Singapore Banks - UOB Kay Hian 2020-07-06: Well Positioned To Reward Shareholders With Sustainable & Stable Yields


Singapore Banks - Well Positioned To Reward Shareholders With Sustainable & Stable Yields

  • MAS stated in Apr 20 that it does not see a need to restrict banks’ dividend policies and we do not expect MAS to make a U-turn in its stance. Singapore banks intend to maintain their CET-1 CAR within their comfort range of 12.5-13.5%. We expect any trimming of DPS to be manageable at 10% or less.
  • Maintain OVERWEIGHT.
  • BUY DBS (SGX:D05) (Target: S$26.22) and OCBC (SGX:O39) (Target: S$12.18).

Entered crisis in position of strength.

  • Singapore banks’ CET-1 CAR has increased from an average of 11.8% in 2014 to 14.1% in 1Q20, a significant improvement of 2.3ppt over the past five years. DBS, OCBC and UOB (SGX:U11) have strong CET-1 CAR of 13.9%, 14.3% and 14.1% respectively, higher than the average of 11.2% for US banks.
  • A cursory comparison suggests that Singapore banks have comparable CET-1 CAR compared to British banks averaging 13.7%. However, Singapore banks have conservative RWA intensity at 52.5% for DBS, 52.8% for OCBC and 56.0% for UOB (US banks: 55.3%, British banks: 29.2%). British banks’ lower RWA intensity suggests that their risk-weighted assets (RWA) are understated and their CET-1 CAR overstated.
  • Singapore banks have also had to comply with more stringent regulations on liquidity (LCR) and funding (NSFR) under Basel 3 since Jan 15 and Jan 18 respectively.

US banks: Suspended share buybacks.

  • The Fed has suspended share buybacks and capped dividend payments after completing stress tests for 34 US banks in Jun 20. However, the eight largest US banks have already voluntarily suspended share buybacks. Dividend payments are capped at the average quarterly net profit for the four preceding calendar quarters, which sets a low bar that currently does not impose much hindrance on US banks paying dividends.

US banks incurred hefty provisions for their consumer businesses.

  • JPMorgan Chase increased provisions by 5.5x y-o-y to US$8.3b in 1Q20, of which 70% was for Consumer & Community Banking (largely for Cards). Citigroup increased provisions by 3.5x y-o-y to US$7.0b in 1Q20, of which 69% was for Global Consumer Bank (mainly general provisions). Similarly, Bank of America increased provisions by 4.8x y-o-y to US$4.8b in 1Q20, of which 48% was for Consumer Banking (mainly general provisions).
  • US banks are hard hit by losses from consumer loans, such as residential mortgages, auto loans, student loans, credit card overdraft and unsecured personal loans, during recessions. Conversely, residential mortgages, which accounted for 78.5% of consumer loans, are a bastion of strength for Singapore banks due to relatively stable prices for residential properties and strong household balance sheet.

British banks harder hit by COVID-19 pandemic.

  • The Bank of England (BOE) has ordered banks to temporarily halt paying dividends and share buybacks in 2020. Banks also have to cancel plans for cash bonuses for executives. The UK has been harder hit by the COVID-19 pandemic with new confirmed cases surging to a high of 8,700 in mid- April. New confirmed cases have subsided recently but remain high at about 830 on average.

British banks burdened by high cost structures and low ROEs.

  • HSBC Holdings’ earnings are mainly generated within Asia. It incurred losses of US$511m in Europe and US$111m for North America in 1Q20. Provisions of US$700m were set aside for a “corporate account in Singapore”. British banks HSBC, Standard Chartered and Barclays have low ROE of 3.7%, 4.3% and 4.6% respectively for 2019. Their cost/income ratios are stubbornly high at 57.6%, 54.6% and 51.8% respectively in 1Q20.

Not a surprise that British banks are restructuring.

  • HSBC has unveiled a massive overhaul involving cuts of 35,000 jobs in Feb 20. Standard Chartered has completed the sale of 44.6% stake in Bank Permata in Indonesia for US$1.07b in May 20, which increased its CET-1 CAR by 40bp. Barclays cut 100 senior jobs early this year, mostly trading roles at Corporate & Investment Bank.

MAS not interfering in banks’ dividend policies.

  • MAS announced on 7 Apr 20 that “our banks have sufficient capital to see them through the current economic slump while continuing to supply credit to the economy to support businesses and individuals”. MAS does not see a need to restrict banks’ dividend policies. However, MAS cautioned that the release of capital buffers should not be used to finance share buybacks.

Temporary easing of regulatory requirements.

  • MAS adjusted selected regulatory requirements to enable banks to focus on supporting their customers during the COVID- 19 pandemic:
    1. Banks can draw on Capital Conservation Buffer (CCoB), including any applicable Counter-cyclical Buffer (CCyB).
    2. Net Stable Funding Ratio (NSFR): The amount of stable funding that banks must maintain for loans to individuals and businesses that are maturing in less than six months will be halved from 50% to 25%.
    3. Banks are allowed full recognition of their regulatory loss allowance reserves capital. The relief applies until 30 Sep 21.

Voluntary trimming of DPS to be manageable.

  • We do not expect MAS to make a U-turn on its stance on banks’ dividend policies. While regulatory requirements for capital have eased, Singapore banks intend to maintain their CET-1 CAR within their comfort range of 12.5- 13.5%. We expect any trimming of DPS to be manageable at 10% or less. See
  • Banks are expected to reactivate their scrip dividend schemes to shore up their capital base to weather a prolonged COVID-19 pandemic.


Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-07-06
SGX Stock Analyst Report BUY MAINTAIN BUY 26.22 UP 22.300