UBS Group AG and Citigroup Inc. are at odds on how Singapore’s move to cap dividend payouts at the nation’s banks will play out for equity investors.
Citigroup says the move will be viewed negatively by investors as dividend yield is an important factor when considering buying bank stocks. UBS sees the central bank’s move as prudent in the context of the coronavirus pandemic and no threat to the sustainability of payouts.
Singapore’s central bank on Wednesday ordered lenders to cap their 2020 dividends at 60% of last year’s levels, a move in line with other global central banks’ actions in the wake of the pandemic. The lenders command the biggest weighting in the MSCI Asean Index and are set to announce their quarterly earnings next week.
See: MAS calls on banks to cap dividends for FY20 to 60% of FY19
Shares of the three lenders extended recent losses on Thursday. DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp. each dropped more than 3%, while United Overseas Bank Ltd. fell 2.8% as of 10:54 a.m. in Singapore.
Here’s why the investment banks differ over the outlook for banks:
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‘Buying Opportunity’
“The short term and prudent nature of this measure does not raise any question marks on the long-term sustainability of dividends,” UBS Group analyst Aakash Rawat wrote in a note. “Investors with a slightly longer-term horizon are likely to see this weakness as a buying opportunity.”
The impact seems greatest for DBS, which investors see as a bigger proxy for generating dividend income than its peers, he wrote.
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According to Sanford C. Bernstein, a cap rather than outright postponement suggests MAS is sufficiently comfortable with the banks’ ability to ride through the year. Investors should keep holding the stocks as banks are likely to resume payouts at 2019 levels as soon as they’re able, analysts Kevin Kwek and Pranav Gundlapalle wrote in a note on Wednesday.
‘Viewed as Negative’
“This will be viewed as negative for the banks as the dividend yield is considered an important component of the investment thesis for owning these names, especially DBS,” Citigroup analysts Robert Kong and Weldon Sng wrote in a note.
The cut in dividends will add to the pain of a sharp sequential narrowing of net interest margins and may prompt banks to front-load provisions, they wrote.
Prefer SGX to Banks
Jefferies Financial Group Inc. prefers shares of Singapore Exchange Ltd. to those of the nation’s banks citing the bourse’s “similar but fully underwritten cash yield,” according to a note.
The announcement will weigh on sentiment as yield gets capped at around 4% versus 6% previously, although investors should remember the strong capital positions of the banks, analyst Krishna Guha wrote.
The brokerage downgraded DBS to hold from buy, lowering its dividend estimates by 29% for the 2020 fiscal year.
