OCBC signals caution as it pays lower dividend than peers

Singapore

OCBC has defended its decision to keep more capital than some analysts would like, as the bank frets over an impending downcycle.

This comes as the bank posted on Friday an 11 per cent fall in net profit for its fourth quarter. Net profit for the three months ended Dec 31, 2018 stood at S$926 million, down from S$1.03 billion for the year-ago period, impacted by mark-to-market losses stomached by Great Eastern. This translated to annualised earnings per share of 85 Singapore cents, down from 96 Singapore cents a year ago.

With its results, the bank said it would pay a total full-year dividend of 43 Singapore cents a share, up 16 per cent from a year ago. This includes a final dividend of 23 Singapore cents per share - up from 19 Singapore cents a year ago - and brings OCBC's total dividend payout ratio to 40 per cent of its core 2018 net profit.

But some analysts point out that OCBC's peers have raised their dividend payout to some 50 per cent of earnings, with this paid all in cash.

As a comparison, UOB on Friday announced a total dividend that came up to S$1.20 per share for the full year, an increase of 20 per cent over last year. This represented a payout ratio of about 50 per cent, and comes as UOB declared a final dividend of 50 cents per share, on top of a special dividend of 20 cents. It had paid an interim dividend of 50 cents.

UOB's payout of S$1.20 per share puts it on a par with that from DBS, which last year committed to an annual dividend of S$1.20 a share from 2018 onwards.

OCBC also bucked the trend with its dividend payout by offering the option for shareholders to receive scrip for the final dividend, with these shares to be alloted at a 10 per cent discount to the trading price.

In a report, Citi analyst Robert Kong said: "We view OCBC's decision to cap dividend payout at 43 per cent plus invoking a scrip dividend, despite a Tier-1 capital ratio of 14 per cent, as likely detrimental to return on equity (ROE) prospects."

While OCBC has guided that ROE could recover to 12 per cent in 2019, up from its 11.5 per cent now, Citi said it is "more cautious". It downgraded the stock to "neutral", and cut its target price to S$12 from S$12.80. Shares of OCBC closed on Friday at S$11.39, down 18 Singapore cents or 1.56 per cent.

What is not paid out from profits as dividends goes into retained earnings, which is used to calculate the ratio of a bank's capital cushion against risk-weighted assets. As a comparison, DBS had a Tier-1 capital ratio of 15.1 per cent, with its ROE at 12.1 per cent - the highest since 2007. UOB's Tier-1 capital ratio stood at 13.9 per cent, and its ROE at 11.3 per cent.

Pressed by analysts on its dividend payout during a briefing, OCBC group CEO Samuel Tsien said the bank is watching the risks ranging from geopolitical developments to an economic slowdown. "We feel that the market is going to be a rougher market," he said.

The bank is also open to snapping assets from a strong capital base, said Mr Tsien.

"Should there be market opportunities that could be available, of which we are not looking at right now, we would also be able to expand our franchise along the lines of our corporate strategy."

OCBC's net profit after tax from banking operations grew 22 per cent from a year ago to S$817 million. Net interest income climbed 7 per cent to S$1.52 billion, driven by loan growth and a five basis point rise in net interest margin to 1.72 per cent.

But the results were also hurt by higher allowances, which rose 14 per cent to S$205 million. The allowances rose in part as OCBC further restructured its oil-and-gas portfolio across seven accounts belonging to five groups, to reflect the "realistic expectations" of the cashflow from certain offshore vessels, said Mr Tsien.

This comes as charter rates for offshore vessels failed to increase even as oil prices are up at US$60-70/bbl, said Mr Tsien. As a result, certain vessels are still not making the optimal cashflow, being chartered at less than breakeven rates by the bank's repayment requirements.

OCBC's non-performing loan ratio stood at 1.5 per cent, flat over the year, but up from 1.4 per cent a quarter ago. Over the quarter, the group had registered a bad asset from a trading account out of Hong Kong, and accounted for one corporate restructuring case in Malaysia.

For the full year, the bank posted a net profit of S$4.49 billion, up 11 per cent from S$4.05 billion a year ago.

Additional reporting by Claudia Chong