Shares of DBS, OCBC, UOB hit by MAS call to cap dividends

DBS, OCBC and UOB command the biggest weighting in the MSCI Asean Index.
DBS, OCBC and UOB command the biggest weighting in the MSCI Asean Index.PHOTO: ST FILE

SINGAPORE (BLOOMBERG) - Local bank shares tummled on Thursday morning (July 30) after Singapore’s central bank urged them to cap dividend payouts hit so as to conserve their lending power amid the grim economic outlook caused by the Covid-19 pandemic.

DBS Group Holdings and Oversea-Chinese Banking Corp each dropped more than 3 per cent, while United Overseas Bank fell 2.8 per cent as of 10:54am.

The Monetary Authority of Singapore (MAS) on Wednesday asked the banks to cap their 2020 dividends at 60 per cent 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.

UBS Group and Citigroup are at odds on how the move to cap dividend payouts at Singapore banks will play out for share 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.

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.

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.



“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.



Jefferies Financial Group said it prefers shares of Singapore Exchange 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 per cent versus 6 per cent 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 per cent for the 2020 fiscal year.