Following the Monetary Authority of Singapore (MAS)’s July 29 announcement on capping Singapore banks’ FY20 dividends, analysts from DBS Group Research, OCBC Investment Research, and CGS-CIMB Research have maintained their “hold” or “neutral” recommendations for the shares of DBS Bank, UOB and OCBC.

See: MAS calls on banks to cap dividends for FY20 to 60% of FY19

CGS-CIMB analyst Andrea Choong and Lim Siew Khee say the move by the MAS is the first such preemptive move, which is spurred on by sustained global uncertainty due to the Covid-19 pandemic.

They note that the move follows similar moves taken by regulators in Europe, UK, the US, and Australia in restricting dividend payouts and/or share buybacks in 2020 in a bid to conserve capital amid potential asset quality deterioration as a by-effect of the pandemic.

They said DBS has confirmed a distribution per share (DPS) in FY20 of 72 cents, implying a yield of 3.5%, and added that they “expect OCBC and UOB to cut FY20 DPS to around 32 cents and about 78 cents, respectively, yielding 3.5-3.9%.”

In addition to their “neutral” call on the sector, Choong and Lim have recommended “hold” calls on all three banks, with target prices of $18.80, $8.37, and $19.04 for DBS, OCBC, and UOB respectively.

DBS, they add, is their top pick for its “firepower in sustained trading and investment gains, which should offset some negative sentiment”.

DBS Group Research analyst Lim Rui Wen says that while this may negatively impact the banks’ share prices in the short term, he believes that the dividend cap will place Singapore banks in a stronger position to combat the challenges ahead.

Based on the 60% cap recommended by MAS, Lim says that it implies a dividend payout ratio of 40-44% based on FY20 earnings to 73.8 cents, 78 cents, and 31.8 cents for DBS, UOB, and OCBC respectively. He pointed out that Singapore banks’ valuation, now trading at around 0.8-1.0x FY21 book value, was supported by their relatively high dividend yields. 

“Should there be a stabilisation of the pandemic situation and economic outlook improves towards FY21-22F, we do expect Singapore banks to eventually pay out special dividends should their CET1 ratios remain well above their pre-COVID 19 levels,” Lim adds.

Lim has placed target prices of $20.90 and $9.30 for UOB and OCBC, representing a price-to-book ratio of 0.8x on FY21F book value.

“At this juncture, we believe that there are limited catalysts ahead of a weak 2Q20 earnings season with downside risk to earnings arising from weaker-than-expected net interest margins (NIMs) and asset quality. Should asset quality be significantly worse than expected, we believe that the dividend cap may be extended beyond FY20F,” Lim says.

The team at OCBC Investment Research expects “near-term weakness” ahead due to higher street expectations of less than 5% yield for FY20e.

However, it believes that prudence on capital usage is in line with the cautious stance seen globally. “In this respect, Singapore banks are still relatively less constrained than European banks for example, which have been restricted on all dividends and share buybacks this year,” it says.

In previous sector updates, OCBC says it has highlighted downside risks for dividends even for well-capitalised banks or firms with stronger balance sheets as capital preservation will be prioritised as the downturn becomes more prolonged and deeper. 

“Our advice for investors to moderate dividend expectations during this downturn and diversify their portfolio is unchanged given the extended Covid-19 recovery path. For the banking sector, time will be needed for asset quality deterioration to pan out. As a recap, we expect a deteriorating credit cycle from 2020 to 2021”. 

OCBC has estimated fair values of $20 and $21.50 for DBS and UOB respectively.

DBS Group and UOB will report their 1H results on August 6, and OCBC will report its results on August 7.

As at 3.16pm, shares in DBS, UOB, and OCBC were changing hands at $19.60, $19.32, and $8.50 respectively.