MAS doing more stress tests to assess lift on Singapore banks' dividend cap

ANALYSTS expect the Monetary Authority of Singapore (MAS) to soon ease its current dividend restrictions on local banks, given their strong capital levels and earnings, but cautioned that there is still ongoing economic uncertainty that could weigh on the central bank’s decision.

This comes as the MAS said on Wednesday that it is conducting additional stress tests to assess whether it is necessary to extend the current dividend caps on local banks.

The MAS is in close discussions with banks on their capital-management plans and will be advising them on its position "very shortly", said Ho Hern Shin, MAS' deputy managing director for financial supervision at the launch of MAS' annual report.

Since July last year, the MAS has called on local banks to cap their total dividends per share for FY2020 at 60 per cent of the previous year's dividends per share, and to offer shareholders the option of receiving the dividends in scrip in lieu of cash. This was done as a pre-emptive move to ensure that banks could prioritise lending and support businesses and individuals during the pandemic.

On Wednesday, MAS managing director Ravi Menon pointed out that the central bank's earlier concerns that defaults among weaker corporates could strain banks' profitability and capital positions, have not materialised. The MAS estimates the financial services sector grew by about 6 per cent in the first half of this year.

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The domestic systemically important banks started the year with "strong capital positions" with an aggregate CET-1 (Common Equity Tier 1) ratio at 14.7 per cent in the first quarter of 2021, higher than the 14.4 per cent prior to the onset of Covid-19, he said.

While there was a slight uptick in non-performing loans, the ratio has remained largely stable at 2.4 per cent as at the first quarter, added Mr Menon.

That said, he cautioned that problem loans can take time to surface. "Borrowers on full or partial loan moratoriums may not show signs of financial stress, especially if they are also obtaining financial support from the government," he said. But as the support measures taper off, banks will have greater clarity about the repayment ability of their borrowers.

This comes as the MAS recently announced the "final extension" of the current set of credit relief measures by another three months, till the end of September 2021.

Analysts believe that there is room for the MAS to ease dividend curbs on local banks.

Kevin Kwek, managing director and senior banking analyst at Alliance Bernstein, said that his baseline view is that the restrictions should be lifted, if not eased, “as soon as it is deemed safe”. This comes on the back of the healthy earnings and capital levels seen in all three local banks, as well as the positive outlook.

Easing will allow the banks to manage their capital more efficiently, he added.

CGS-CIMB Securities’ analyst Andrea Choong concurred that conditions are ripe to consider lifting the dividend cap.

“Banks have so far reported that asset-quality concerns are stabilising, with borrowers' repayments post-moratoriums streaming in steadily,” she said.

She noted that borrowers in need of aid would likely have stepped forward for aid by now, or ceased operations. At the same time, banks have taken hefty pre-emptive impairments in 2020 to build a buffer for potential deterioration, while maintaining strong capital levels.

Maybank Kim Eng’s head of research Singapore Thilan Wickramasinghe is more cautious.

“We think there is room for some loosening, but it may be too early for a full withdrawal,” he said. “While the banks are well capitalised, they are still carrying exposures to pockets of moratoriums and restructurings around the region. This creates uncertainty.”

Resurging Covid-19 infections is also further clouding visibility and could raise questions on asset quality, he added.

But Mr Wickramasinghe acknowledged that Singapore is not faced with the same levels of risk and unpredictability as at the start of the pandemic, when the dividend caps were imposed.

Analysts said that allowing dividends caps to lift too early could put banks in a weak position to support the economy if credit is needed.

Ms Choong noted: “Realistically, if the caps are lifted too quickly, a very severe asset-quality deterioration could see earnings being impacted as a result of potential credit costs ahead.”

That being said, she emphasised the capital strength of Singapore banks, with CET-1 ratios of 14-15 per cent.

Mr Kwek also said that it seems unlikely that the banks will go overboard with payouts because of a lifting of caps.

“Equally, excess capital won’t mean they become imprudent on lending,” he added.

Elsewhere, US banks the likes of Morgan Stanley, JPMorgan and Goldman Sachs have said that they are hiking their dividend payouts after the US Fed gave them the green light after their annual stress tests, ending pandemic-era restrictions on how much capital they could return to investors.

The European Central Bank could also follow suit in the coming months, thanks to an improved macroeconomic environment in the euro zone.

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