Singapore banks likely to ease rather than lift dividend caps fully

Singapore

THERE may be room to lift dividend caps imposed on Singapore banks last year, with the banks sounding an optimistic note for an earnings rebound in 2021. But most analysts said just a partial relaxation from the 60 per cent cap is expected.

"A full relaxation may take longer as tail risks to asset quality remain from regional loan moratoriums, continued border closures and vaccine delivery logistics," Maybank Kim Eng's head of research Thilan Wickramasinghe told The Business Times.

In July last year, the Monetary Authority of Singapore (MAS) nudged local banks to cap their total dividends per share for FY2020 at 60 per cent of the amount in the previous financial year. The authority also directed that shareholders also be offered the option of receiving the dividends to be paid for FY2020 in scrip, in lieu of cash.

The MAS had said then that while stress tests have shown the Big Three banks to have strong capital positions, it would be "prudent" for them to put aside a greater portion of earnings during this period, given the substantial uncertainties brought on by Covid-19.

This would bolster the local banks' ability to continue to support the credit needs of businesses and consumers, as well as absorb economic shocks in the case of a more adverse scenario, the authority said.

The restrictions on dividend payouts are applicable until FY2020 for OCBC and UOB, which pay half-yearly dividends, and until the first quarter of FY2021 for DBS, which makes quarterly payouts. MAS has not commented on what happens beyond this timeframe.

During the earnings season last month, the banks presented better-than-expected asset quality and guided on lower credit costs in 2021, spurring hopes from investors that regulators would lift caps. Notably, the common equity tier-one ratio, a measure of banks' capital strength, rose for both OCBC and UOB.

An SGX research note showed that the three banks have each gained about 6 per cent in all of February - the month their full-year results were announced - helping to lift the total returns of the Straits Times Index (STI). DBS, OCBC, and UOB make up 40 per cent of the STI weights.

The trio's return on equity ratio of about 8 per cent in FY2020 is also above the 7 per cent median for global banks, and their Asia-Pacific peers, the SGX note said.

In the first two weeks of March, the banks have continued to gain ground. As of Friday, shares of the three banks have risen 12-17 per cent since the start of the year.

JP Morgan analysts said in a recent research note that Singapore banks are one of the best geared towards rising rates in Asia. The analysts also see "potential upside to the dividend (payouts) in 2021, if MAS allows", noting that capital levels for the three banks are "more than adequate".

Krishna Jyoti Guha, an equity analyst at Jefferies, said he expects a "gradual relaxation" of the dividend caps to be announced sometime in the second quarter. "It will be about striking a balance between all stakeholders. Investors do rely on cash dividends to meet their liabilities. At the same time, impacted sectors also need cash and credit to tide over the crisis and emerge stronger," he said.

Maybank's Mr Wickramasinghe added: "Singapore banks have delivered credible results in 2020 despite the weak macro environment. They have also built strong provisioning buffers. So we think a partial relaxation of dividend caps is potentially possible."

Phillip Securities research analyst Tay Wee Kuang said there are "compelling reasons" for dividend caps to be lifted, noting that suppressing the payouts could lead to excessive build-up of capital. "This could lead to lower return-on-equity for the banks, which means lower capital efficiency, which could in turn dampen investors' confidence," he added.

Kevin Kwek, managing director at research firm Alliance Bernstein told CNBC that partial lifting of the caps, such as up to 80 per cent of the previous year's payouts, would be "pretty realistic".

Elsewhere, regulators have been softening their stances toward banks' dividend distribution, which could serve as cue for the MAS to lift its curbs, too. But analysts noted that the restrictions imposed by these foreign regulators were more onerous to begin with.

The United Kingdom's Prudential Regulation Authority last December said it will allow banks under its charge to begin paying dividends again, with cautious guard rails - these payouts must not exceed 0.2 per cent of the lender's risk-weighted assets, or 25 per cent of cumulative quarterly profits over 2019 and 2020, after deducting shareholder distributions.

Shortly after, the European Central Bank urged the continent's banks to keep dividends and share repurchases to less than 15 per cent of profit for 2019 and 2020, or 0.2 per cent of their key capital ratio, whichever is lower - softening from its earlier de-facto ban on bank dividends.

Ivan Tan, director for financial institutions ratings at S&P Global Ratings, said: "A lot of regulators are softening their stance. So I think MAS will follow suit as well. Whether it'd be total relaxation, I am not sure. It is quite likely to be less stringent compared to last year."

The banks' top executives have themselves expressed hope for dividend caps to be lifted. DBS chief executive Piyush Gupta had noted at the bank's results briefing early February that regulators in other jurisdictions have allowed lenders to start returning capital to shareholders.

He said: "It is possible the MAS might take that view as well, but it is equally possible that the MAS could maintain their prior guidance given that they had been relatively lenient on these restrictions as compared to other regulators. Nonetheless, we have always maintained that we have the capacity to pay more dividends."

OCBC's chief financial officer Darren Tan said the bank hopes the cap will be lifted "as a way to recognise and reward our shareholders' confidence in us". UOB said the bank would resume its 50 per cent dividend payout ratio as soon as curbs are lifted.

In the latest quarter, DBS proposed a final dividend payout of 18 Singapore cents per share, against 33 Singapore cents a year ago; OCBC proposed a final dividend of 15.9 Singapore cents per share, down from 28 Singapore cents in the year-ago period; and UOB proposed a final dividend of 39 Singapore cents per share, down from the final dividend of 55 Singapore cents and special dividend of 20 Singapore cents previously.