SINGAPORE (Jul 8): UOB Kay Hian is maintaining “overweight” on Singapore’s banking sector after reviewing the city state’s three banks, citing their intention to maintain their common equity tier-1 capital adequacy ratio (CET-1 CAR) within their comfort range of 12.5-13.5%.
The sector is “well-positioned to reward shareholders with sustainable and stable yields” as it entered the Covid-19 in a “position of strength”, noted analyst Jonathan Koh in the Jul 6 report. He added that any trimming of dividend per share (DPS) is expected to be manageable at 10% or less.
Koh named DBS and Oversea-Chinese Banking Corporation (OCBC) as “buy” picks with target prices of $26.22 and $12.18 respectively.
Singapore banks’ CET-1 CAR has increased from an average of 11.8% in 2014 to 14.1% in 1Q2020, a “significant improvement” of 2.3 percentage points over the past five years, noted Koh.
“MAS stated in April 2020 that it does not see a need to restrict banks’ dividend policies and we do not expect MAS to make a U-turn in its stance,” he adds.
This is in contrast with the US, where the Fed has suspended share buybacks and capped dividend payments after completing stress tests for 34 US banks on June 20.
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US banks are hard hit by losses during recessions from consumer loans, such as residential mortgages, auto loans, student loans, credit card overdraft and unsecured personal loans.
“Conversely, residential mortgages, which accounted for 78.5% of consumer loans, are a bastion of strength for Singapore banks due to relatively stable prices for residential properties and strong household balance sheet,” says Koh.
That said, the eight largest US banks have already voluntarily suspended share buybacks, noted Koh. Dividend payments are capped at the average quarterly net profit for the four preceding calendar quarters, which sets a low bar that currently does not impose much hindrance on US banks paying dividends.
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DBS, OCBC and UOB have strong CET-1 CAR of 13.9%, 14.3% and 14.1% respectively, higher than the average of 11.2% for US banks.
Compared to British banks averaging 13.7%, a cursory comparison suggests that Singapore banks have comparable CET-1 CAR. However, Singapore banks have conservative risk-weighted assets (RWA) intensity at 52.5% for DBS, 52.8% for OCBC and 56.0% for UOB. US banks are averaging at 55.3%; and British banks, 29.2%.
The British banks’ lower RWA intensity suggests that their RWA are understated and their CET-1 CAR, overstated.
British banks have also been hit harder by the Coid-19 pandemic. The Bank of England (BOE) has ordered banks to temporarily halt paying dividends and share buybacks in 2020. Banks have also cancelled plans for cash bonuses for executives.
Restructuring has been on the cards for British banks, though the shake-ups are “not a surprise” given recent heavy losses, said Koh.
Burdened by high cost structures and low return on equity (ROE), HSBC Holdings incurred losses of US$511 million in Europe and US$111 million for North America in 1Q2020.
British banks HSBC, Standard Chartered and Barclays have low ROE of 3.7%, 4.3% and 4.6% respectively for 2019. Their cost/income ratios are stubbornly high at 57.6%, 54.6% and 51.8% respectively in 1Q20.
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In response, HSBC unveiled in February a massive overhaul involving cuts of 35,000 jobs. Standard Chartered completed the sale of 44.6% stake in Bank Permata in Indonesia for US$1.07 billion in May, which increased its CET-1 CAR by 40 basis points. Barclays cut 100 senior jobs early this year, mostly trading roles at Corporate & Investment Bank.
At home, while MAS has decided not to restrict banks’ dividend policies, it cautioned in April that the release of capital buffers should not be used to finance share buybacks.
To help banks here tide through the pandemic, MAS introduced temporary easing of three regulatory requirements until Sep 30, 2021.
Specifically, banks can draw on Capital Conservation Buffer (CCoB), including any applicable Counter-cyclical Buffer (CCyB); the amount of stable funding that banks must maintain for loans to individuals and businesses that are maturing in less than six months will be halved from a Net Stable Funding Ratio (NSFR) of 50% to 25%; banks are allowed full recognition of their regulatory loss allowance reserves (RLAR) as tier-2 capital.
As at 11.50am, shares of DBS and OCBC are trading 1 cent and 6 cents higher at $21.68 and $9.30 respectively.
