGD1.30/share (including SGD0.2/share special dividend) respectively. Hence, a 60% cap on FY19 DPS for DBS and UOB would mean FY20 dividends are limited to SGD0.738/share for DBS and SGD0.78/share for UOB (i.e. implying ~41% dividend payout ratios based on our FY20 earnings per share forecasts for DBS and UOB respectively, in line with the sector’s long term historical average dividend payout ratio). See DBS Dividend History, OCBC Dividend History, UOB Dividend History.
  • The 60% cap on FY19 dividends for the sector translates to lower estimated dividend yields of +3.6% and +3.9% for DBS and UOB respectively, based on yesterday’s closing prices of SGD20.40 and SGD20.02. We expect near-term weakness in share prices due to higher street expectations of > 5% yield for FY20e.
  • As highlighted in our previous updates, dividend expectations have also been higher for DBS following management’s recent 1Q reiteration of a quarterly dividend per share of $0.33/share. See report: Singapore Banks - OCBC Investment 2020-05-12: Navigating Multiple Headwinds.
  • DBS has issued refreshed guidance for cumulative DPS of SGD0.72/share for the next four quarters starting 2Q20: After the MAS release yesterday evening, DBS has announced that subject to board approval, its cumulative dividends will be cut to SGD0.72 per share for the next four quarters starting from 2Q 2020 (i.e. SGD0.18 per quarter). The bank notes that its capital and liquidity are well above regulatory requirements, and its balance sheet has also been fortified by high levels of allowance reserves. Given that 1Q20 dividends (SGD0.33/share) have been paid out, this translates to a total FY20E DPS of ~SGD0.87/share.


Disappointing near term, but stronger capital build-up should provide room for higher dividends in the future

  • While the latest dividend cap for the sector is a disappointment for investors this year, mandating prudence on capital usage is largely in line with regulators’ cautious stance globally, reflecting the extent of the pandemic’s impact. In this respect, Singapore banks are still relatively less constrained than European banks for example, which have been restricted on all dividends and share buybacks this year.
  • In our previous sector updates Singapore Banks - OCBC Investment 2020-05-12: Navigating Multiple Headwinds, we have highlighted downside risks for dividends even for well capitalised banks or firms with stronger balance sheets as capital preservation will be prioritised as the downturn becomes more prolonged and deeper. Our advice for investors to moderate dividend expectations during this downturn and diversify their portfolio is unchanged given the extended Covid-19 recovery path.
  • For the banking sector, time will be needed for asset quality deterioration to pan out. As a recap, we expect a deteriorating credit cycle from 2020 to 2021. For Singapore banks, credit costs are expected to reverse from prior years’ benign levels (FY19 sector range of 18-33bps), with cumulative increases expected at 100-130bps over 2020E-2021E (or 50-65bps per year).


Valuations Summary






OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-07-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.000 SAME 20.000
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000
HOLD MAINTAIN HOLD 21.500 SAME 21.500



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