Banks raise dividends to sustainable levels despite heightened risks

From next year onwards, DBS will keep its core dividend at the higher 33 cents per quar­ter level, or 10% higher than FY2019. Barring unforeseen circumstances, the annualised div­idend will be $1.32 per share, an increase of 10%, says DBS in a statement.

“Prior to announcing the dividend increase, we did a lot of simulations and are confident that we can sustain the annualised $1.32 per share as long as our net profit grows and CET1 (tier 1 capital ratio) is at 12.5–13.5%,” Chng Sok Hui, CFO at DBS, explains during its re­sults briefing. “The increase in the quarterly dividend is in line with our policy of paying sustainable dividends that rise progressively with earnings,” she adds.

In 4QFY2019, DBS reported net profit of $1.51 billion, up 14% y-o-y, but down 7% q-o-q. In FY2019, DBS’s net profit was $6.39 billion, up 15% y-o-y, and within expectations.

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“We are still accreting earnings. Even if we assume no profit growth, based on our $6.4 billion earnings last year, we have capacity to be able to maintain the dividend,” reiterates DBS CEO Piyush Gupta at the results briefing.

OCBC’s 2H2019 dividend surges

Oversea-Chinese Banking Corp, which pays dividends twice a year, announced a final dividend of 28 cents per share for 2HFY2019 ended Dec 31, 2019. This is 22% higher than the final dividend of 23 cents a year ago, and 12% higher than the FY2019 interim dividend of 25 cents.

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Together with the interim dividend of 25 cents, the total dividend for FY2019 for OCBC amounts to 53 cents, up 23% y-o-y. The es­timated total dividend payout will amount to $2.31 billion, up 27% from FY2018. This rep­resents a dividend payout ratio of 47% against core net profit of $4.87 billion which itself is up 8% y-o-y. Net profit in 4QFY2019 rose 34% y-o-y and 6% q-o-q to $1.24 billion.

OCBC has the highest CET1 ratio among the banks, due to both profit accretion and higher shareholders’ funds from its scrip div­idend last year — although it is not being ap­plied this year because the bank has so much excess capital.

“We have guided a progressive dividend policy where we are looking at the quantum of dividend that would move in line with our long term growth prospects,” says OCBC CFO Darren Tan.

Despite the recession in Hong Kong and the slowdown in Asia from Covid-19, OCBC CEO Samuel Tsien says, “On the revenue side, we will see a 2% reduction on what we would have seen. It’s not a 2% reduction on 2019 rev­enue, but a 2% reduction on what we would have seen under a normal situation.”

United Overseas Bank, which pays div­idends twice a year, raised its final dividend for 2HFY2019 ended Dec 31, 2019, to 55 cents per share. This versus 50 cents a year ago. It also announced a special dividend of 20 cents, taking total dividends for FY2019 to $1.30, up from $1.20 for FY2018.

The total payout for FY2019 will be $2.17 billion, or around 50% of FY2019 net profit of $4.343 billion, which was up 8% y-o-y. In 4QFY2019, UOB reported net profit of $1 bil­lion, up 10% y-o-y, but down 10% q-o-q. Its books will close on May 13 and dividends will be paid on May 21. The UOB scrip dividend scheme will not be applied to the final and special dividends.

When asked whether UOB would still pay $1.10 if profit falls, CFO Lee Wai Fai says, “If you look at my guidance at how much is spe­cial dividend, and core dividend, it will give you a signalling.” In a year when should prof­its fall, dividends will be expected to moderate down to just core dividend, which would be $1.10 for FY2020. If net profit registers growth, a special dividend such as FY2019’s 20 cents would boost dividends, Lee indicates. UOB’s CET1 rose to 14.3% as of Dec 31, 2019, un­derpinned by profit accretion. Lee has guid­ed that the payout ratio of 50% is subject to a minimum CET1 ratio of 13.5%.

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Due to challenging economic conditions, Moody’s Investors Service expects “very weak” loan growth for the banks in general. “As a re­sult, internal capital generation will continue to outpace capital consumption. This will re­sult in higher pre-dividend capital ratios at the three banks in 2020. In this event, we expect the banks will pay higher cash dividends to balance declines in their returns on equity,” Moody’s says.

How high can credit costs go?

