DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - What Is Next For Dividends?
- MAS likely to ease its stance on dividend cap imposed as Singapore banks have preserved sufficient capital.
- We expect higher dividends for FY21F on gradual relaxation of dividend caps; a two-stage relaxation seems to be a more likely scenario.
- Banks may adjust high capital buffers through some special dividends from FY22F, subject to asset quality and corporate actions.
- Maintain BUY on OCBC (SGX:O39) and UOB (SGX:U11) as recovery plays.
MAS likely to ease stance on dividend cap
- MAS likely to ease stance on dividend cap imposed on FY20 dividends as Singapore banks have preserved sufficient capital.
- In July 2020, the Monetary Authority of Singapore (MAS) called on Singapore banks to cap their total dividends per share at 60% of FY19 levels for FY2020, while offering the scrip dividend option. This has allowed Singapore banks to preserve sufficient capital to ride through macroeconomic uncertainties.
- Following the relaxation of dividend restrictions by various central banks going into FY21 on the back of improved visibility for an economic recovery, we expect MAS to also ease its stance for Singapore banks.
Expect higher dividends from Singapore Banks in FY21F
- We expect higher dividends for FY21F on gradual relaxation of dividend caps; a two-stage relaxation seems to be a more likely scenario. As the targeted loan moratorium under the Extended Support Scheme – Standardised rolls off after Jun 2021, we expect MAS to progressively relax its dividend restrictions for banks.
- A two-stage relaxation, where Singapore banks would be initially allowed to pay out up to a percentage of their FY21F net profit prior to the complete removal of restrictions, seems to be a more likely scenario.
- We believe higher dividends are on the horizon as the managements of banks have signalled their willingness and ability to commit to higher dividends in FY21F, subject to MAS guidelines.
Special dividends possible
- Banks may adjust high capital buffers through some special dividends from FY22F, subject to asset quality and corporate actions. As of end-4Q20, Singapore banks’ CET1 ratios of 13.9%- 15.2% were well above their comfortable operating range of ~13% +/-0.5%.
- Mathematically, the banks can revert to FY19’s dividend policy/payout levels and will still have ample capital buffers within their comfortable range.
- We believe banks may adjust their high capital buffers via special dividends from FY22F, subject to asset quality and corporate actions at that juncture, as banks navigate through a COVID-19 recovery. Should provisions come within managements’ current expectations, we believe there is a case for some special dividends from FY22F.
Prior to COVID-19, Singapore Banks' dividend policies and stances have differed.
- Since 2018, Singapore banks have continued to increase their dividend payout ratios. Dividend policies and stances have also differed across banks, with DBS (SGX:D05) being committed to a fixed dividend policy, while OCBC’s dividend payout ratio was below peers – citing defensive and offensive reasons. Scrip dividend was applied at a discount of ~10% up till 2Q19. UOB committed to a higher dividend payout ratio of ~50%, subject to a CET1 ratio of > 13.5% and sustainable financial performance.
Post COVID-19, Singapore banks signalled willingness and ability to commit to higher dividends
- We believe that uncertainties, especially for regional emerging countries, may still linger on in view of the various expiry timeframes for debt moratoriums. As such, big ticket M&A may not be on the horizon for Singapore banks that may prefer to grow regionally via digital channels.
- According to OCBC, management maintains that there are no M&A plans at the moment due to the murky visibility. Management also does not wish to undertake an M&A in a deteriorating market, where resources are required to manage its current portfolios, despite its previous stance on keeping capital buffers for offensive and defensive reasons. Management believes that some capital buffers are necessary for organic growth across ASEAN.
Banks may adjust high capital buffers through some special dividends from FY22F, subject to asset quality and corporate actions.
- Mathematically, the banks can revert to FY19’s dividend policy/payout levels and will still have ample capital buffers that are above their comfortable range. We believe banks may adjust high capital buffers through special dividends from 2H22F, subject to asset quality and corporate actions at that juncture, as banks navigate through a COVID-19 recovery. Should provisions come within managements’ current expectations, we believe there is a case for some special dividends from FY22F, though banks may also wish to keep some of the excess capital to deploy for growth.
- Higher dividend payout policies post-FY21F may also be an avenue to distribute excess capital.
Exploring theoretical dividend payouts while maintaining CET1 ratio of ~13.5%.
- See summary table in report attached below for our dividend payout estimates for OCBC and UOB. To arrive at a more realistic special dividends payout situation, we took into account adjustments for final 4Q20 dividend payout, RWA growth of ~8% taking into account management loan growth targets and some credit deterioration due to higher NPLs in FY21F.
Maintain BUY on OCBC and UOB as recovery plays.
- We maintain BUY on OCBC and UOB as recovery plays, as we look towards am earnings recovery led by more stable NIM, higher loan growth, and lower credit costs alongside an uptick in long-end yields.
- See report attached below for summary charts on DBS, OCBC and UOB's historical dividend payout ratios and capital ratios.
- See also
Rui Wen LIM
DBS Group Research
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https://www.dbsvickers.com/
2021-04-01
SGX Stock
Analyst Report
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