Lower dividends on the horizon for banks' shareholders: analyst

Requirements to allow for losses may force dividends to be cut.

Banks across the APAC region are showing signs of strain as COVID-19 hit customers applying for moratoriums or outright defaulting on loans. Much of the evidence is so far anecdotal, but what the analysts are hearing is truly shocking, with the example of India’s Axis Bank where 10% of customers representing 25% of loans have stopped repayments.

The worst-hit systems will be China, India, and Indonesia, according to a report by S&P. But even usually rock solid Singapore is seeing loan impairments especially in the oil and gas sector. In April, oil trader Hin Leong, one of the world’s largest, collapsed with $5.74b in losses to banks, including Singapore’s DBS and OCBC. And in May, another Singapore oil trader, Zen Rock, was taken to court by HSBC for owing more than $850.5m.

Even Stalwart Singapore companies such as Keppel and Sembcorp, who make much of their income from supplying oil and gas drillers with equipment, are facing operating losses, though there is no suggestion that there will be credit losses to their lenders. As of end Q1, oil and gas industry exposure as a percentage of total group loans is estimated at a higher ~6% for DBS and ~3.6% for UOB, which is expected to be manageable.

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OCBC notes that, in the recent Q1 earnings release, Singapore banks reported stable top line growth and non-performing loan (NPL) ratios of 1.5-1.6% whilst earnings contracted double-digits from a year ago (average sector net profit and pre-provision profits of -30% decline and +2.2% gain YoY respectively) due to substantial hikes in allowances taken to strengthen coverage and pre-empt increased credit risks.

The cut to earnings along with the requirement to allow for losses may mean that dividends will have to be cut, according to OCBC. A difference in payout policies may also influence dividend amounts. UOB’s payout ratio policy implies that the bank’s shareholders will get a lower absolute dividend per share (DPS) amount, in contrast to banks who committed absolute quarterly dividend payments such as DBS, in line with the broad earnings contraction expected in the sector.

In its recent Q1 results update, DBS reiterated its commitment to a quarterly absolute DPS of $0.33/share, which suggests ~6.8% forward yield and raised FY20E dividend payout ratio in the high 70% level. The guidance came with caveats that the dividend policy is subject to management discretion and a base case scenario of lockdowns in major economies easing by middle 2020.

On the other hand, in line with their conservative stance, UOB’s management has maintained its guidance for a ~50% payout ratio so long as CET1 ratios remain above 13.5%, citing its focus on maintaining the bank’s stable credit rating.

Singapore banks do have a strong buffer against losses, with a strong sector CET1 ratio at above 14% as of end 1Q20, which may see some softening in the coming quarters but should still remain at decent low-teen levels.

With domestic loans making up two thirds of total loans exposure for the sector and a more prolonged Covid-19 management situation domestically, we expect modest loans growth to contribute towards a challenging recovery outlook for the sector this year. As such, near-term sector performance should be largely in line with the broad equity market, with a more meaningful rebound likely only when the macro growth outlook picks up.