MAS reviewing banks' capital plans, including dividend payouts

Singapore

AMID "substantial uncertainty" over the global economic outlook as corporate defaults are set to rise, the Singapore regulator is now in "close discussions" with Singapore banks on their capital management ahead, which would include conversations around - though not limited to - restricting dividend payouts.

Speaking to reporters at the release of the central bank's annual report, Monetary Authority of Singapore's (MAS) managing director Ravi Menon said banks' capital management should be approached "from a position of strength".

"We should start early and not wait until the capital position starts looking weaker," said Mr Menon on Thursday. He added that MAS has not yet concluded on how it should ensure that Singapore banks are further buffeted in this area.

Major central banks around the world have set limits on how much banks can pay out dividends. More recently, the US Federal Reserve said in June that third-quarter dividends from 33 of the biggest US banks that underwent stress tests can be no more than the amount paid in the second quarter. That quarterly dividend also should not be more than the average of the firm's net income for the four preceding calendar quarters.

It also said these US banks would also be barred from buying back their shares until at least the fourth quarter of this year.

Singapore banks have in general kept their dividend policy up for review, with the trio due to report second-quarter results in early August. They have already halted share buybacks after some active repurchases in March.

To be sure, large banks in Singapore with a significant retail presence have very strong and healthy capital buffers, said MAS.

A stress test conducted by MAS against an adverse scenario - that is consistent with what it might possibly see in the current Covid-19 crisis - also showed that banks remain resilient under such conditions.

Under such scenarios, the banks' capital ratios, while hurt, would stay above MAS's minimum requirements. The insurers have also pre-emptively bolstered their capital positions and have plans to restore their capital position under severe stress.

These stress scenarios assume that, over a two-year period, the level of GDP will decline by close to 6 per cent, effectively meaning that Singapore is assumed to go through a recession in 2020 and 2021; unemployment rate rises to around 6 per cent; equity and oil prices fall by more than 30 per cent; and property prices decline by more than 35 per cent.

"The stress test showed that our major banks and insurers remain resilient against this very adverse scenario," said Mr Menon.

Still, even with the "encouraging" stress test results", MAS has been engaged with the banks and insurers on their capital management plans.

"We want to ensure that they retain adequate capacity to continue providing financial services to support the economy even in extreme tail risk scenarios," said Mr Menon. MAS has also urged lenders to be prudent on discretionary distributions, so as to preserve their ability to lend.

For all the turmoil unleashed by a global virus, the financial sector is "not likely to contract" from a year ago, MAS said. For the first half of this year, MAS estimated that financial services grew by about 5 per cent, even faster than all of last year's growth of 4.1 per cent.

Even as growth in the sector would moderate in the second half of the year due to weaker credit demand and interest margins, the sector was propped up by exceptionally strong growth in offshore bank lending, re-insurance and life insurance activities in the first quarter.

For the year as a whole, MAS expects the financial services sector to still be a net creator of jobs, though at a much lower level than in previous years. There was a net increase of about 4,900 jobs in financial services and the fintech segment. So far this year, employment has held firm.

This job creation will also mean that the financial sector is on track to meet the Industry Transformation Map (ITM) target of 4,000 jobs per annum for 2016-2020. The four-year average net job growth in financial services and fintech for 2016-2019 is already at 4,900 per year.

This also means the sector should be able to hit its ITM target of 4.3 per cent annual growth in value-added growth over 2016-2020. The four-year average growth rate of value-added in financial services for 2016-2019 is already 4.8 per cent per annum.

Singapore's financial market is also now home to Asean's largest green finance market, accounting for close to 50 per cent of cumulative Asean green bond and green loan issuances. This translated to more than S$8 billion of green, social and sustainability bonds that have been issued in Singapore to date. This year alone, green and social bonds issued out of Singapore so far this year have totalled some S$750 million.

Against that backdrop, MAS is developing a grant scheme for green and sustainability-linked loans in the fourth quarter of this year. This scheme would be similar to what the regulator has offered for green and sustainability bonds.

As a financial centre, Singapore has also not seen any significant relocation moves by Hong Kong-based companies, said MAS in response to media queries.

Hong Kong is still a "formidable" financial centre, and even as enquiries from businesses looking to set up shop in Singapore amid the concerns in Hong Kong are on the up, the final fund flows are not significant.

"The financial services industry in Asia is growing, so it is not a zero-sum game," said Mr Menon, adding that several financial firms have businesses in both locations.

"It's better to compete with a strong financial centre because that means growth and opportunities in the region are good. If things go badly wrong in Hong Kong, that's not good for the region, and not good for Singapore."

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