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Singapore banks' H1 dividend unlikely to be shaken by regulator's capital review

Payout will depend more on earnings impact from NIM

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Singapore banks' upcoming dividend payout is less likely to be impacted by deliberations by the regulator on banks' capital management plans, said CGS-CIMB.

Singapore

SINGAPORE banks' upcoming dividend payout is less likely to be impacted by deliberations by the regulator on banks' capital management plans, said CGS-CIMB.

Instead, their dividend payout in the second quarter will depend more on their earnings impact from the current operating environment amid pre-emptive provisioning and net interest margin (NIM) headwinds, CGS-CIMB analyst Andrea Choong told The Business Times. "We believe (these) are already being taken into account when banks assess their dividend payouts."

The Monetary Authority of Singapore (MAS) on Thursday said it is in close discussions with the banks on their capital management ahead, which would include conversations on - though not limited to - restricting dividend payouts.

"As banks already actively manage dividends vis-a-vis their capital positions, the discussion between them and MAS may not cause incremental pressure on banks' dividend outlooks," said Ms Choong.

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In a report on Friday, CGS-CIMB noted that the risks of lower dividends in Q2 due to NIM headwinds is likely to trigger some profit-taking by investors.

DBS and OCBC are projected to pay an interim dividend of S$0.33 and S$0.25 a share respectively for Q2. UOB's interim dividends are expected to compress to about S$0.35-S$0.45 a share, compared with S$0.55 previously.

While the banks' strong capital ratios of around 14 per cent "make clear" their ability to maintain their dividend policies, these may be reviewed amid weaker NIMs, said CGS-CIMB.

In particular, UOB's 50 per cent payout stance may present downside risks from the brokerage's current full-year dividend payout forecast of S$1.10 a share due to revenue headwinds.

"We see downside earnings risks from the NIM compression to come, and correspondingly, FY2020 dividends (for UOB)," said Ms Choong.

The brokerage is expecting Singapore banks to see record-worst NIM compression of around 15-23 basis points (bps) in Q2 as benchmark rates collapse.

It has projected for a NIM of 1.63 per cent for DBS; 1.61 per cent for OCBC; and 1.51 per cent for UOB. "We think NIMs could be the negative surprise this quarter."

Overall, CGS-CIMB maintained its "neutral" position on the Singapore banks as NIM headwinds play out and credit cost surprises are priced in.

With benchmark rates close to bottoming out, NIM declines in the coming quarters are expected to be "comparatively subdued".

DBS is CGS-CIMB's preferred sector pick for its "sustained strength" in treasury income to buffer topline weakness, a smaller SME (small and medium-sized enterprise) book among its peers, and dividend visibility.

The lockdown in April and May is also likely to result in a weaker fee income showing from the three banks in Q2.

Card spending stayed soft while wealth income was lower due to the general risk-off sentiment and restrictions on relationship managers to meet clients, said CGS-CIMB.

However, it noted that trading and investment gains may jump even higher given conducive equity markets in Q2 to cushion non-interest income weakness.

OCBC could see a "significant recovery" on this front, recovering the substantial mark-to-market losses incurred in Q1.

Credit costs in Q2 are expected to stay elevated at around 54-66 bps from overlays, a pre-emptive move against potential credit quality deterioration at the end of the year.

Given the front-loading in Q1, CGS-CIMB is projecting for lower credit costs of 60 bps in Q2 for DBS, and 66 bps for OCBC.

UOB could see higher credit costs of 54 bps - from 36 bps in Q1 - due to management overlays, given weakened macroeconomic indicators through the P&L (profit and loss).

For now, CGS-CIMB said these impairments are firmly within the guided 80-130 bps range till FY2021.

Shares of DBS closed trading at S$21.38 on Friday, down 22 Singapore cents, while shares of UOB ended at S$20.56, down nine cents. OCBC shares closed flat at S$9.17.

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