MAS lifts dividend cap on Singapore banks and finance companies

THE Monetary Authority of Singapore (MAS) on Wednesday lifted its dividend cap on locally-incorporated banks and finance companies based in Singapore.

It joins other central banks that have recently eased dividend restrictions imposed on banks last year, as the global economy rebounds amid gradual re-openings and rapid vaccine rollouts.

But as downside risks remain, local banks and finance companies should exercise continued prudence in their discretionary distributions, whilst prioritising support to customers, said Ho Hern Shin, MAS deputy managing director, in a statement.

"Particularly when Covid-19 is not yet endemic, businesses may face added liquidity strains when Covid-19 measures are tightened from time to time," she cautioned.

In July and August last year, MAS had called on local banks and finance companies to respectively cap their total dividends per share (DPS) for FY2020 at 60 per cent of FY2019's DPS, and offer shareholders the option of receiving the remaining dividends to be paid for FY2020 in shares in lieu of cash.

DBS analyst Lim Rui Wen expects the banking trio to start lifting absolute dividends from the second quarter this year, and reckoned they will be able to raise their dividend payout ratios to around 50 per cent.

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OCBC and UOB will release their second-quarter results on Aug 4, and DBS on Aug 5. Interim dividends will be respectively declared.

In pre-pandemic times, OCBC's dividend payout ratio stood at 47 per cent in FY2019, while UOB maintained a dividend payout ratio policy of about 50 per cent of earnings, subject to a minimum CET-1 (Common Equity Tier 1) ratio of 13.5 per cent. DBS had paid an absolute DPS of 33 cents per quarter.

Sanford C. Bernstein analyst Kevin Kwek said the banks' capital levels and outlook justified the removal of the cap.

"There was little risk that credit losses or a big loan growth spike would push the CET-1 levels to be far south of 13 per cent. The banks will certainly increase payout.

"The (dividend payout) ratio was generally 40 to 55 per cent among the three with DBS typically doing a little more as profitability was a tad higher, as was return on equity. DBS will likely pay out more ahead too, to at least match pre-Covid levels," Mr Kwek told BT.

Still, the lenders are unlikely to play catch up on the past year. DBS's Ms Lim said the trio "will not be in a rush" to pay out all the excess capital in 2021 and may wait for 2022 as they evaluate their M&A (mergers and acquisitions) plans.

In a statement on Wednesday evening, DBS chief financial officer Chng Sok Hui said the bank will "take into account" MAS' latest move in its dividend considerations for the upcoming results.

OCBC chief financial officer Darren Tan said the bank will "heed MAS' guidance and will determine and declare our interim dividend accordingly".

"MAS has lifted dividend restrictions on local banks and finance companies, and has also guided for us to exercise continued prudence in our discretionary distributions, whilst prioritising our support to our customers," he added.

Meanwhile, UOB "welcomes the move" by MAS to lift dividend restrictions and will remain "prudent and disciplined" in capital management.

"We believe that our strong balance sheet ensures that we are well-placed to support the economic recovery and to see our customers through to better times," said group chief financial officer Lee Wai Fai.

In a statement, MAS pointed out that dividend restrictions imposed last year were a pre-emptive measure, introduced to ensure financial institutions maintain strong lending capacity to support the economy throughout the pandemic, given the significant uncertainties at that time.

"The global economic outlook has since improved. While some uncertainties remain, Singapore's economy is expected to continue on its recovery path, given strengthening global demand and progress in our vaccination programme," said the regulator.

It further said local banks and finance companies have maintained strong capital adequacy ratios and continued to meet the credit needs of individuals and businesses, despite higher levels of provisioning made during the pandemic.

Under MAS' latest stress tests, these ratios are projected to remain resilient even under an adverse macroeconomic scenario. That would mean a stalled global recovery associated with delays in vaccine deployment and a global resurgence in the pandemic due to mutated virus strains, leading to the Singapore economy slipping again into recession this year.

UOB Kay Hian analysts had earlier said the banks are "well-positioned to fully normalise DPS to their pre-Covid-19 levels when MAS allows them to do so". They noted that the banks' CET-1 capital-adequacy ratios - a measurement of a bank's core equity capital, compared with its total risk-weighted assets - are "substantially higher" than their target range.

The local lenders had an aggregate CET-1 ratio of 14.7 per cent in the first quarter of 2021, higher than the 14.4 per cent prior to the onset of Covid-19. While there was a slight uptick in non-performing loans, the ratio has remained largely stable at 2.4 per cent as at Q1.

Last Friday, the European Central Bank said it will lift restrictions on dividends and share buybacks at eurozone banks, scrapping earlier plans to extend these measures beyond September 2021.

On July 13, the Bank of England lifted its cap on dividends paid by HSBC, Barclays and other top lenders in Britain.

Over in the US, the Federal Reserve in June announced that it will lift Covid-era dividend and share buyback restrictions on the largest banks, as all 23 of the banks that were stress-tested appeared to have "strong capital levels" and would be able to withstand a severe recession.

READ MORE: Singapore bank shares chalk up strong gains in H1, but more rotations ahead