Analysts expect dividends of banking stocks to rebound this year when the Monetary Authority of Singapore (MAS) permits. In 1QFY2021 ended March, DBS Group Holdings, which pays out quarterly dividends, announced a total payout of $460 million in dividends, representing a payout ratio of around 22%. In FY2019, DBS had raised its quarterly dividend from 30 cents per quarter to 33 cents per quarter.
However, in FY2020, the MAS directed banks to moderate dividends and preserve capital for supporting the economy during Covid-19. DBS’s dividends per quarter from 2QFY2020 onwards was 18 cents, which it maintained for 1QFY2021.
“CET1 (common equity tier 1) was 14.3% at the end of the first quarter and since then, Shenzhen Rural Commercial Bank has had less than a 0.2 percentage points impact. So capital is more than sufficient even if we were to bid for part of Citibank’s portfolio. Our high capital levels also mean that we have the capacity to return to our pre-Covid dividend,” says Piyush Gupta during a 1QFY2021 results briefing at the end of April.
Meanwhile, Oversea-Chinese Banking Corp (OCBC) has a CET1 ratio of 15.5%, up from 14.3% a year ago. OCBC’s Group CFO Darren Tan says: “The high CET1 came about because we’ve been optimising our RWA (risk-weighted assets which is the denominator in the CET1 ratio) which is also why there was volatility over the years especially in 2020 when it declined to 14.2% and recently rebounding and going back to 15.5%.”
Shareholders of OCBC should expect steady sustained distributions. “If you look at our history in terms of how we manage the numerator, it has always been dividend payouts in a sustainable progressive manner and for this, we will have to take guidance from the regulators. Last year, the regulator set a cap in terms of the dividend we could pay out. The prospect of that return of capital depends on the regulator lifting that cap,” Tan adds. Most observers reckon that the MAS may only issue a statement on the dividend cap ahead of the banks’ 1HFY2021 results as both OCBC and UOB pay dividends half-yearly.
Elsewhere, United Overseas Bank’s (UOB) group CFO Lee Wai Fai says that its CET1 which fell 40 basis points q-o-q is likely to remain around 14% this year. “With this quarter’s loan growth of 5% y-o-y and together with earnings coming in, CET1 will be around 14% plus/minus by the end of the year. As a result, our dividend guidance is of a 50% payout ratio, provided MAS approves,” Lee says. Interestingly, DBS has also been optimising its RWA which rose by around $1 billion despite quickening loan growth. “MAS has approved a refinement in our market risk model that is more consistent with the way risk is managed in the dealing room. We have now moved to a duration-based method, which is more efficient than the maturity-based method we were previously using. The duration-based method allows us to bucket cash flows by their interest rate sensitivity rather than taking the entire net present value (NPV) and slotting it at maturity,” explains Chng Sok Hui, group CFO of DBS.
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Bullish outlook for DBS
Among the banks, DBS sounded the most positive, while the management of OCBC and UOB had messages of positivity peppered with caution. “The first quarter was extraordinary with all businesses recording strong growth. Loan growth accelerated, CASA (current account and savings account) growth was sustained while fee income and treasury income both reached new highs. We remained disciplined on costs that were stable from a year ago excluding LVB. Asset quality stabilised, resulting in a general allowance writeback,” DBS CFO Chng summed up during the bank’s results briefing.
“The first quarter was a golden quarter for us. Loan growth was strong and broad-based. Corporate lending has been consistently growing for a few quarters. Trade loans also grew for the first time in several quarters. This is partly due to higher commodity prices, but also due to stronger overall import and export activity of our clients. Housing loan growth continued to be strong. Bookings for the first quarter were almost at record levels,” Gupta echoes.
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Loan growths for UOB and DBS had risen 4% q-o-q and 5% y-o-y respectively. Both banks grew loans by around $12 billion. All three banks are guiding for loan growth of mid to high single-digits this year.
Opportunities in GBA
Geographically, OCBC and UOB are focused on the flow of capital and wealth between North and Southeast Asia. “We are positioning ourselves for the future and a few things we can classify as organic growth are flow of capital, trade and investment across Southeast Asia and Greater China. We want to continue to expand our wealth management franchise and continue to invest in sustainability and expand our sustainable finance book and accelerate digitalisation,” says Helen Wong, group CEO of OCBC.
As Wong hails from Hong Kong, she understands the potential of the Greater Bay Area (GBA) more than most. “The GBA has been discussed for quite some time among ourselves and peer groups. I want to highlight that it’s a VERY big market and the population is more than 60 million and the wealth accumulated in that area is huge. We’ve already seen Chinese customers very interested in investing outside of China so there is a lot of outbound investment expected. And as China opens up its capital market we see inbound interest as well although we have to see how the WealthConnect opens up,” Wong elaborates.
“We have 80 branches in GBA. In terms of working with other partners, we have very strong partnerships with financial institutions in China and this helps in sourcing customers and taking customers inbound and outbound. I expect very strong competition but the market is so big that I think the pie is big enough for everybody to do a reasonable business,” she adds.
UOB will focus on the flow of business between North and Southeast Asia, which it captures through its FDI Advisory offices across Asia and also on the opportunity from US$1 trillion ($1.3 trillion) of sustainable loans for green infrastructure in Asean.
No boost from writebacks for OCBC, UOB
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Following DBS’s results, analysts were looking to the local banks for further writebacks from over-provisioning in FY2020 to their earnings forecast for FY2021. However, the management of first UOB and then OCBC pointedly indicated they have no intention of writing back their general provisions yet.
“I don’t think we’ve fully recovered. We’ve reduced credit guidance [to 30 basis points for the year] but we don’t think we should be writing back so early,” CFO Lee of UOB says. He points out that Singapore has reversed back into Phase Two. “We need to understand the impact on customers and their activities,” he says.
Tan of OCBC also says the bank will also not be writing back its general provisions at this point in time. Tan says this is because of the expected credit loss (ECL) model where there are certain assumptions based on mean variants, credit history and volatility, and the impact on ECL. The pandemic is a black swan event, which under the ECL model is termed a multi-standard deviation event (MSDE) and hence the need to set aside management overlay (which are additional provisions) to adjust for the MSDE.
“The experience of volatility would over time accumulate in that model. As long as that mean variant component has stabilised in terms of outlook being clearer and the trajectory of what we expect becoming clearer, then potentially we may explore a write back,” Tan says.
Even without writebanks, analysts expect strong net profit growth for OCBC and UOB this year. CGS-CIMB is forecasting a 38% y-o-y rise in net profits for OCBC to $4.96 billion and a 37% y-o-y rise in net profits for UOB to $4.01 billion. DBS’s net profit is also expected to rise by 38% to $6.544 billion.
