DBS GROUP HOLDINGS LTD (SGX:D05)
OVERSEA-CHINESE BANKING CORP (SGX:O39)
UNITED OVERSEAS BANK LTD (SGX:U11)
Singapore Banks - Dividend Cap Lifted
- MAS announced that its dividend restrictions on banks have been lifted.
- Contained asset quality, strong capitalisation and consequently, a return of net profit to pre-COVID levels allow for a reinstatement of dividends to FY19 levels.
- Reiterate Overweight. UOB (SGX:U11) is our top pick as a laggard and economic re-opening play. The bank reiterates its stance to resume 50% dividend payout.
MAS lifts its dividend cap for Singapore banks, in line with the move by Fed and ECB
- The Monetary Authority of Singapore (MAS) announced that dividend restrictions on locally-incorporated banks and finance companies headquartered in Singapore will not be extended.
- Recall that the MAS called on these FIs to cap total dividend for FY20 (until 1Q21) at 60% of FY19’s dividend. Nonetheless, the regulator maintains its call on banks to exercise continued prudence in their discretionary distributions.
- The easing of the restrictions is underpinned by an improved global economic outlook. Although uncertainties remain, banks have maintained strong capitalisation ratios and met credit needs of the society despite higher levels of provisioning.
- MAS’s move follows the Federal Reserve and European Central Bank in ending restrictions on dividends (and share buybacks for banks in the U.S.) in Jun/Jul 21 for banks that pass the central banks’ annual stress tests and remain above minimum capital requirements.
Asset quality across Singapore banks have been contained
- Asset quality across Singapore banks have so far remained well-contained throughout the pandemic. To recap, remaining loans under government relief across the banks stood at ~1-2% of group loans as at 1Q21. While broad-based government debt moratoriums across the region expired at end-20, further targeted loan relief has been extended to SMEs and individuals in need until end-21. As such, any potential asset quality deterioration will surface only in 2Q22F as these loans season, in our view.
- That said, the banks have provided hefty pre-emptive impairment buffers in FY20, with general provisions amounting to ~S$900m-1.7bn in anticipation of NPLs potentially rising to ~2-2.5% (from ~1.6% currently).
- We understand that the regional movement restriction orders recently introduced could result in an uptick in loan relief applications, but significant credit quality concerns are unlikely at this juncture.
Banks are on firm trajectory to return to pre-COVID net profit levels
- We highlight that FY22F net profit across the banks are on a firm trajectory to return to pre-COVID levels (FY19) as business transactions and loan growth rebound, amid sturdy market-driven income and significantly reduced impairments. At this stage, the banks are on track to meet our FY21F ROE forecasts of ~10-12%.
- Banks’ capital levels have also strengthened over the course of the past year (partly due to capped dividend distributions), holding at ~14.3-15.5% in 1Q21.
- As such, we expect banks to reinstate FY21F dividends closer to that of FY19, and pencil in
- 2Q21F dividend of S$0.30 for DBS (SGX:D05) (1Q21: S$0.18),
- 2Q21F dividend of S$0.25 for OCBC (SGX:O39) (4Q20: S$0.159), and
- 2Q21F dividend of S$0.55 for UOB (SGX:U11) (4Q20: S$0.39).
- A scenario analysis of banks using DDM valuation (risk-free rate: 1.2%, terminal growth: 2.5%, beta: 1, market risk premium: 6%) yields
- fair value of S$27.72 for DBS (SGX:D05),
- fair value of S$11.22 for OCBC (SGX:O39), and
- fair value of S$27.43 for UOB (SGX:U11).
Andrea CHOONG
CGS-CIMB Research
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-07-29
SGX Stock
Analyst Report
32.640
SAME
32.640
13.750
SAME
13.750
28.840
SAME
28.840
