DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Good Tidings Of Comfort & Joyous Dividends
- Our survey of regulations around the globe indicates a transition from blanket restriction to a bank-by-bank assessment in regulating dividend policy in 2021. It is not a question of whether restrictions of dividends will be eased, but a question of when.
- Assuming MAS does not interfere with banks’ dividend policy, we expect DBS (SGX:D05) and OCBC (SGX:O39) to provide dividend yields of 4.3% and 5% for 2021F and 5.2% and 5.6% for 2022F respectively.
- Maintain OVERWEIGHT.
UK: Signalling resumption of dividends.
- The BOE’s Prudential Regulation Authority (PRA) has signalled that it will soften its restrictions to banks' dividend payout on a case-by-case basis by early next year (after banks reported their 4Q20 results). PRA could allow banks with sufficient capital strength to resume dividend payout, although the level is likely to be lower than that before the COVID-19 pandemic. PRA will also take into consideration the state of the broader economy and progress on COVID-19 vaccine when crafting its new policy on banks’ dividend payout.
- British banks, such as Barclays, NatWest and Standard Chartered, were vocal in urging regulators to ease the ban on dividends. They are keen to resume paying dividends as their 3Q20 results were more resilient than expected. They argued that clamping down on dividends would damage the investment appeal of banks, making it harder for banks to raise equity during future crises.
- In particular, HSBC will consider restarting payment of dividends as provisions for bad loans have declined. The bank sees stabilisation in economic activities with tail risk from COVID-19 pandemic diminished. HSBC plans to pay a “conservative dividend” for 2020 if it obtains approval from the regulators.
EU: Switching back to the usual bank-by-bank assessment.
- Yves Mersch, Vice Chair of ECB’s supervisory board, said banks who demonstrated that their balance sheet is sufficiently strong to survive the economic and financial fallout from the COVID-19 pandemic would be allowed to pay dividends again in 2021. He conceded that it is difficult to maintain the ban on dividends beyond end-20 due to legal uncertainty over enforceability of a blanket ban. ECB will revert to its usual regulatory practice of assessing planned distributions of dividends on a bank-by-bank basis.
- Regulators in Sweden and Switzerland have indicated their willingness to allow banks to resume payment of dividends in 2021. In a sign of return to normalcy, UBS has set aside US$2.5b to return to shareholders in 2021, comprising US$1b for dividends in Apr 21 and US$1.5b for share buyback. Credit Suisse will set aside capital to pay a 2020 dividend that is 5% higher than 2019 and budgeted US$1.1b-1.6b for share buyback in 1Q21.
US: More cautious due to unique circumstances.
- The FED has extended the ban on share buyback and cap on dividends for 33 large US banks to 4Q20. In light of economic uncertainty, the restriction will preserve banks’ capital, which acts as a cushion against loan losses and supports lending. Janet Yellen, former FED chairwomen and potential candidate for the post of Treasury Secretary in the new Biden Administration, weighted in by saying “If things work out well, banks can distribute income later on. If not, they will have a buffer that will be needed to support the credit needs of the economy.”
- We opined that the FED has taken a more conservative approach due to the delay in passing the second stimulus package caused by the transition to the new Biden Administration. The FED will conduct a second round of stress test to assess the resiliency of large banks. The results from the second stress test will be crucial in determining whether the restrictions get extended into 1Q21.
Australia: Cap on payout ratio at 50% could be removed.
- The Australian Prudential Regulation Authority has allowed banks to resume paying dividends but has capped the maximum payout ratio at 50% since Jul 20. It requires banks to moderate dividend payments to a sustainable level based on robust stress testing and banks must continue to prioritise lending to customers.
- In mid-November, Chairman Wayne Byres promised to relook at the guidance for dividends again, which sparked speculations that the cap on dividend payout might expire by end-20. He cited improvement in economic outlook, while banks’ capital has increased. This is good news for many retirees who hold banks’ shares for dividend income.
The pendulum has swung the other way.
- Regulators around the globe had restricted banks’ dividend payout in June and July to ensure they have sufficient capital buffer to absorb loan losses and to support lending to power the economic recovery. Since then, many banks have reported 3Q20 results that were above expectations due to lower provisions for loan losses.
- Cognisant of the improved outlook for the economy, regulators have signalled the potential easing or removal of caps on dividend payout.
A question of timing.
- Singapore banks will resume their roles as yield plays. We envisage a 2-step process in normalisation of dividend payout back to their pre-COVID-19 levels. We expect DBS to pay 30 cents per quarter in 2021 and 33 cents per quarter in 2022. We expect OCBC to pay 25 cents per half year in 2021 and 28 cents per half year in 2022.
- Thus, we see dividend yield from DBS improving from 4.3% 2021 to 5.2% in 2022. Dividend yield from OCBC is expected to improve from 5.0% 2021 to 5.6% in 2022.
Banks to benefit from lower credit costs in 2021.
- DBS’s and OCBC’s total provisions for 3Q20 had dropped 35% and 53% q-o-q respectively. DBS’s and OCBC’s credit costs for 3Q20 eased to 59bp and 52bp respectively, compared to 104bp and 105bp in 1H20. Banks have maintained guidance for cumulative credit costs in 2020-21 at 80-130p (S$3b-5b) for DBS, and 100-130bp (S$2.5b-3.5b) for OCBC.
- For DBS, we estimate provisions at S$2.9b in 2020, and to drop to S$1.6b in 2021.
- OCBC is optimistic that credit costs for 2020-21 could gravitate toward the bottom-end of management’s guidance at 100bp. For OCBC, we estimate provisions at S$2.1b in 2020, and to drop to S$0.9b in 2021.
Singapore likely to roll out COVID-19 vaccination in 2021.
- Singapore is actively pursuing the procurement of COVID-19 vaccines with a number of pharmaceutical companies (covered by confidentiality obligations). The Ministry of Health (MOH) has established an expert panel of doctors and scientists to advise on the selection of vaccine candidates and other logistical issues. The priority is to protect individuals most vulnerable to COVID-19 and those more likely to be exposed to the infection, while working progressively towards a high level of vaccination in the population.
- The commencement of vaccination would:
- improve business confidence;
- ease safe distancing measures; and
- reduce stress on the corporate sector, thus moderating NPL formation.
- Banks, being cyclical stocks, will benefit from an economic recovery as consumer behaviour and domestic consumption normalise when vaccination commences.
Maintain OVERWEIGHT. BUY DBS and OCBC.
DBS (SGX:D05)
- Assuming MAS does not interfere with banks’ dividend policy, we expect DBS to provide dividend of S$1.08 for 2021F and S$1.32 for 2022F, which represents dividend yields of 4.3% and 5.2% respectively.
- Our target price of S$26.75 is based on 1.27x 2021F P/B, derived from the Gordon Growth model (ROE: 9.1%, COE: 7.5%, Growth: 1.5%).
- See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.
OCBC (SGX:O39)
- Assuming MAS does not interfere with banks’ dividend policy, we expect OCBC to provide dividend of S$0.50 for 2021F and S$0.56 for 2022F, which represents dividend yield of 5.0% and 5.6% respectively.
- Our target price of S$13.48 is based on 1.19x 2020F P/B, derived from the Gordon OE: 8.8%, COE: 7.5%, Growth: 1.0%).
- See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.
Catalysts to Singapore banking sector
- Gradual recovery in earnings and DPS due to decline in credit costs in 2021F and 2022F.
- Continued recovery of the Singapore economy accompanied by easing of safe distancing measures.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-12-01
SGX Stock
Analyst Report
26.750
SAME
26.750
12.850
SAME
12.850
99998.000
SAME
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