COVID-19 could drive DBS and OCBC's dividends to over 6%

But net profit forecasts had been cut by 5.8% and 3.7%, respectively.

The economic disruption caused by the coronavirus pandemic may drive DBS’ and OCBC’s dividend yields to overshoot to 6% as a result of a steep share price correction, reports UOB Kay Hian.

Over the past 30 years, the two banks have hit above a dividend yield of 6% once, during the Global Financial Crisis. Meanwhile, UOB has attained this yield twice: during the GFC and the Asian Financial Crisis.

However, net profit forecasts for the two banks have been cut on the back of the ongoing coronavirus spread.

UOB Kay Hian analyst Jonathan Koh has cut DBS’ net profit forecasts by 5.8%, and OCBC by 3.7%, on the back of expected further net interest margin (NIM) compression due to the 75bp cut in Fed funds rate in H1 2020. Further weighing in are additional credit costs of about 5bp due to these banks’ exposure to the oil and gas sector.

Currently, DBS and OCBC’s NIMs are projected to come at 1.81% and 1.71% in FY2020.

Also read: Lower oil prices no silver bullet for Singapore's economic woes: analysts

Moderate loan growth as well as moderate fee growth especially for credit cards will also squeeze the bank’s margins.

“We expect dividend payouts for Singapore banks to be sustainable due to strong CET-1 CAR, which are above 14%. The banks also have the option to turn on their scrip dividend scheme should regional economies slip into a recession,” stated Koh.