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BT EXCLUSIVE

Hot stocks: DBS, OCBC, UOB tumble after MAS asks to cap dividends

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Despite the short-term hit to share prices, the dividend cap is prudent and will place Singapore banks in a stronger position to combat challenges ahead, the DBS research team pointed out.

SHARES of Singapore's local lenders extended their slide on Thursday morning, after the central bank asked them to cap dividend payouts.

As at 10.21am, DBS dropped S$0.85 or 4.2 per cent to S$19.55, OCBC Bank tumbled S$0.45 or 5.1 per cent to S$8.45, while UOB fell S$0.73 or 3.7 per cent to S$19.29. They were the most actively traded counters by value on the bourse in the morning.

The Monetary Authority of Singapore (MAS) on Wednesday called on Singapore banks to cap their total dividends per share (DPS) for FY20 at 60 per cent of FY19's total DPS, and offer shareholders the option of receiving dividends in scrip in lieu of cash.

This is a pre-emptive move to ensure the lenders are able to continue supporting businesses and individuals in the face of significant uncertainties ahead, and is in line with other central banks' actions in the wake of the coronavirus pandemic.

DBS, OCBC and UOB command the biggest weighting in the MSCI Asean Index. They will release their second-quarter financial results next week.

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In a research report on Thursday, DBS analyst Lim Rui Wen said this implies a dividend payout ratio of 40-44 per cent based on FY20 forecast earnings.

"We believe that Singapore banks' valuation, now trading at about 0.8-1.0 times of FY21 forecast book value, was supported by their relatively high dividend yields," she wrote.

Therefore, the support levels could be pushed down by MAS's latest move, which implies lower DPS for FY20 translating to lower dividend yields of 3.6-3.9 per cent compared with the previously forecast 5.2-6.5 per cent, Ms Lim said.

Likewise, Citi said the latest development will be viewed as negative for the banks as their dividend yields are considered an important component of the investment thesis for owning these names.

This is especially so for South-east Asia's largest lender DBS, which delivered a positive surprise in Q1 2020 by keeping a quarterly DPS level at S$0.33. That was one reason for the stock outperforming its peers, noted Citi analysts Robert Kong and Weldon Sng.

UBS Group analyst Aakash Rawat also believes the impact will be the greatest for DBS, which investors see as a bigger proxy for generating dividend income than its peers, according to Bloomberg's report on Thursday.

The cut in dividends will add to the pain of a sharp quarter-on-quarter fall in the trio's net interest margins for Q2, according to Citi's Mr Kong and Mr Sng.

"With reduced market expectation of high dividends, we hope banks decide to front-load profit and loss provisions to pave the way for 2021 ROE (return on equity) recovery," they wrote.

Despite the short-term hit to share prices, the dividend cap is prudent and will place Singapore banks in a stronger position to combat challenges ahead, the DBS research team pointed out.

As at Q1 2020, the Common Equity Tier 1 (CET1) ratio stood at 13.9 per cent for DBS, 14.3 per cent for OCBC and 14.1 per cent for UOB, among the highest across Asean banks. DBS analyst Ms Lim estimates that the dividend cap will add 0.2-0.3 per cent to the research team's projected CET1 ratio as at the end of FY20.

She expects the lenders to eventually pay out special dividends should their CET1 ratios remain well above their pre-pandemic levels, if the Covid-19 situation stabilises and economic outlook improves towards FY21-22.

UBS also sees the central bank's move as prudent in the context of the coronavirus pandemic, and believes it does not threaten the sustainability of payouts.

"The short-term and prudent nature of this measure does not raise any question marks on the long-term sustainability of dividends," Mr Rawat wrote, as cited in Bloomberg.

"Investors with a slightly longer-term horizon are likely to see this weakness as a buying opportunity," he added.

Meanwhile, Jefferies Financial Group prefers the shares of the Singapore bourse operator to those of the local banks, due to the Singapore Exchange's (SGX) "similar but fully underwritten cash yield".

Jefferies analyst Krishna Guha said in a note that while the MAS announcement will weigh on sentiment, investors should remember the strong capital positions of the banks.

Mr Guha downgraded DBS to "hold" from "buy", and lowered its dividend estimates by 29 per cent for fiscal 2020.

DBS Group Research maintained its "hold" calls on OCBC with a S$9.30 target price, and on UOB with a target price of S$20.90.

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