While investors expect credit costs to rise, the banks’ top management have moderated ex­pectations. For instance, all three banks guid­ed on credit costs rising by single-digit basis points. Credit costs are important because they are allowances for loan loss which affect net profits by having a negative impact on pre-pro­visioning operating profit or POPP. The high­er the credit costs, the lower the net profit.

Gupta says: “Collectively, our stress testing suggests that we will likely see a 4–5bps in­crease in credit costs for the year.” In FY2019, DBS’s expected credit loss stage 3, which is the equivalent of special provisions (SP), stood at 20 bps for the full year, and at 21 bps in 4QFY2019.

“Even if it was double that — meaning go­ing up to 10bps — it would imply an incre­mental credit cost of $250 million to $300 mil­lion. The general allowances we have built up over the past year have been robust. We had put aside a cushion for the US-China trade issues and for the situation in Hong Kong. They are large enough to absorb the increase in credit costs and hence the impact is unlik­ly flow through the P&L,” Gupta explains. In 4QFY2019, DBS wrote back $77 million in ECL Stage 1 and 2. ECL is the equivalent of gener­al provisions or GP.

Tsien of OCBC expects the impact of Cov­id-19 to dwindle by June and estimates that credit costs will be mildly higher than FY2019’s. “Based on our best estimation of how this is go­ing to end, the virus is going to dwindle down by June this year which is the starting of the summer months. The recovery will happen in 3Q2019 but this will be a gradual recovery and a more normal situation will only be seen in 4Q2019. Covid-19 will erode the improvement we would have seen this year, resulting credit cost to be a few bps above that seen in 2019,” he elaborates. In FY2019, OCBC’s total cred­it cost was 25bps.

Covid-19 is likely to impact hospitality, F&B, airlines and consumer spending directly, an­alysts say. “A Tier-1 distress may raise credit charges towards 25–30bps, based on OCBC es­timates,” says a recent report by Maybank-Kim Eng describing OCBC’s credit costs.

In FY2019, UOB’s total credit cost was 18bps of loans, with credit cost in 4QFY2019 rising to 24bps. When pressed during a results brief­ing, Lee of UOB says: “We think a moderate increase to say 25–30bps [is possible]. We fin­ished 4QFY2019 at 23–24bps.” UOB’s risk man­agement says that in the worst-case scenario, credit costs could surge to 70–80bps.

“We de-risked the loan books in North Asia, in two regions that would be most bad­ly affected. We just looked at the econom­ic and macro flows and we decided to do some de-risking. If Covid-19 lasts for three to six months we’ll be ok. If the recovery is U-shaped, we will take that decision when it happens,” Lee says.

Credit Suisse, in an FY2019 results review, says UOB’s net interest margins could be rela­tively more stable in the near term, given that UOB has taken most of the repricing from the three rate cuts in 2019. In addition, its low loans-to-deposit ratio of 85.4% could be used for loan growth, and extending its securities book duration is an added lever to support NIM, Credit Suisse adds.

Looking forward to the recovery

UOB’s CEO Wee Ee Cheong reminds analysts and media that UOB — which has a bancas­surance agreement with Prudential — will start to receive $77 million a year in fees from this year. “For our LDR (loan-to-deposit ratio), we have plenty of liquidity. Our challenge is de­ployment of funds. And being conservative, we try to protect our balance sheet. It’s actually a healthy thing and if it’s challenging to deploy, we can take liabilities (such as deposits) down to protect margins,” Wee says. “Our Southeast Asian infrastructure is in place and we can pick up the loan growth tempo,” he adds.

Tsien of OCBC reckons that the recovery fol­lowing Covid-19 could materialise in the sec­ond half of the year. “This is an event. Events come and go. It’s an event that may have a short-term impact but this short-term im­pact is well within our forecast and based on strong 2019 results it will be easily absorbed. If it’s an event-driven cycle, the recovery will be shorter but it will take another quarter for sentiment to regain itself. So we will start to see consumer sentiment and spending, and business investment only in the fourth quar­ter of this year,” he says.

Since the banks appear able to withstand Covid-19 and continue to grow their income levels, albeit at a more glacial pace than 2019, their elevated dividends appear relatively se­cure. As to which bank is best, yield investors would have noted that for the full year, DBS pays its dividends in April, UOB in May and OCBC in June. DBS also pays its dividends quarterly, so investors looking for regular div­idends could consider all three banks when the price is right.