All eyes are on the Monetary Authority of Singapore (MAS) to review the dividend cap on local banks, which has been in place for a year, says PhillipCapital Research analyst Terence Chua. If Chua is right, the MAS could ease the restriction, which has capped the banks’ total dividends per share at 60% of FY2019 levels.
According to Chua, the MAS is running additional stress tests on the local banks to assess whether it is necessary to extend current dividend restrictions on them. It is in close discussions with the banks on their capital management plans and will be advising them on its position “very shortly”.
In a July 8 note, Chua is maintaining “overweight” on the banking sector here, while maintaining “accumulate” on both DBS Group Holdings (target price $31.40) and United Overseas Bank (target price $28.70). Chua is also maintaining “buy” on Oversea-China Banking Corp (OCBC) with a target price of $14.63.
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“We believe MAS could ease the dividend cap as Singapore banks have kept sufficient capital buffers. We prefer DBS for sector exposure on account of its wealth management and investment banking franchises,” says Chua.
Earlier concerns that defaults among weaker corporates could strain banks’ capital ratios have not materialised, writes Chua. Domestic banks have common equity tier-1 (CET-1) ratio at over 14%, which are higher than their pre-Covid-19 levels. “With total allowance coverage over 30% above MAS’ regulatory limit, we believe the central bank could lift its dividend cap,” he writes.
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Local lending rates rebounded in June. Interest rates reversed their decline in May, with 3M-SIBOR and 3M-SOR recovering to 0.43% and 0.24% respectively in June as Singapore transitions out of Phase 2 (Heightened Alert). Current 3M-SIBOR is 1bps higher than the 1Q2021 average of 0.42%. 3M-SOR is 2 bps lower than its 1Q2021 average of 0.26%.
That said, domestic loans growth rose just 0.2% y-o-y in May, tracking below Chua’s expected range of 2% to 3% for 2021 but still above his expectations as concerns over loans growth slowing from Singapore’s move into Phase 2 (Heightened Alert) did not materialise.
Business loans contracted for the ninth straight month by 0.5% y-o-y in May, even though business loans picked up for the month. Loans to the building and construction segment, the single largest business segment was up marginally by 0.1% for the second straight month to $152.37 billion, while loans to manufacturing reversed the decline in April to register a 5.1% gain.
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Consumer loans were up for the tenth straight month by 0.3% y-o-y in May, aided by strong loan demand in the housing segment. Housing loans, which make up three-quarters of consumer lending, extended their growth streak for the ninth straight month, up 2.6% y-o-y to $205.1 billion for the month.
Overall loans through the domestic banking unit, which captures lending in all currencies but reflects mainly Singapore dollar lending, rose for the seventh consecutive month. They were up 0.2% in May to $693.7 billion, up from the 0.1% increase in April.
“Despite the run-up in their share prices in 1H2021, we remain positive on banks. The banks have traded above 1.4x price to book value (P/B) over the last five years and are currently close to, or below, our P/B targets,” writes Chua.
Forward targets are supported by improving return on equity as allowances reverse in FY2021F, says Chua. “With total allowance coverage being over 30% above the MAS’ regulatory limit, we believe there is further room for general provisions (GP) reversions in 2021. This would boost earnings.”
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All the capital that banks have shored up for the past year could make for an attractive payout for shareholders, once MAS’ cap is removed. “We believe the banks could pay out special dividends to adjust their high capital buffers,” says Chua.
As at 3.42pm, shares in DBS are trading 13 cents higher, or 0.44% up, at $29.67; while shares in UOB are trading 17 cents higher, or 0.66% up, at $25.75; and shares in OCBC are trading 15 cents higher, or $1.28% up, at $11.89.
Photo: Bloomberg
