Dividend cap on Singapore banks to weigh down sentiment

Singapore

ANALYSTS have reset their dividend estimates for Singapore banks in the upcoming second-quarter results, while also projecting for sharp dips in share prices in the near term, after the regulator nudged banks to cap their dividends.

In a move to shore up capital amid the uncertain economic climate, the Monetary Authority of Singapore (MAS) last Wednesday called on local banks to cap their total dividends per share (DPS) for FY2020 at 60 per cent of the amount in the previous financial year. Shareholders should also be offered the option of receiving the dividends to be paid for FY2020 in scrip in lieu of cash.

Jefferies analyst Krishna Guha viewed this move as a significant change as earlier, the regulator "didn't see a need" to restrict banks' dividend policies and had "refrained from being prescriptive".

This is likely to weigh on sentiment as the yield for local banks will be capped at around 4 per cent - compared with 6 per cent earlier - as well as associated dilution from the scrip scheme, Mr Guha noted.

He has lowered FY2020 dividend estimates for DBS by 29 per cent to 87 Singapore cents; OCBC by 33 per cent to 31 cents; and UOB by 13 per cent to 78 cents.

UOB KayHian analyst Jonathan Koh is expecting a "kneejerk drop" in the banks' share prices in the near term following MAS's announcement.

"Based on required dividend yield of 4 per cent, we see buying support for DBS at S$18.45, OCBC at S$7.95, and UOB at S$19.50," said Mr Koh.

Shares of the three local banks tumbled after MAS nudged the banks to cap their dividend payout. DBS shares closed on Thursday 63 cents lower at S$19.77, OCBC shares fell 34 cents to S$8.56, and UOB shares dropped 63 cents to S$19.39.

DBS and UOB will report their Q2 earnings and interim dividends on Aug 6, while OCBC will wrap up the results season on Aug 7.

CGS-CIMB analyst Andrea Choong said DBS could see relatively more share price pressure compared to its local peers, as its dividends were a key investment thesis previously. UOB could be least affected by this announcement given lower expectations from investors.

Citi analyst Robert Kong also said the dividend cap will be particularly impactful for DBS, which "positively surprised" in Q1 with a quarterly DPS payout of 33 cents and S$1.32 annualised. "It was one reason in our view why the stock had outperformed its peers."

A DBS spokesperson said the new cap restricts its cumulative dividends to 72 cents per share for the next four quarters starting from Q2 2020, or 18 cents per quarter - with all dividends subject to board approval.

According to MAS, if a bank has already paid out interim dividends for Q1 2020, the dividend restrictions and the offering of dividends in scrip will be extended for an additional quarter until Q1 2021. The 60 per cent cap will apply to the revised period, but still reference FY2019.

DBS analyst Lim Rui Wen cautioned that lower DPS - which in turn translate to lower dividend yields of around 3.6 to 3.9 per cent - could dampen the local banks' valuation support levels.

"We believe that Singapore banks' valuation, now trading at around 0.8 to 1.0 times estimated FY2021 book value, was supported by their relatively high dividend yields," she said.

OCBC Investment Research said: "While valuations are undemanding for long-term investors, we see limited catalysts in the near term and expect a more meaningful sector performance when the macro growth outlook picks up."

Goldman Sachs Equity Research's latest dividend guidance for OCBC and UOB implies a payout ratio of 42 per cent and 48 per cent respectively.

OCBC's dividend payout ratio stood at 47 per cent in FY2019, while UOB maintains a dividend payout ratio policy of about 50 per cent of earnings, subject to a minimum CET1 ratio of 13.5 per cent.

OCBC chief Samuel Tsien last week said the bank will "heed the call" by MAS on dividend restrictions, while UOB group chief financial officer Lee Wai Fai said the bank supports the precautionary move.

Citi's Mr Kong noted that if the banks "follow the full spirit" of MAS's guidance, DPS will be 100 per cent subject to a scrip dividend scheme. The scrip will likely be offered at a discount to market price to encourage share take-up.

"This will add to Q2 results pain where we have already predicted that the banks could see sharp quarter-on-quarter falls in reported NIMs (net interest margins)," he said. The banks' Q2 NIMs are widely expected to be near their all-time post-global financial crisis low.

While the dividend cap will lead to short-term downward pressure on share prices, analysts say the move by MAS will place Singapore banks in a stronger position to see through prolonged economic pain.

"We think it is reassuring that MAS has noted the banks' current capital are sufficient even if a more adverse macro situation materialises," said Goldman Sachs analysts Melissa Kuang and Siward Ludin.

As at Q1, DBS, OCBC and UOB's CET1 ratio stood at 13.9 per cent, 14.3 per cent and 14.1 per cent respectively, among the highest across Asean banks.

Based on DBS's Ms Lim's estimates, the dividend cap will add 0.2 to 0.3 per cent to projected CET1 ratio as at end-FY2020.

Should the pandemic situation stabilise and the economic outlook improve over the next two years, DBS's Ms Lim expects Singapore banks to eventually pay out special dividends if their CET1 ratios remain "well above" pre-virus levels.

UOB KayHian's Mr Koh has tentatively projected for FY2021 DPS to be 80 per cent that of FY2019. He is looking at DBS producing a dividend yield of 4.3 per cent for FY2020 and 4.4 per cent for FY2021, and OCBC to see 3.6 per cent and 4.7 per cent respectively.

Jefferies' Mr Guha said the dividend cap will conserve an estimated S$3 billion of capital - or 40 per cent of FY2019 dividends - and result in S$30 billion of lending at 10 times leverage.

"If MAS's worry is stemming from potential fallout from expiry of the Jobs Support Scheme in August and planned easing of moratoria by year-end, extension of credit should provide reprieve for industrial and retail SMEs in the near term," he noted.

UOB KayHian's Mr Koh reckoned that the second wave of infections in the US and Japan had prompted MAS to make the pre-emptive move to ensure the banks have sufficient capital.

OCBC Investment Research said mandating prudence on capital usage is largely in line with regulators' cautious stance globally, reflecting the extent of the pandemic's impact on asset quality deterioration.

"Singapore banks are still relatively less constrained than European banks, for example, which have been restricted on all dividends and share buybacks this year."

Over the longer term, DBS is CGS-CIMB's top sector pick for its "firepower" in sustained trading and investment gains, which should offset some negative sentiment.

OCBC may surprise on the upside from a rebound in portfolio revaluations from Great Eastern Holdings, said CGS-CIMB's Ms Choong.

READ MORE: Singapore banks face scrutiny on asset quality at upcoming Q2 results